September 4, 2014

Are We There Yet?

gdpdropsI’m not sure why so many people get bent out of shape with the thought of a market correction.  As if the markets correcting is akin to having root canal without anesthetizing the tooth being ‘rooted’.  The markets are not falling apart they are falling into place – normalizing – returning to the mean.  Calling for a correction doesn’t make the analyst a pessimist or a bear.  In fact I actually know many market ‘bears’ that are very optimistic people.  Recognizing an extreme shouldn’t be confused with being out of touch with reality.  On the contrary recognizing the extreme but failing to accept it would seem to me of a sign of being out of touch.  Honestly, sticking one’s head in the sand to avoid the truth that a disaster is heading your way won’t change the outcome.

The fact that the ECB and the FED are taking turns pumping huge sums of money into the global economies and in turn making it more difficult to put that money into a bank as savings by adopting zero interest rate policies leaves very little choice for anybody seeking a return higher than 0.05%, which is as of today the benchmark interest rate after the ECB cut rates by 10 basis points.

ecbTo add insult to injury banks will now have to pay the ECB more to park cash within the ECB.  Talk about forcing the issue – deposit rates were already negative at -0.1% after today and going forward the rate is -0.2%.  Yes, Sparky that means banks will pay 20 basis points to gain the “safety” of depositing rates to lend that money out.  So Mr. Draghi and the ECB have made it even cheaper for banks to borrow and gave even more incentive through negative deposit rates to lend that money out.

But wait it gets even better the ECB will start buying asset-backed securities and looks to be taking a cue from the famed QE programs here in the US by possibly starting to buy government bonds in October.  Yes again, Sparky the ECB is doing everything it can to force investors to pour money into the European economy.  Let’s hear it for the Draghi Asset Bubble.  Did anyone really pay attention to the Bernanke Asset Bubble as it created massive amounts of debt via massive amounts of money printing to see if the economy really was better for the majority?

Back to the question; are we there yet?  No, but we are getting closer. While I continue to expect some correction within the equities market I am still expecting additional new highs before all is said and done.  The primary reason is because of the continued availability of “free money” from central banks operating under ZIRP (zero interest rate policy).

risingstocksThe markets can and just might continue to accelerate higher as the new created money continues to seek yield and I would expect some of it would spill over to the US markets.  From Thursday morning’s reaction I suppose some felt it was imminent and on its way.  Unfortunately the majority didn’t agree and that was evident by the lack of participation.  After reaching new highs overnight prices were initially pushed lower.  After an additional thin volume attempt at pushing back towards the highs the sellers stepped back in. Why you ask?  Likely due to the facts continuing to argue that the markets are extremely overbought and experience along with reality and gravity stepped in.

The markets continue to push to new all time highs on thin volumes.   The state of the global economies clearly suggest it is an all out asset bubble, but a bubble that continues to get pumped by the Central Banks of the United States, Europe, and Asia.  A correction at this stage should not be considered unhealthy – because it isn’t.  Coming down for some air is a good thing.

With regards to the correction that does appear underway off of Wednesday’s highs I don’t expect it to be long in duration or deep in retracements.  With earnings season basically complete until the start of the 4th quarter the markets will take their cues from economic reports that will continue.  The August employment report is due out tomorrow morning and that is likely to dictate direction initially.  Next week the futures roll (broader indexes) should kick in as traders roll September positions out to December and that will take us to September expiration on Friday the 19th.

Consider the markets entering into a seventh inning stretch.  While we may be in the later stages of the great bull market of our lifetimes, so often the most explosive part of a game occurs in the final innings.  The current boom times will end they always do.   Therefore, it continues to be a matter of when and not if.

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Trading the number remains key to being able to reduce and separate the “noise” from opportunity.  This takes knowing and executing a well-defined strategy and allows you to see opportunities amongst the “chaos” and by trusting the mechanics of your strategy, be able to take advantage of them.

Opportunity continues to knock on our doors.  While it doesn’t come without risk, risk can be defined and more manageable. Volatility and broad moves are exactly what a day trader desires and being able to respond without questioning is a luxury many are unaware of.

Steer the course and don’t compare yourself to everyone else.  You are not they and they are not you.  Remember to trust and believe what makes you unique at this moment in time and in this situation and allow others to choose for themselves.  Don’t be swallowed up by the chaos and false emotions swirling around.  Remember it’s just a number.

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