ECB Ready To Act

In a familiar theme of words and little in the way of action, the head of the European Central Bank was jawboning again Monday. From The Wall Street Journal:

"The European Central Bank is willing to take additional easing steps including purchases of government bonds if needed to keep inflation from staying too low for too long, ECB President Mario Draghi said Monday. Mr. Draghi's remarks, in testimony to the European Parliament, underscored the central bank's commitment to expand its balance sheet--the value of assets it holds--and if necessary widen its stimulus efforts to ensure that inflation rises back to the ECB's target of just below 2%."

The theme of ongoing "easy money" ties in nicely with what history says about the current stock rally in the United States.

Rare And Unprecedented

Since numerous rare occurrences, including the massive V-type rally in stocks, could skew the current landscape from a historical perspective, it is important we remain open to all outcomes (bullish, bearish, and sideways). However, it is also prudent to ask:

Can we learn anything from similar rallies in the last 10 years?

Weather Analogy

Just as meteorological conditions shift slowly over time between the middle of summer and the dead of winter, markets experience observable changes as a bottom is formed after a correction and during the subsequent rally. The market was weak (temperature of roughly 13 degrees) just prior to the October 15 low. Since then, conditions have improved relative to the market's profile (temperature of roughly 83 on November 7, 2014). How has the market performed in the past after moving from a profile of 13 to 83? That question is explored in this week's video.

The table below is described in the video above, along with charts showing numerous examples from recent history.

Investment Implications - The Weight Of The Evidence

Regular readers know our approach frowns upon forecasting and instead allocates based on the facts we have in hand. Therefore, the exercise above is simply about exploring the range of possibilities based on recent history. The market may go sideways or it may go down, but history tells us upside is also a realistic outcome in the months ahead. Based on the evidence we have in hand, our market model is calling for a heavy weight to equities (SPY), complemented by a modest stake in bonds (TLT). If the bulls can carry the market over the 2043 to 2046 level this week, the evidence may call for another incremental add to our stock ETF holdings.

ECB image Adam Baker Flickr