The “Rally” Just Flinched
Pardon me for speculating here, but did anyone else just see what I saw?
Despite of (or rather because of) ubiquitous inflationary bullish sentiment, the current rally just hiccuped. And the set-up for a major market top couldn’t be more perfect:
- Did the 170 point drop in the Dow get any media attention? Nope
- Are investors inclined to short the market or just buy the dip? They are buying the dip with no thought of downside risk.
- Are retail and institutional investors over-invested in this market? Yes, if one accounts for current cash reserves in the context of deflation adjusted interest rates, their cash positions are historically low. (Sorry no link on this one because its a subscription service)
- The USD just spiked lower and then quickly reversed just after a FOMC statement.
- A prominent deflationist just announced that he has switched camps.
- Dr. M stated this yesterday: “I don’t know what else to say at this point, other than that everyone had better be ready for massive inflation.”
- Insider selling has been significant and sustained over several months (numerous sources including Dr. M)
- The market is strenuously overbought on a fundamental basis.
- Volume on this rally is pathetic (suggesting that it is a counter-trend move)
- The first five-wave decline in the markets in months occurred yesterday.
- Dividend yield is as low as it was at the previous market tops in 2000 and 2007.
It is my belief (pure speculation) that the set-up for a major top in the markets is in place, and that we have seen early indications that that the top is near.
A second that JAG. All my indicators say the drop is dead ahead. Glad I’m wearing SHORTS.
Hm. Well, I’ve had my shorts on for about 2 months now, so I was a shade early to the party. But I’ve resisted the urge lately to shuck ’em off. (For which everyone at the party is, no doubt, profoundly grateful. ) It’d be nice to watch my numbers go up for a change…
Viva — Sager
I’m with ya JAG but I keep thinking it is ready to fall off the table then away we go again! I was very surprised to here Jim Puplava lean toward a possible 4th quarter and “maybe into the first quarter” rally during his last weeks Financial Sense Newshour. No one can be more confused then I. My shorts are getting worn out!
The rydex traders are buying the dips and are holding very little cash. Downside risk is growing exponentially.
Figure 1. Rydex Bullish and Leveraged v. Rydex Bearish and Leveraged/ daily
Figure 2. Rydex Money Market Fund/ daily
Link: Rydex Market Timers All In (zerohedge)
From Daneric’ blog : The Conventional Wisdom
Ok, where to begin? Let me begin by first stating that many traders like to pride themselves on not accepting conventional wisdom. After all, conventional wisdom represents the herd. And betting with the herd will work for a while but eventually a cliff will be reached. Think lemmings.
I will say that governments tried desperately for 17 months at stimulus measures. Look up the numbers. The FED and treasury had already spent trillions even before the December to March final wave down occurred. Fear ran rampant despite the Fed’s efforts.
The number one media mantra of “walking a fine line” between removing and keeping stimulus in place will result in success or failure type thinking. This is all hogwash is all I can tell you. If you buy what the media is spewing out on this you might as well listen to “analyst” upgrades on stocks and trade off of that.
Let me interject a bit of logic in this equation; the underlying reason the general media spews forth the “walking a fine line argument between stimulus and not stimulus” is the underlying conventional wisdom that the Fed does indeed control the fate of the economy.
So taking that next step further, if you believe the FED controls it all, then you must believe in the general media mantra of the “fine line” argument! You cannot separate the two with logic!
And you now agree with Jim Cramer, financial guru of the masses. You are trading on Cramer-logic!
As usual, Mish says it better than I ever could: Reflections on “The Last Bear Standing”
Weiss lists four Inflationary Forces
I suspect we will do through periods of inflation-deflation for a decade, with painfully slow growth followed by recessionary and deflationary relapases. Those expecting the CPI to go soaring anytime soon are likely very mistaken.
Deflation will end with a whimper, not a bang.
What Weiss is doing is extrapolating the recent past into the foreseeable future. He is overlooking the fact that the number of dollar bears is now extreme. Only 3% are bullish on the dollar. I am in that group, not perpetually, just right now.
The same goes for expanding household wealth. Yes there was a huge stock market bounce, but as I have pointed out there was a similarly huge bounce in early 1930.
