"Where else are you going to put your money?"

In today's Profit From the Pros newsletter from Zacks, Steve Reitmeister discusses the reasons why the market has been inching up. No fireworks here, but no pessimism either:

Why is the stock market moving higher when earnings and other fundamentals continue to soften?

The general consensus was that a bull market typically stays in place until GDP slips under 1%. And with bond rates so low, and the majority of the world economy being risky, then US stocks are still the best game in town. 

In fact, the key statement shared by many was: Where else are you going to put your money?

The market internals continue to be supportive as seen by the McClellan Oscillator and Summation index. The Summation charts of both the Advance Decline and the New High New Lows also point to a supportive money flow.

BUT, the current high level of the Medium Term Implied Volatility (VXZ) to Short Term Implied Volatility (VXX) ratio points to a high level of near term complacency. So a small pull back maybe coming. But no Apocalypse yet. 

Let's build a base.

After 9 days of  white or green candles, a small pullback would be in order. The stochastics are also in overbought territory after the breakout the range SPY has been the last few months.

The market breadth as measured by the McClellan Summation index also looks over extended with an RSI at +80.

I think a good place to revisit would be the 20 day moving average. Somewhere around 206 and 207 would make a nice base camp to higher levels, fundamentals permitting. There are no real catalysts to continue in the uptrend at his immediate point. Yes, fund flows will still keep flowing to equities.

'Get out of bonds and into stocks'

"As a bond man, I've got to say 'get out of bonds and into stocks' and believe me that was a painful thing to say," Bill Blain, the senior fixed income strategist at Mint Partners, a division of New York's BGC Partners, told CNBC Tuesday.

Yes, boys and girls. This is where the final leg up for this bull market will come. The flow of funds out of bonds and into equities will give us that multiple expansion characteristic of the End of Days before a bear market begins. This asset class rotation will be more pronounced because of how low bond yields have gone. The Baby Boomers are the ones in need of income and will have to reach for yield in dividend paying stocks.

Kerry Craig, global market strategist at JPMorgan Asset Management, agrees that moving into equity markets would be more beneficial for investors. He told CNBC Tuesday that good dividend paying stocks can be found in battered euro zone bourses. He said that cyclical stocks - that react to fluctuations in the global economy - are his preference but said health care firms are some of the most expensive currently.

"Equity markets can deliver at the moment," he said, paying particular attention to retired investors that are searching for yield over shorter term.

Why Anarcho-Capitalism cannot work.

My Position
As an Objectivist, I agree with the conclusion that a Free Market Capitalist system is the only moral social system because it is the only one compatible to the individualistic nature of our species. We are social because it is to the advantage of the individual, not because it is hardwired in our brain. Humans are contractual animals, not social animals.
In order to live together in a society of individual minds, rules of conduct must be devised and enforced in order to protect the individual's rights: life, liberty and property. Clear objective rules established by a central body have to be enforceable by the use of retaliatory force. This central body, which we can call the state, has it's authority because the individuals within the geographic area in question have delegated to it the individual's sovereignty in the use of retaliatory force. This consent of the governed can be withdrawn by a vigilant citizenry in case the government oversteps its bounds.

The Anarcho-Capitalist (AnCap) Position.
I will refrain from expressing what I think AnCaps think, so I will quote from Wikipedia.

Anarcho-capitalists believe that in the absence of statute (law by decree or legislation), society would improve itself through the discipline of the free market (or what its proponents describe as a "voluntary society").^[6][7] In an anarcho-capitalist society, law enforcement, courts, and all other security services would be operated by privately funded competitors rather than centrally through compulsory taxation. Money, along with all other goods and services, would be privately and competitively provided in an open market. Therefore, personal and economic activities under anarcho-capitalism would be regulated by victim-based dispute resolution organizations under tort and contract law, rather than by statute through centrally determined punishment under political monopolies.^[8]

 My Objections to Anarcho-Capitalism.

1. The use of competing Dispute Resolution Organizations would be a very efficient and cheap alternative to the court system. The problem arises when two of these organizations cannot agree on a resolution. At this point, society needs a Arbiter of Last Recourse. Without one, two competing organizations within one geographic area could end up in a less than amicable conflict, if their clients or the organization itself refuses to settle.
2. The only way to avoid that an irreconcilable conflict degenerates into outright violence is to have a population that is highly rational and self-interested enough to see that violating other people's rights is not in their best interest.Unfortunately, in most if not all societies, many people are driven by their whims and not their reason. Many are motivated more by status than by profit. Some would rather be the Chief of a jungle tribe, then be a butler in Monaco.Many are just bullies trying to get other people to do things their way while others crave to be relieved of personal responsibility.
3. The only way to make sure a society is fully, or mostly, populated by rational citizens is to be able to choose who is admitted to the geographic area in question, as well as having the ability to expel them in a credible way. Here again the need arises for a central choosing authority whose powers emanate from the consent of the governed..
4. Taxation is the forceful confiscation of property by the state. But it is not the only way to fund a government that is just big enough to operate the courts, police and military necessary to defend individual rights. I won't go into this, but you can find some insights into no-taxation funding here and here.

