It was a wild week for the market and a grueling one for me. Let us start by reviewing from the last post:
“Readers know that I am leaning bearish. As a bear, when I see that everyone around is agreeing with me, it scares the day light out of me. If everyone agrees and everyone is right, it would be so easy to make money in stock market. Alas, it is never that easy. “
“Today I closed my short position because I would not be able to monitor it regularly, may be a little too early and left some profits on the table, but hey, no regrets. The big game is still on and I will be there. For now I think a bounce is brewing, which will kill few bears and trap few more bulls.”
“However, for now when everyone has jumped on to the bear side, I would like to step back and wait for a while. I do not trust these bots and dark pools. Moreover, FX has not dropped along with Apple. Euro is still above 1.2062 and AUD has not broken 1.02 yet. They will break down very soon, but for now, the slide has halted. Short term, the indexes are over sold. This week 173 firms representing 37% of S&P will have their ER. So caution is warranted. “
Now you be the judge.
How do I read this market? I am just amazed that they are able to manipulate the market so easily. As if just by mere wishing. And there are suckers every time ECB or The Fed or their pets mention QE or some sort of bond buying program. Or just simply says, “believe me”. We definitely are walking on quick sand and people still fall for the same BS over and over again.
How do I invest or trade in this market? I do not invest in this market and have been largely in cash for well over two months now. I kept writing that preservation of capital is most important in this environment. I believe that the fundamentals do not justify the stock market going up and requires at least a 20% correction before we can see value again. The sovereigns are struggling and on the verge of bankruptcy or default. The Powers That Be are out of tools and are applying band aid after band aid and are praying each day that passes. The markets are behaving like a terminally ill patient in ICU, who is given blood transfusion and steroids just to keep it alive. When given the shot, it stirs and sits up but the effects of these transfusions are getting shorter and the patient falls back in coma shortly thereafter. At some point, the patient will die.
Understanding that fundamental concept and knowing that manipulators with the active backing of a corrupt governmental system are playing havoc, will help us remain safe. But there are still people out there ( I know, I get comments and emails!) who have faith in the system, who thinks that the market is bigger than the ability of the TBTF banks to manipulate and those who think technical analysis alone will help them make money in this quagmire. Even God cannot save you, guys.
You may ask, very well, now that we know that it is doomed, why are we not short with everything or as Prechter says, short will leverage? Let me explain that with an analogy. Its rainy season and rain is expected. The weather man said at night that tomorrow there will be sun shine. You get up in the morning and see that it is not raining but the sky is over cast. What do you do? I would still take an umbrella while going out but not open it. The situation is somewhat similar here. The dark clouds are hovering over us. The weathermen ( B and D) are telling us that it is not going to rain and everything will be fine. So we remain prepared for the worst but do not open the umbrella either. I have said repeatedly in the past, never under-estimate the power of these crooks. They can and will distort the market in the short term. TA is powerless in the face of these master puppeteers. But I take my cue to get out of any short position from TA. Please don’t ask for any particular indicator because there is none. It is a combination of many indicators and judgment call. At the end of the day, we make the call and hope to be lucky. When I got out of the short position on 24th July, I was thinking maybe I got out too quickly. But I was sure of the coming squeeze and I sent out many tweets to that effect.
So what’s next? I think the risk remains to the downside. Against everything negative, low revenue growth, earnings call misses, global slowdown, looming sovereign default of Eurozone countries and massive , unsustainable debt by USA, only thing holding up the market, is the hope that Bernanke will bring QE on August 1st. By front running QE it is making Bernanke’s job that much difficult. When DOW is 13000, what justification can he have to pump more money? Isn’t the QE been already priced in? Even if QE comes on 1stAugust, which I doubt, how far will it push the market up when the economy is on stall speed at 30000 ft above the ground. Personally, I do not think we will have the QE this time. Because it will be politically suicidal for Ben when “Audit The Fed” bill has passed congress and the Democratic hack Chuck Schumer is openly urging him for action. Everyone knows that Ben’s is the only game in town and Republicans will tear into him. But It will be there before election. If what I am thinking works out correctly, can you imagine how disappointed the market will be on August 1st? But we cannot be certain. It is a bad idea to gamble with the retirement savings. If we must play, then take a calculated risk of losing a very small portion of the portfolio and try out to see what happens. But I would advice strong risk management. Even if we miss this down opportunity, we can be sure of the easy money opportunity coming next because then there will be QE and we can catch the ride up risk free.
I want to emphasis that this is not the last opportunity and if we have the power dry, (Cash) we can shoot when the ducks are in line. Right now, they are scattered all over. If we allow our conviction and greed to override caution, we will get hurt.
So let the markets go up for the next two days. Some indicators are over bought, some are not. But over bought can remain over bought for a long time and if you want to short just looking at RSI, that would be a mistake. Wait for the short squeeze to end and momentum to fade. Above all, just remove that “fear of missing out” from your head. If no QE 3 on August 1st, then the road is clear for the bears.
Thanks for all the wonderful comments and emails. The coming week is also going to be tough for me but I will tweet as soon as I get an opportunity. So join me in Twitter (@ BBFinanceblog). But the most important thing for today is to enjoy your weekend with your loved ones. Crooks and their manipulated markets can wait.