BEARISH NEWS IGNORED Stock index futures continue to ignore or only temporally respond negatively to bearish news. For example, there was only a one day price decline following a report that China was considering slowing or halting purchases of U.S. government debt. In a quick turnaround there were large gains the next day when China’s foreign exchange regulator said the previous day’s report could be based on erroneous information, adding that the country was developing a plan to diversify its foreign exchange 


More recently there were fears that the partial U.S. government shutdown could have a negative impact on U.S. stock index futures. In fact, however, the partial shutdown only had a short term slightly negative impact, which in itself should have been viewed as a sign of strength for stock index futures.


ARE INTEREST RATES TOO HIGH? There are many analysts that believe this market is topping and is headed for a major reversal. There are several reasons why the bears are calling for this unprecedented advance to end. Some of the bearish arguments appear to be better than others. For example, one of the better ones is the interest rate argument as they cite the fact that the Federal Reserve has increased its fed funds rate from a range of zero to 25 basis points in December 2008 to the current level of a range of 1.25% to 1.50%. Also, it appears that the Federal Open Market Committee is on track to hike rates again by 25 basis points at its March 21 policy meeting followed by one or possibly two more increases before the end of the year.


My answer to this is that, in spite of the rate hikes from the Federal Reserve, tighter credit and prospects of reduced accommodation from other central banks, interest rates in the U.S. and overseas are still low enough to sustain the bull market for stock index futures. In many countries interest rates, in fact, are still negative. It appears that U.S. and global interest rates will likely remain low enough for long enough to sustain the bull market in stock index futures for quite a while longer.


Chart 2: Dow Jones Futures - Weekly


IS THIS BULL MARKET LASTING TOO LONG? Although tighter credit policies from the Federal Reserve is the main reason on the part of the bears for their expectations of an imminent price reversal, there are others. Some are of the opinion that this advance in stock index futures has to end soon simply because “it has persisted for too long, and after such an extended advance there is nowhere to go but lower.” The bears argue that this bull market has exceeded the average in its scope of advance and also in its duration, and it is logical to believe that it is about time for this historic advance to come to an end.


My answer to this is, of course it is true that a bull market cannot go on forever, but why should it stop now? Although there is a growing chorus of analysts saying the days are numbered for this bull market, my analysis suggests this old bull market has plenty of life remaining and any setback in prices will be short lived and will not be the beginning of a new bear market.


Stock index futures are likely to continue to advance, extending the second longest bull market on record. In fact, there is no reason why the current bull market can’t be the longest in history.


Alan Bush


E: alan.bush@admis.com 


Source: Provided by QST


17 | ADMISI - The Ghost In The Machine | January/February 2018


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