Friday, November 12, 2010

Market Musings

There are two dynamics going on in this market.  Call it force versus force.  It is the overbought, over bullish and over valued market that should rollover versus the buyer of last resort, the Federal Reserve.  And there can only be one winner. 

There are a lot of factors why the market should rollover and this list is by no means exhaustive:

1) overbought - by most measures (i.e., oscillators) including market internals

2) over bullish - sentiment data shows too many bulls as many series are consistent with market tops

3) weak technical underpinnings to the current rally - volume has been lack luster

4) weak fundamental underpinnings to the current rally  - hope is not a strategy

5) inflationary pressures are on the rise and this is a headwind for equities

5) current solutions to right the economy do not address structural causes

6) do I need to mention unemployment, healthcare, and housing?

7) sovereign debt and currency wars

There is only one reason to be bullish and that is the Federal Reserve is backstopping this market.  Whether it be through permanent open market operations (POMO) or other means, Chairman Bernanke has targeted asset prices.  Now I am not jumping on the POMO bandwagon nor do I have expertise in this area, but many have pointed to the fact that the market only goes up anymore on days that POMO is being conducted.  So according to this article at Zero Hedge, the next 20 trading days are POMO days.  That is a lot of money and it has to go somewhere, and if I can paraphrase those at Zero Hedge, the money usually ends up in the Apple's and Netflix's of the world all in the name to make "us" feel better.

So if we think about the current market dynamics, overbought and over bullish usually implies a dearth of investors or lack of money on the sidelines to propel prices higher.  Thus the market is prone to rolling over.  But with the Federal Reserve in the game, we now have the ultimate buyer - one with endless buying power (i.e., a printing press).  

The data says that the market should rollover.  QE2 and POMO is a force that says "happy days are here again".  On the other hand, when information like POMO is known by all, then it isn't worth knowing. 

It is an epic battle.  Force against force.  Titan v. titan.

To see how I am playing it, you can check out my real time portfolio.

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