As I See It, Here’s Where The Risk Lies
Since trading remains pretty quiet with the exception of a few select setups
throughout the day, I would like to deviate a bit and discuss the market in
terms of the big picture. Naturally, the commentary will have ZERO relevance as
it relates to your trading today, but hopefully it will pique your interest and
give you something to factor into your longer-term investment/trading plan. Also, despite my degree in Economics, I am by no means the expert, I am simply
sharing my observations with you.
Deflation? That was the big word last week from the FOMC meeting. And guess
what? The market and the media got a little scared. But let me ask you a
question, what products/services are you paying less for presently?
- Health Care?Â
- Cable TV?
- Food?
- Gas?
- Insurance?
- Housing?
- Electricity?
I don’t know where you live, but here in Southern California, it ain’t cheap. Quite the contrary. So, if prices are going up, why is the “official”
measurement of inflation going down? Simple, due to the way it is calculated. The Bureau of Labor Statistics factors in “improvements in the quality” of the
product, i.e., you are getting a far better product, but the fact is the product
takes more from your product than it did a year ago. Naturally, technology is
the exception to this rule, as the cutthroat pricing in tech is startling. (Makes
you wonder why people pay ridiculous prices for tech stocks when the profit
margin is so little, but I digress).
But what about the Producer Price Index number that showed the biggest drop
ever? Good question. Statistical anomaly? I really do not know. Let’s see a
series of similar numbers before drawing any conclusions.
Nonetheless, more money leaves my pocket now than it did a year ago. So I
don’t give a crap about what the BLS says, I am spending more money. So why the
deflation mantra? In my humble opinion, the Fed needs to continue to add
tremendous amounts of liquidity (lower rates, open market operations, etc.) in
order to prevent the consumer and the housing sectors from slowing down, or worse
yet, implode. This idea that the Fed will cut rates at any cost and “turn on
that machine called a printing press” (Courtesy of that inept Fed governor Bernake) continues to fuel the belief that a recovery can be forced artificially
on the economy. Hmm, 12 rate cuts have not worked, why would the 13th, 14th
or 15th?
“In a scene reminiscent of the
previous bubble, Greenspan has basically said, ‘yields will not rise, play the
steep yield curve and you will not be allowed to lose.’Â Bond investors are
listening, equity investors may have to. It is a dangerous game, but for now
it’s safe to go back in the pool.”
While there may be many differences between us and Japan, Japan is a perfect
case of intervention gone terribly wrong. Rather than letting the weak banks
fail and purge the system, they continually bail them out. The result has been a
painful drift lower for better than a decade. Alan Greenspan seems to be
oblivious to this and continues to believe that He is somehow capable of
righting a ship that is terribly lopsided.
My point is simple. We are either on the verge of making an economic rebound,
and as a result a stock market rebound, or things may get even weaker. Am I a
pessimist? No, I believe I look at things rather objectively. For me, I
constantly weigh the risk/reward in just about everything I do, especially
trading/investing. Right now, while I remain very cautious, I still cannot
see any really compelling reason to be long equities. The risk is still to the
downside. Yes, the charts and the internals look good, and listening to the
talking heads who are suddenly back on the tube after losing better than 50% of
their investors’ money in the last three years are once again being treated as
financial alchemists does have a certain “jump in the pool, the water is fine”
draw to it. The nagging fundamentals keep me away. For now I am quite content
picking up 3%-5% in some foreign denominated CDs and simply playing the market
purely from a trading basis where my time frame is so limited that my risk too
is limited. Remember back in 2000? Overvaluation was always brushed aside, it
did not matter…until it did matter.
While today’s column was my interpretation on present day scenarios, I must
give credit where credit is due. If it were not for the writing and insights of
the following individuals, I would not have had the perspective to put together
such a piece. I trust you found it helpful. Bill Fleckenstein, Marc Faber and
Fred Hickey.
| Support/Resistance Numbers for S&P and Nasdaq Futures |
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questions.
P.S. I also have a new trading module
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