In regards to exploding money supply, Weiss is late to the party. This happened some time ago. More recently the rate of many measures is falling. But also note that in the early 1930’s money supply soared and it did not help.
Yes this was a spectacular rally by any measure. Enough so as to change Weiss’ mind. How many more dollar bulls and stock market bears are left in the house?
Not many. Even Rosenberg is discussing decoupling. Sheesh.
The next wave down could be a doozy.
Its going to be a doozy alright, which is why my capital is invested with the “Last Bear Standing”.
No real content in this post, just a great quote from David Rosenberg:
“We still marvel at the shills who believe that the market is fairly valued and that somehow it is not fair to compare how far the market has ballooned over the March lows since those lows were “artificial”. Excuse me. The 676 closing low on March 9th was any more of an egregiously oversold low than the October 9th/02 low of 776? Or the August 12th/82 low of 102 when the S&P 500 was trading at an 8x P/E multiple, a 6 1/2% dividend yield and below book value? It always appears to be an oversold low at the trough, with the benefit of perfect hindsight. But the stock market, at the lows, was merely pricing in reality, a -2.5 GDP growth trajectory which is exactly what we will see posted for 2009 when the books are closed for the year. The market was down 60% from the highs, but guess what? So were operating earnings. And reported “unscrubbed” profits tumbled 90%. To think we can have a 60% rally from the lows in six months and believe that somehow this is normal – please. By the time the market is up 60% from any low, it usually is up that amount in three years, not six months; and over 2 million jobs have been created. This is the first time the market has rallied this much with the economy shedding 2.5 million jobs.”
Beautiful, just beautiful….
I am beginning to think that the DOW, S&P, and Nasdaq are not just not reacting to fundamentals, they are reacting in cohort with government bond prices.
Please allow me to rewind:
Normally, in a robust economy, private capital has two choices: productive private investment, or government debt. Those two choices are exemplified by the “stock market” vs. “government debt” choice, and those respective markets mirror each other in an inverse fashion. That is, bonds go up, stock markets go down, and vice versa. To be fair, it is really a “private market” vs. “government debt” choice, and the “private market” includes not just the stock markets, but also private debt (corporate bonds).
In this “normal” scenario, there is a “scarcity” of capital and a “surplus” of capital demand. No market can go up (say bonds) without another going down (corporate debt or stocks). That is what has been our experience for decades.
By contrast, the current environment appears to be heading (or is already at) towards a scenario where there is a surplus of capital and a scarcity of capital demand. In this scenario, capital outweighs demand, so normally divergent investment classes converge. This is because one of those three investment categories (the three are stocks, corporate debt, and government debt), namely corporate debt, has left the dance floor, leaving only stocks and government debt to waltz with each other. They can both go up at the same time precisely because there is an excess of capital and not enough capital demand.
For anyone wondering how there can be an excess of capital when unemployment is up, wages are down, layoffs are around the corner, etc etc: Most of the unemployed, underemployed, and soon-to-be-employed people are not the ones who were previously funding Americas economic engine. The capital is still there, there is just nowhere to put it.
Back to the story: When there is excess capital and scarce capital demand, capital demand sources don’t have to compete for an “insatiable” pool of capital. So, both stocks and bonds can go up. The thinking goes, “if I can only get 0.25% on a bond, why not invest it in a stock that’s trading at a PE of 90? The “PE” of that bond is even more than that so why not?”
The bond price and PE ratio used above may not make any sense, but you get the drift. It’s late, and I’m too lazy to get my calculator out.
I am now not so sure the stock market will crash and am seriously rethinking my shorts on the stock market. I think gold will get hit worst of all as it does not provide any return whatsoever (PE = Infinity). I think we are in a capital whirlpool of ever-diminishing returns which will continue until all this capital somehow makes it into the pockets of people who actually buy goods and services and the hyperinflation wave can begin.
a) there is no private debt (corporate debt) choice. This is a fact that can be verified by looking at the collapse in corporate debt.
I am now not so sure the stock market will crash and am seriously rethinking my shorts on the stock market.
Attention Goldman Sachs: The Farmer Brown Sentiment Index has officially rolled over….. Proceed with Directive One: FULL MARKET CRASH!!!!