Monday, March 9, 2015

Ticking Time Bomb

The market is on the clock.  There is not much time before the crap hits the fan for this market.  I am talking about the big picture, not a pullback, but the start of a bear market.  It looks to me that the market is now in the exact opposite situation of 2014, when good or bad news was interpreted as good for the market, as seen by the number of gap ups you had during nonfarm payrolls reports.  But that is no longer the case.  With supposed Fed rate hikes getting closer, good news is bad, and bad news is bad, because the market needs a strong economy to support these valuations.

The only thing holding up this market is the optimism over ECB QE, and corporate stock buybacks, which are now increasingly funded by bond issuance.  That is not healthy in the long run.

So on "good" jobs news, Friday we had stocks down big, bonds down really big, oil down big, and gold down really big.   That is a rare feat.  To have the markets crushed all around.  It goes to show you what the market thinks about a Fed rate hike.  It is NOT priced in.  The market has been conditioned for the Fed to come up with all kinds of excuses to delay tightening monetary policy, or to raise the bar for how good economic data has to be to raise rates.  They did that with Bernanke, who said 6.5% unemployment would force them to tighten, and then they raised the bar to 5.5% unemployment rate, and then got rid of it all together.  It has been a fool's game to expect the Fed to tighten, because they have always erred on the side of caution, and kept the easy money flowing.  It will be a shock to the system when they raise rates, even when many expect it, because there are still many out there, including me, who don't believe they have the guts to do it in a timely manner.  They will only raise rates if they think the market would be disappointed if they didn't.  In other words, the Fed will only feel the urgency to raise rates when the majority in the market thinks they should be raising rates immediately.  That is not the current opinion of the market.

So I do believe Friday is not a making of a long term trend of stocks and bonds going down together.  But until the Fed meeting next week, stocks and bonds should remain weak.  Then Yellen will probably have some soothing words for the financial markets to avoid a situation like 2013 with the taper tantrum.

No position in stocks or bonds, but I am bearish commodities, especially crude oil.  Also am waiting for the USDJPY to get a bit higher to start a short position there.  And if the euro gets really extended to the downside, EURUSD 1.05 would be a good point to buy euros.

No comments: