Thursday, 7 July 2011

Momentum Chasing Is Not Investment.

Last night I wrote that we are more likely to see a move upward and sure enough we did. But the anomalies of “Risk On” trade continues. The Euro sold off after the ECB rate hike, which I expected, Gold and Silver did not rally but the stock markets jumped off the gate as if someone has put fire at its back.

As Phil Davis said in his morning newsletter:

“Things are neither fixed or broken in minutes – or days for that matter.  Just because the markets CAN move up or down 5% in a week, doesn’t mean that they should and it certainly doesn’t mean the VALUE of the stocks has moved up or down 5%.  Do they companies suddenly make 5% more or less profits than the week before?  Do the companies make 5% more or less sales?  No – it’s all conjecture and extrapolation taken to a manic-depressive extreme driven by a 24-hour news cycle that needs to pump the greed and fear machine to keep you watching and reading and most of all – TRADING – because panicking you in and out of positions on a daily basis is making the brokers record profits and a return to buy and hold by investors would wreck their business model.”

Nothing really changed from June to warrant this irrational exuberance and all these are a process of forming the top. As Phil says, 95% of this market is manipulation and 5% is valuation. And S&P is way overvalued. With this constant churning, the manipulators are trying to make people forget the coming credit collapse or the looming contagion is Europe. Today’s comedy show special came from Europe when the ECB President Mr. Trichet announced that ECB will suspend the rating requirement for Portugal Bonds. Does anyone believe them anymore?

In short term, stock markets can and possibly will go up till end of August but I am advising my clients to be in cash right now because it is too risky to short the market before end of August and suicidal to go long at this point. We do not want to be momentum chasing lemmings following the pied piper over the cliff.   

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