Wednesday, December 1, 2010

Market Musings: 12.1.10

There is no question that we all would like to see a strong stock market.  In theory, a higher market should be reflective of a better economic outlook, and if the economy is prospering, then, as a whole, society should benefit.  Unfortunately, the current market is not reflective of a strong economy and more likely reflects the wishes of policy makers who see a higher market as a sign of prosperity.

I guess my point is that our policy makers have so much vested interest in being seen as right that they are willing to do whatever it takes to make themselves and their policies look right.  The stock market has become that vehicle where success or failure of a policy is judged.  "By all means necessary" is the policy of our economic leaders, and whether it be by capital infusions or money printing, jawboning, changes in accounting rules, or fudging of the economic data, there is one goal: keep the stock market higher.  

From a big picture point of view none of this is good as structural issues are ignored, and capital and investments are mis-appropriated.  But that day of reckoning seems to be a long ways away as the "can has been kicked further and further down the road".

In any case, the actions of our policy makers have become a real headwind to the market rolling over; it makes it difficult to bet against the market.  There is nothing they do or say that will harm the markets and one could argue "why should they?".  But we all know that at some point we must grow up and take our medicine.  

Nonetheless, the dynamic I wrote about several weeks ago -- an overbought, overbullish, and overvalued market that should rollover v. POMO (i.e., policy maker intervention) --continues to play out.  At this point, there is no clear winner as prices are about where they were from a month ago.

I am still sticking with the data.  It is always tough when betting against the stock market.  It is just not normal to bet against America, hope, American innovation and all that other stuff we have been forced fed over the years.  But these aren't normal times.  We have an additional "force" to contend with.  Betting against the market is even tougher.   


Denali92 said...

Right now, it feels as though no one is really winning in this market - YES, the bulls feel GREAT today, but yesterday they were very worried!

It seems like we get these huge gap ups and everyone is thrilled and then we sell off - See last Wednesday, see Nov 4th / 5th.

The rally in to October made a huge amount of sense - this latter period (basically since the Bernanke Op Ed) has been frustrating for everyone....

Being long when the market regularly gaps down is not fun.... being short when it has HUGE gaps up is not fun either.

The market could really use a proper sell off to refresh itself... without it, I fear that it will be an endlessly frustrating market for anyway that has a time horizon of more than a few hours...

The only trades that seem to be working is to go home short when the market has surged higher too much and to go long on a gap down open - that is not healthy for either investing or trading.

I am all for a strong stock market when it makes sense. I am also for a market that is able to find its own path - government manipulation always ends badly! - it just takes longer...

I really wish the governments of the world would follow the bankruptcy re-organization route - it is healthier for all involved!

Thanks for all of your great perspective!


Guy M. Lerner said...


Thanks for the nice comments.

A sell off of more than a few % would be healthy - no question, but it doesn't seem to be in the cards right now; if this is due to manipulation (i.e., gov't policy) or a strong market in the face of being overbought and overbullish is hard to decipher.

As stated in the article, we are at a stand off for now and over the last 4 weeks as well.

PD Quig said...

Wait a minute: the Fed is pumping $6-9B POMO per day. Is there really any question whether this rally is artificial? Good God. Then, yesterday PM the CBOE P/C is 40K calls to 8K puts an hour after the close. Gee, who knew that the USA was going to backstop the Euro? Quite a f**king few people, evidently.

No. The way to make money is to trade 24 hours. Overnight is the Fed's hunting ground and they like the light action. Go along for the ride.

Akhil Khanna said...

I am a regular reader of your blog. All the news and happenings in the financial world have led me to some conclusions about the state of world economy in the future.

One question that puzzles me is that why most of the analysts are recommending Gold as an investment in times of crises.

I would be a buyer of Gold if the price was determined by the demand and supply of physical gold. The price derived today is a result of long and short speculative positions in the exchange. So it is like any other commodity whose price is likely to fall as margin calls intensify in times of crises.