Some random thoughts , but first I'll repeat what I always say. There's no right or wrong in any of this and any speculation on the future direction or fundamentals of the market has absolutely no bearing on how I trade and is in the interests of general discussion only. I've spent over a decade developing a system that is smarter than I am and is designed to be acted upon without question and avoid being on the wrong side of the market. The last two shorts I've taken in recent weeks on the XJO (4950 weeks back and more at 4925 on resumption after Easter) didn't necessarily feel right at the time but have so far done me a lot of good. I still hold hundreds of stocks (mostly centred around gold/energy/property trusts and strong dividend yield stocks) but if we move much below recent lows I can see that short position being added to again and lots more stocks being exited. Any clear move towards 5000 would likely see a decent move up but with all the headwinds we face (including $AUS) I struggle to see it.
** the other day I was talking in terms of All Ords 5100 but you cannot short the All Ords so I reverted to XJO terms.
A few bullet points:
- I have felt for a while and still feel we're entering a period like the 70's of low growth and relatively high commodity inflation - conditions conducive to a volatile market that ultimately goes not very far.
- I agree that almost all of the talk regarding our currency has had little currency
for the most part but that in recent days and weeks the market has drawn a line in the sand and said "OK - from this point I'm taking notice." Let's also not forget that in constant currency terms the US market is going nowhere at best and valued in Euro/Aussie is going down and vice versa with our market.
- I feel that a period like 1994 is not out of the question.............strong appreciation in the Australian currency that saw the US market move mildly higher while we suffered a mild bear market. Whatever happens (assuming continued US dollar weakness) I expect the Aussie market to seriously underperform.
- I have no real interest in "bellwether" stocks as such. Many so called bellwethers (Microsoft, Cisco) in their particular area have come and gone and been replaced. I also feel it is dangerous to focus on a cyclical sector which almost by defintion tops out when profits are strong and PEs are cheap (ala most of our big resource stocks in 2007.....only to halve or worse as prices crumbled and contracts were torn up/deferred) and in a sector that in a weak economy/strong commodity inflation situation may well substantially outperform the overall market. Too many variables.
- I feel the USA is likely to eventually recover but let's be frank - the only reason it isn't in a situation like some of the Euro countries is mostly by default than good management. It has earned a period of grace becuase of its size and reputation (shaky) , its bond markets attract money by default as it is the only market liquid enough to handle all the money that needs a home and it can monetise its debt with the world reserve currency , a strength it may one day lose. If we get news on the wires one night that the Treasury struggled to cover a bond issue then look out! China has also shot itself in the foot by accumulating so much US currency which also helps , but it is making serious moves to diversify away as we speak. I have no bullish/bearish bias but I do believe most of their big banks remain insolvent (free to plough on due to relaxed accounting standards) and that the ZIRP is as much about recapitalising the banks by stealth (they borrow from the Fed at close to zero and invest in treasuries @ 3% or so) as anything else. In the process of course they - the Fed- continue to encourage speculation in junk to get any sort of return (junk bond issuance is at all time highs) , the Fed has received little heat after explicitly stating that boosting the stock market is official policy (says it all) , they penalise anyone who dares to save and trash the value of their dollar which in the lower to middle class is seeing people with stagnant wages and poor employment prospects smashed by higher food and gas prices. Of course much of this has little short term relevance to multinationals with soaring US dollar profits and record profit margins (which is often a market negative).
- IPOs ,which totally dried up in 2009, are being issued at a rate only exeeded once in the last 8 years - mid 2007. This can either be taken as a strong market or an overheated market - take your pick.
- the banking index in the US is in downtrend and leadership in the current advance is getting narrower.
- Further to the above - I also have friends and family in the US across multiple wealth classes. My impression is that the rich get richer and the poor get poorer and the middle class are in a big struggle to stay there. The wealthy people I know are having a great time on the markets, scooping up cheap assets etc.............while those who I would class as ordinary Americans see very little to be positive about at all. The recent Gallup poll doesn't do anything to dissuade me from this view
www.reuters.com/article/2011/04/28/us-usa-economy-gallup-idUSTRE73R3WW20110428?feedType=RSS&feedName=domesticNews- We may well look back on the last week as the start of something - not only our market's reaction to the currency but the movements on various world markets Friday night. Gold (which moved up above its range into what can sometimes signal a parabolic move) and agricultural/energy markets all took off in a big way while copper moved down along with the US dollar. This isn't something you expect to see and might be the start of a more explicit low growth/high commodity inflation scenario in the markets..........this is all assuming the US dollar continues its current course.
- eventually the appreciating Euro will bite there too , as will oil if we move up too much further
- Given the above and the ticking time bombs all over the world (too many to list) and the vast majority of Western governments ill able to handle any further crises (all bullets spent and more) , to have the VIX hovering around multi year lows indicates a level of complacency that is almost surreal.
- Another interesting comparison (in the spirit of Twain's "history rhyming") is the 70's period I mentioned earlier - see the chart below. This all depends on the US dollar holding the break of support .
You can see in the top pane that the current demise of the $US has been hurried along by Uncle Ben's addiction to printing - the results during the 70's were similar to what I've been talking about. A parabolic move in gold and a US stock market that rose in nominal terms but fell adjusted for inflation.
Anyhow - it's all just trivia and speculation . I'm happy to keep trading long for as long as its in my interests but I have that feeling that when the proverbial hits the fan (and it will) the current complacency will not be justified. At some point trashing the US dollar will not be enough. I'd also keep a lazy eye on China which often leads by a couple of months and whose indices will look rather sick if too much further downside occurs.
The positives about my low growth/high commodity inflation outlook:
- the best stocks and sectors will stand out like dogs balls (rather than a rising tide floating all sorts of junk) and can often make it easier rather than harder to get onto the big trades
- this outlook might make it possible to short the index and be long gold stocks (as an example) and make good money in both directions
So it's certainly not all doom and gloom from a trading point of view. I would just prefer the index (ours) to do something for a change.
As a contrast here's a bloke who sees only bullish times ahead - he sees a lot of what I see (rich get rich , multinationals thrive) and sees it only getting better with governments more than capable of sustaining their current course........
www.marketoracle.co.uk/Article27835.htmlIn the end the best advice is "listen to the market" and the need for the sort of analysis above is eliminated.
Cheers,
Ed
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for the most part but that in recent days and weeks the market has drawn a line in the sand and said "OK - from this point I'm taking notice." Let's also not forget that in constant currency terms the US market is going nowhere at best and valued in Euro/Aussie is going down and vice versa with our market.