Sunday 23 September 2012

Bearish Reversal?

Friday we had a bearish reversal day when the market opened higher closed lower / red.  In a normal world I would have considered it as the signal for a top and trend reversal. But in this day and age of new normal, I am asking myself, was it a failed tests of the high and I am not convinced that it was so.  The price actions of other risk asset classes were not in sync with a sell off yet. Therefore, my take is, even if we see little weakness in the next day or day, we are unlikely to close below 1450 in SPX. If however it does close below 1450, that will be the 1st warning shot. On the other hand does it mean we are going higher to the moon? Not yet.  I expect there will be lots of head fake and whipsaws in the next few days.  Let us not forget that QE3 or QEInfinity officially starts from Monday.

Question is, can the market go down when QE is on? The following chart is from Dshort.

Which shows that equities have gone up during the earlier QEs.  This was precisely the reason the US stock market is sitting at multi year high when everything ran up on the anticipation of QE.  But it does not tell the whole story. The law of diminishing return in coming in play and the balloon seems rather fully inflated. The next is an asset bubble burst of epic proportion. Also if you carefully analyze the chart, you will see that immediately after every QE the market has actually gone down and then up.

I think we are coming close to a short term top of some kind but it is not the ultimate top. For that we will have to wait till after election when the sh*t fits the fan. It now seems that whole world want ”O” to be re-elected and EU leaders have expressed their dislike for the Republican candidate and the party in many shapes and forms. Europeans and even the Russians think that they are better off with the known devil in an uncertain world and they will not rock the boat too much till November. Even the two mad men of Middle East will wait till the election in USA to start the war game, if at all. In some sense, discussing politics is a waste of time because the politicians have already sold themselves many times over to the highest bidders and irrespective of whom so ever wins, we will be screwed. Guaranteed!

Bottom line, a 5-7% correction now will be a good buying opportunity. In any event, precious metals will be a safe play long run because everyone is printing and inflation will pick up sooner rather than later. You may ask if inflation is a concern how come bond yields are going down. One of the reasons is that the Fed is monetizing the debt and now holds almost 30% of all outstanding treasuries. But soon the Fed is going to lose control and interest rates will rise poking a giant hole in the bond bubble. It’s just bit early for the balloon to burst but burst it will. The Fed is actively seeking inflation and it will get it. The problem with inflation is, once the genie is out, it is difficult to put it back in the bottle. It is a question of when not if.

Elsewhere in the world, Spain is fighting with its autonomous regions who are asking for fiscal independence.  It is like playing a game of bluff within bluff. Catalonia is bluffing Spain and Spain is bluffing EU. Who will blink first? And here is an article about another region of Spain which is without medicine as well as empty construction projects.
And we thought only China has ghost towns. It seems the story of boom and bust is same everywhere.

All in all, it is going to be an interesting week or two going forward. So remember to fasten your seat belt and trade safe.

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  1. Thx for the post BB. When you say asset Bubble burst are you including precious metals as well?...could a weaker dollar policy a way to negate china's peg to the dollar..not sure how that would help when the entire world is facing a recession of epic proportions...

    1. We are entering an uncharted territory. But I think gold and silver will be fine and so is other physical assets.

  2. Very glad to have you back! Hope your time off was fruitful. Looking forward to reading your blog as often as possible. Every so often please do give insights into some individual stocks & commodities, e.g. Gold, Silver, Apple, JPM, etc.

    1. Thanks. I do comment on gold & silver and oil. Individual shares not so much because I go with sector ETFs.