Stocks rallied sharply Monday morning in what may be the start of a serious buying spree or "fall melt-up", as described by today's guest Ed Dempsey, CIO of Pension Partners.
The trigger for today's rally appears to be hopes for progress in Europe after German Chancellor Angela Merkel and French President Nicolas Sarkozy pledged this weekend "to deliver a response that is sustainable and comprehensive" by the G20 meeting in early November.
Secondarily, a plan by Belgian authorities to break up Dexia and a government guarantee of up to 90 billion euros (about $122.5 billion) has relieved investors' concerns about the troubled bank. In addition, China's sovereign wealth fund has pledged to buy shares in the country's biggest banks, giving global markets another government-sponsored boost.
In recent trading, the Dow was up more than 2% on the heels of last week's solid rally and decent gains overnight in Asia and strength in Europe. Gold, oil, copper and other s0-called risk assets were also rallying. (If it weren't closed for Columbus Day, the Treasury market would almost certainly be suffering a big sell-off today; if Dempsey's right, that's to come in the days ahead.)
According to Dempsey, the market was primed for a big rally ahead of this latest news from Europe. Noting the extreme outperformance of "defensive" sectors like healthcare relative to the S&P, as well as bonds, he and partner Michael Gayed made their "fall melt-up" call late last week.
Stocks are priced for a "Lehman-like event" and if that kind of cataclysm is avoided, the market has "enormous room to run," according to Dempsey. "Markets could move up very quickly and violently."
At a minimum, Dempsey says major averages could move back to their highs of 2011, at around Dow 12,810 and S&P 1363.
In the accompanying video, Dempsey explains the rationale for the "fall melt-up" call, which is a bookend to his "summer swoon" forecast, made in June and detailed here.
- French President Nicolas Sarkozy
- German Chancellor Angela Merkel