The stock market is suffering from a Keynesian mania

The stock market responded positively to Friday’s news that Germany, and Europe as a whole, would again bail out Greece. Greece has been bankrupt since 2012 and nothing Europe is proposing will do anything but kick the can of reckoning down the road. Life in Greece will become increasingly unbearable. But, the bigger financial danger starts with Italy and Spain going down the same road. Their financial situation is just as hopeless. For example, Italy’s debt is 150% of its GDP. The only way for them to have a chance of saving themselves is to cut their government expenditures with an ax. But this cannot happen politically. They are, therefor, doomed.

 

What happens to world financial markets as the Euro zone disintegrates? Add to this sorry state of affairs, China’s stock market dump. The Chinese authorities tried to forcibly stop the fall. But they’ll have no more ability to stop gigantic market pressure than any other government in world history. In June, before the Chinese stock market started to fall, their margin-on-steroids induced valuations exceeded 60 times earning. Even after the current crash it’s still a very high 45 times earnings. The average world-wide P-E ratio is 18.

 

The stock market has been moving sideways since February. Long sideways moves are known as trading ranges. The late June selloff had higher volume then did the gain over the last few days. Yesterday’s up bar had particularly low volume. A drop below either Tuesday’s low or the March 11th low would be very bearish, unless it is very quickly and powerfully reversed.

 

My relative strength stock sector table shows how defensive the stock market has become. Since July 1st: The Utility sector zoomed higher by an amazing 7.4%. The Consumer Staples Group was the only group to gain and the formerly strong Financial Group has begun to lose strength.

 

The graph below is the relative strength Utility Sector:utilities

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