The primary reason the market has seen a massive rally since the low on March 23 is no mystery. There have been trillions of dollars injected into the economy by central banks and fiscal policy, and a big chunk of it has flowed into the stock market.
This massive wave of cash has enabled the market to ignore the Covid crisis and all the associated economic damage. The flood of cash has even helped bring small individual investors back into the market and drive small-cap stocks higher in a frenzy of buying.
The bears and pessimists assure us that we will pay a heavy price for these excesses at some point, but they are clueless as to when the day of reckoning may occur. The warnings will continue, but there is no immediate end in sight for the injection of more cash.
President-elect Biden is scheduled to announce a major stimulus plan later today, which is expected to include $1,400 stimulus checks and to exceed $1.5 trillion. The prospect of more cash is helping equity markets to continue higher Thursday morning, but it will still take a while before any fiscal stimulus plan is passed. Even though the Democrats now have control of the Senate after the wins in the Georgia special elections, there are still many obstacles.
The fiscal stimulus battle has been going on for months and isn't over yet, but the battle lines will be more clearly drawn after Biden's speech tonight. What is important is how the market reacts to it. The anticipation of a fiscal deal helped to keep a bid under the market through much of the chaotic election process, and that is continuing. Nothing is more critical to the market than more capital.
As long as the prospect of more fiscal stimulus and additional dovish monetary policy is out there, it will be difficult for the bears to gain much traction. There is much complaining about how this market is extended, how the speculation in groups like SPACs and EVs is unsustainable, and how there is a disconnect between stocks and economic reality.
The problem for the market players that keep on trying to anticipate a market top is that there is too much liquidity out there with no other place to go. Small traders are looking ahead to receiving more capital, and they have been doing so well lately that they aren't going to relent quickly or easily.
There are plenty of macroeconomic arguments for why this market will collapse, but there is one giant reason that it will continue to hold up -- liquidity. And it looks like even more is on the way.
I'm going to continue to do what is working and will keep aggressively trading small-caps. The key is to be selective, however, there is still plenty of vigorous action.