Yes, I know the markets are at new highs, and maybe I’m the last person who still hold the view that markets can still correct significantly (maybe by 10% to 15%).
Here are some recent articles that I gathered in no specific order. I suggest that you should read all of them. The markets are like a puzzle (and a moving/changing one). You must put all the pieces together, and attempt to decipher the whole view. I will not go into the details of these articles, but only make a brief comment on them.
- Upcoming 4th quarter earnings & guidance from Todd Harrison. I consider Todd as one of the astute traders in the current credit crunch (based on his past articles). The 4th quarter guidance may become a point of realization where reality meets hype. Needless to say, I advise extreme caution.
- Frank Barbera is indicating a potential top in crude oil, while Bob Hoye has gone out stating that the intermediate top in crude oil is/should be in already. Frank Barbera was a little more positive on crude. He believes a more sideways actions from crude due to falling of $US. In any case, what this entails for the the overall market is NOT good. Energy sector has been a leading sector in this bull market. But you can already see it faltering, especially the in the OIH chart (click on the chart, if you can’t see it clearly) which was definitely the leader in gain, but is NOT confirming the new highs in the markets. Furthermore, MACD is giving a sell signal.
- Despite the above negatives, I am carefully bullsih on precious metals because $US doesn’t seem to be turning around yet. I subscribe to Clive Maund’s observations that PM markets may continue to stride forward due to fall in $US.
- From the venerable trader Bill Cara’s recent posts, it appears that he is in agreement with my view on the global markets (1998 or 1970). Once in a while, it feels good that someone really well-respected has independently reached similar projections as you do.
So what is the KEY to all these markets, and what would be the TRIGGER of the coming actions? I believe that the TRIGGER can be the 4th quarter earning, a currency unpegging event by China or Petro-country, or another credit crunch event. But the real KEY to global markets lies in the exchange rate of US dollar. If you go back to the recent market panic on August 16th, you will see that market falls are associated with a dramatic rise in $US (to 82.13) and usually a rise in US bonds too. It is counter-intuitive, but it is very true. If the $US falls, US (and global) stock markets tend to rise, and vice versa. Such relationship is not always true, but during those periods that when it is true, the correlation is quite strong. My explanation is that during those times, US markets are definitely not making new high in foreign currency, which is a clear indication that the bull market is associated with US dollar devaluation/asset inflation. And when it goes to reverse gear, for some right or wrong reason, both $US and $US bonds serve as a false safe haven for global financial markets, and all markets (especially emerging markets) get hammered and/or repatriated back to US.
Have you noticed that something weird is happening in the currency markets this week (or last)? $US dollar index stopped falling and turned back up from about 77.6 level. BUT both commodity currencies: Canadian and Australian currencies are either at new highs or close to new highs. If you dig into the details of the turnaround, you will see that while Euro did retreat a little which helped, Japanese Yen did more of the heavy lifting. Apparently, there is some global cooperation going around to help lifting US dollar. However, this turn-around of $US dollar index is FALSE, and therefore, global markets are still making new highs.
If and when US dollar make another strong dead cat bounce, then WATCH OUT. Based on the timing of treasury bond markets however, it seems that this event will probably happen later rather than earlier. The 10 year bond yield is at 4.65%, and it’s truly in the optimal range for Goldilock economy. I think we are at the final stretch of a top, where bond yields are low so that it’s not breaking the backbone of the stock markets, and yet the expectation and sentiments of the stock markets are not turning yet from bullish to bearish. Maybe stock markets can stretch this run all the way into next year before a bigger correction.
In any case, when the lows come, I repeat again here, that the lows in ALL markets should be BOUGHT. I seriously believe that the coming US dollar devaluation is going to generate US domestic inflation and export so much asset inflation around the world that it will be a “Weimar Republic-style hyperinflationary equity blow-off”. Because this blow-off is global in nature, I think the monetary force will be spreaded thinner, and therefore it won’t feel like hyperinflationary (yeah, I tell you that people in China & Petro-countries ARE taking in all of our inflation). However, the best fireworks should be in foreign and precious metal markets, even though US stock markets will probably do pretty okay also in comparison to cash and bonds. The poor bears and deflationists will be crushed by Bernanke, even though they have been always right about the state of economy.
Make sure you get the sequence right. It’s going to be mild inflation, higher inflation, and almost like hyper-inflation, and then deflation/depression. Don’t miss out on the inflationary rocket going to the moon. And of course, since your capital gain is really simply going to compensate/compromise all the inflation, saving on your capital gain tax such as using retirement accounts or Roth IRA probably won’t be a bad idea. And for the last time for your benefits, let me repeat that please forget about using bonds for your retirement for the next 20 to 30 years.
At last, if Peak Oil is really correct and here, then make sure you switch onto the energy bandwagon when the deflation/depression make its early start.