Monday, September 24, 2012

Wait and Watch.

As I said yesterday, I was not convinced that we had a trend change and we are more likely to see a test of the high. So when the market opened lower, I sent out tweets that /ES 1445 is the line in the sand. The line held and the market erased most of the morning loss. Just to repeat myself, today was officially the  1stday of QE3.

It has been a long time; we have not checked the sentiment indicator chart below:

In the battle between fear and greed, greed definitely has an upper hand right now.  Yesterday I asked, can the equities prices fall when there is a QE in play? The answer is: depends. In short term, the risk asset prices rise as we have seen in QE 1 and QE 2. But when there is QE infinity like they have in Japan, the asset prices go down over a longer time horizon. It has happened in Japan where Nikkei is down to 9000 from 38000 in 20 odd years.

I quote the following from Peter Tchir:

The Fed first cut the target rate from 5.25% to 4.75% on September 18, 2007.  Remember when 50 bps was a big cut and not twice the target rate?  The S&P 500 was 1,477 the day before the cut.  It popped 43 points that day to close at 1,520.  It got as high as 1,565 in October and has never been above there since.  So in a 5 year period where the Fed has been more aggressive than any other central bank known to mankind, the Fed is still losing.  Before going further, think about what the Fed has done since that first rate cut and where stocks are now.
I am not looking to go toe to toe with the Fed for 10 rounds of a bare knuckle brawl, but “don’t fight the fed” as an effective investment strategy has a lot of flaws.
Also contrary to the universally accepted wisdom that QE ensures good stock performance, we show QE isn't a cure all for stocks and then many other things, including powerful earnings growth (which we neglected to mention) helped power stocks.  On an even more basic level, the initial QE1, didn’t turn stocks around immediately, and stocks in fact sold off for months and hit record lows after QE was announced.

Therefore, while liquidity will trump in short term, fundamentals will catch up in long term and one should play accordingly.

What is the short term play now? The market is in consolidation mode and the mantra is BTFD. I am waiting for the market to break this consolidation range in either way. A correction is due but with all the free money around, it is hard to come by. So the only sensible thing to do is to wait. The cycles are showing a top in a day or two, therefore I expect a test of high by tomorrow or soon thereafter.  If it makes a new high, all bets are off. If it fails to make a new high, the minor expected correction may follow through. As of now, there is no sell signal yet.  October is going to show which candidate will win the race.

Precious metal sector is showing some signs of weakness. Silver appears to be weaker than gold.
In conclusion, its wait and watch time and cash is king.

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