How are the markets trading? Liquidity inflows? Green Shoots? Or market hysteria?

There are some subtle arguments forming about the recent stock rallies. The consensus view is that there is improvement in the economy (better 'bad' news), not from overall improvement in asset markets per se. In the sense, that a report may come out that housing stats have slightly improved, or company profit has come in better than expected (from a low base). The stock market then reacts to news, it's the search for good news after such a pronounced slump in equity markets for the last 8mths. The other argument from a smaller camp is that liquidity pumped in from central banks, namely the Federal Reserve is supportive of asset prices, thus underpinning price fluctuations within the stock market. Money returns to the market and stocks are bought.

The better 'bad' news argument overshadows the liquidity argument by the fact that the rallies are turning into a buying hysteria - on the small amount of good news. The psychology of the current market doesn't seem to represent a rational perspective. It could be argued that the recent market rallies (US) started after The US President Barack Obama announced that stocks were cheap on March the 5th 2009, please refer to graph:




The continued rally from March 9th 2009 was from the speculative internal memorandum by Citigroup chairman Vikram Pandit, stating that Citigroup will return to profit, mirroring profits from 2007. please refer to graph (note rally point from March 9th 2009 - running deal time daily):


Even though economic fundamentals remain poor, good 'bad' news have rallied the markets to the highs that we currently have, although it pains me to say this, it is President Obama and Treasury Secretary Tim Geithner (re: bank bailouts/toxic assets - despite the banks remaining unprofitable in 2009. Watch for write downs relating to commercial real esate) that are currently underpinning the stock market. Yes politicians and Government officials have successfully rallied stock markets.

A better example and a more recent one of political stock market related hysteria is the Indian market, rallied occurred after India's National Congress Party were voted in as a majority (Tuesday, 19 May 2009), the market rallied to 651.50 (17.74%) in one day!
please refer to graph (running real time daily):



The liquidity argument holds some truth (supporting stock prices) on the pretext of the Fed and Treasury flooding the market with liquidity, but it is a volatile perspective; especially on the back of a global tax shortfall as discussed in "Green shoots". The Global economic recovery, or plastic weeds in quicksand? Be concerned regarding a Global tax shortfall.

If the Obama administration decides to increase taxes for Corporate profits, this will eventually squeeze out liquidity from the markets. This could happen sooner than later as they (US government) will desperately try and fill the deficit hole.

The point is, the market is buying on speculation even if it is from liquidity perspective which I am beginning to doubt. But the speculation is on a political/market influence that is trying to create a artificial environment of market confidence. Reflecting back to the Indian (nifty exchange) stock market surge which is nothing less than bizarre and an alarming aspect of irrational aspects of the market. We are now well overdue for a substantial correction in the market, the longer the market overreacts (on the upside) to 'not so bad' political/economic news, the harsher the correction will be.