The Non-Aggression Principle (NAP) and the Uses of Force.
The NAP is the idea that No One has the right to initiate force against Anyone. This idea was first proposed by Ayn Rand and is part of her philosophy, Objectivism. The difference, though, between the AnCap and the Objectivist view of it starts in that the former views the NAP as an axiom, while the latter considers it a logical consequence of the morality of individual rights.
The use of force can be classified in three different categories:

1. Initiated or Aggressive Force: The unprovoked use of violence or threat of violence against a person. It is this one to which no one has the right to use.
2. Self Defense: Using force to stop an occurring or imminent aggression. Every individual has a right, if not the moral obligation, to defend against aggression from others, including the state.
3. Retaliation: The use of force to punish right violating aggressors, recover any stolen property and the enforcement of contracts. This use of force, in the Objectivist view, should be delegated to a government constrained by rational and objective laws. It is up to the citizens in the geographic area of influence to keep vigilant against any deviation in the use of this force from the objective rules.

AnCaps reject the idea that retaliatory force should be delegated to a single entity as it would impose a single set of norms and it would eventually lead to abuse. In my opinion, they neglect their right as individuals to defend themselves, with force if necessary, from an aggressive use of force by the state; and they neglect their responsibility as citizens to vocal vigilance against "mission creep".

My Opinion on the Role of Government

A limited government has a legitimate and necessary role in a free society. It must be seen as the Arbiter of Last Recourse in disputes between individuals because of breach of contract, negligence, and outright aggression. Any form of private arbitration, binding or not, between parties must somehow be enforced.The prosecution of criminals should be left to an objective entity, and not to the possibility of gang warfare.

The role of the citizen in a free society is to be vigilant of any "mission creep" by the government and be ready to act, with force if necessary, to stop any abuse by the government. The benevolence of those in control of government must not be taken for granted. They must never be allowed to consider themselves above the law or those they govern.They must always feel the eyes of the citizens upon them.

The lack of a central government did not work well for Europe after the fall of the Roman Empire, nor has it worked well within Somalia.Even within a city, where the police does not make it's presence known, gangs rise up to take control of the streets. And when two gangs try to occupy the same territory, war breaks out. All power vacuums will be filled.

Implied Volatility Levels Point to Bullishness in the Equities

When you look at the VIX, you are looking at the level of uncertainty in the market with respect to the natural tendency to go up I've mentioned before.

Currently this perceived uncertainty is coming down because of the Russian-Ukraine situation and few people see the Greece situation leading to any major european shake up.

The VIX is near the lower quartile of it's 50 day range as indicated by it's Williams R%  reading.

Another indication of lower uncertainty, is the term structure of the Implied Volatility as represented by the ratio VXZ to the VXX. The VXZ represents the medium term implied volatility while the VXX represents the short term implied volatility. As the gap between these two implied volatility increases, it indicates that hedgers are less uncertain about the short term. In other words, the implied volatility term structure is normal. When it flattens or becomes inverted, (short term implied volatility is higher than the medium term) it indicates current uncertainty is higher. Notice in the chart below how this ratio drops in mid october when the 10% correction of the S&P 500 was happening.

So in other words, the market is "Risk On".

On Apocalypse Watch

According to Steve Reitmeister of Zacks fame:

Even in the remotest corner of the world, everyone understands the law of gravity. When you drop something...it will fall to the ground.

Interestingly most investors don't really understand the natural gravity of stocks. In fact, they find every way possible to confuse matters with too much commentary, charts, and data.

Plain and simple, the gravity of stocks is to move up. Meaning that to move higher is their natural progression UNLESS an opposing force gets in their way.  - The Natural Gravity of the Stock Market

 I tend to agree with this statement. The nature of the opposing force can be debated, but I will not opine on this today. I'll just share a few graphs that show that the conditions for an upcoming apocalyptic opposing force are NOT in the cards yet.

Both the Advance Decline Index and the New High - New Low Index are in a clear uptrend making the case for a supportive market breadth and money flow.

Another market breadth indicator that also shows support is the McClellan Oscillator and its Summation Index:

If the current consolidation of the major indices was accompanied by a deteriorating market breadth, then odds would be in favor of the Financial Apocalypse being predicted by Austrian Economics. Currently, it seems that the monetary inflation is favoring asset prices. The "Don't Fight the Fed" mantra still applies, regardless of the rationality.

Sooner or later, the financial reckoning of the poor decision of central banks all over the world will defy the natural gravity of the stock market. But that apocalypse is not here yet.