Some Say Bubble, Some Say Boom.

GDP numbers improving, earnings better than feared, bullish forward guidance, market rallying, unemployment slowing down, manufacturing improving, consumer sentiment picking up, housing holding steady and oil not getting any higher.

On the other hand …

Employment in the private sector is falling, overall hiring gets less, dollar remains weak, market keeps getting more and more overbought while volumes get weaker and weaker, interest rates remain at its record lowest and retail sales continue to suffer.

With so much conflicting information and with two very different camps of thought screaming at us from every angle of the market, how is one supposed to form a conscious and unprejudiced opinion about where the market is likely to go over the next three to six months?

What is obvious is that any buying now is not the best advice as it is obvious that nothing is at its lows now. If anything, now is a good time to sell as prices are up and rising. One can never tell how high the high will go but it at least tells us that whatever we’re buying will come with a higher degree of risk than 5 months ago.

So do we sell? Even that carries too much risk when the economy is obviously on some sort of recovery run. Under normal circumstances, it would be the right speculative thing to do. But in today’s market, it’s akin to attempting suicide.

So what exactly is going on in the market and where are we going?

I don’t know anymore. But I do know this … something is changing in the way the market and the economy works. For as long as there has been a market, it has preceded the economic direction like a reliable barometer. In many an economic model, the market has always been perceived as “leading” the economy by about six months. But it would seem that today, the market follows the economy; every tick, bump and grind the economy has to offer, the market has responded accordingly and kept the sentiment till some other economic circumstance changes the direction.

This should come as no surprise. Never before has the market been so full of traders that don’t have a clue and investors who follow like sheep.

In the past, investors had to make their calls through a registered broker who would, in most cases, advise their clients on what to do. The professional advice was always the way to go as it was often sound and based on either technical analysis, fundamentals or insider tips. This placed some “sanity” in the markets and kept things in an orderly fashion … somewhat.

Then came on-line trading. This has put an entirely different spin on the market. Now, more than ever before, the mix of experience and ignorance has to be factored into the market sentiment. This mix of a sizeable group of emotional novice traders with numerous small volume trades against a smaller group of experienced and sophisticated investors in lesser numbers but greater investing volumes has given us one of the most volatile and sometimes, nonsensical money markets in history.

In a sense, the ignorant novices read the headlines and react while the savvy investors read deeper into the report and bide their time. And while all this is going on, the fund managers and institutional traders work to make sense of the madness without any real idea about medium to long term trends. You only need to watch CNBC to see these confused reactions on the faces of some of the most experienced and established Locals on the floor. The divergence in their comments from one Local to another is a clear indication that there is a lot of doubt in the market. It is no wonder we have a trend that looks like a market in distress. (But novices will read the trend as an up-trending V-shaped recovery.)

So while the seasoned investors and traders scream “Bubble!”, the greater number of novices yell “Recovery!” Something has got to give. Only time will tell.

Bubble or Recovery, all I know is that I am not buying into anything for the medium to long term period. Reason being I only buy dips in rallies … and since March 2009, the only real dip was in June into July and if Q3’s pattern is still reliable, August and September are never good months to go long on anything other than Energy. Also, anything I want to buy now is overvalued, at a high or has terrible volumes. This is truly a trend in distress.

Invest at the point of maximum pessimism. ~ John Templeton

To know that this is a trend in distress, we only need to wait a few more weeks to see if volatility rises and if trends take on big swings leading into October. This confirmation will have only one outcome then … you only need to look at the last 12 years on the DOW too see how distressed trends led into volatility and ultimately into the Asian Financial Crisis (1997), Russian Financial Crisis (1998) and the current mess.

Now let’s add another dimension into this play … High Frequency Trading by market moving traders that have no long term vested interests. Such trades also give the market a look that is unreal and often masks the true color of the trend, especially a distressed one.

High-frequency trading from Marketplace on Vimeo.

Be Fearful when the market is Greedy and Greedy when the market is Fearful. ~ Warren Buffet

So as long as this market continues this trend of making big upside moves without following through, as long as we don’t get regular, healthy pull-backs and as long as each big moves stalls before the next, I cannot and will not take this rally seriously. I will just add to the statistic of High Frequency Traders and keep clear of medium to long term positions. Save Energy.

Happy Hunting!

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Comments

Good point of view… appreciate it!

good article
like to recieve more like this

If there’s anything reliable remaining, I believe it’s the Barometer pattern.

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