Ahh ... supply and demand, the two magical forces that free market capitalists hang their hat on. Conventional economics would tell us that the price of any asset is a function of supply and demand, and is typically set at the intersection of these two curves, see below. This relationship generally holds in the long-run, but short-term pricing has another component. You can call it psychology, emotions, or fear, whatever you like. In the short-run this intangible component can have a much larger impact on price than either supply or demand.
Article Category: Psychology
There is nothing like central bank easing to get investors flocking to equities. As expected the ECB moved on Thursday to cut interest rates and also announced additional stimulus measures. The ECB's main lending rate was reduced from 0.25% to 0.15%, and they also introduced a negative deposit rate on cash that banks have parked with the central bank. The goal is to incentivize more bank lending, aka. increase the money supply. The ECB also alluded to preparations for direct purchases of loans and made clear that the door remained open for additional measures to come if needed.
China and Russia just signed a huge natural gas deal that has been in the works for nearly a decade. The 30-year agreement will provide China with over $400 billion dollars worth of natural gas. This deal comes at an interesting time considering the situation in Ukraine. As events unfold, the European Union has been trying to find alternative sources of gas in anticipation of the Ukraine crisis causing supply disruptions. Nearly a third of Europe's natural gas comes from Russia, with about half of that traveling through Ukraine.
There is a natural tendency to become more and more suspect of a bull market as its price levels and duration increase. We're now in the early stages of the 6th year of this bull market, a market which is already the fourth longest in nearly 100 years. Many tops have been called along the way but we have continued higher, either to the dismay of those watching or the delight of those participating.
Most of you are aware (or at least will be now) that we have a new website currently under development. As we move forward one of our goals is to make Dow Theory Letters a major resource for all investors looking to improve their investing IQ. Part of this initiative will include the construction of a massive "Investor Education" section which in many ways, we hope, will be equivalent to a Wikipedia for investing. If you haven't noticed, my remarks typically consist of an "educational" component followed by a few market comments. These educational pieces are being written to slowly build out content for the education section of our new website. All that to say, if you find the information too technical or uninteresting, feel free (I'm sure you already do) to skip down to where the market comments begin. These educational pieces will be housed in our new website, and categorized accordingly, for your reference anytime you need them or are in the mood to enhance your game.