Since my last post not much has changed in the battle between the bulls and the bears. Markets remain overbought and extended since the rally out of the August 7th low. The divergences from the IWM and the DJIA remain (DJIA did not reach a new closing high). Its still to close to call but we either melt up or just simply begin to fall apart soon. I am biased towards the fall apart soon scenario due to the delicate technical structure of this market and the fact that the taper ends in October. People hope the ECB steps up and does QE but I have my doubts as to weather that will plug the hole of the Fed’s lack of QE. The market is simply tired and pooped. Since the taper began the second derivative of this market has shifted to one of price deceleration. The DJIA is up about 500 points after 8 months of work this year. The last two times the Fed ended QE the markets started to rollover and corrected nicely.
Since hedge funds are now the marginal player in the market heavily shorted expensive stocks are out performing cheaper stocks so the market seems to be inflicting the most amount of pain on the maximum number of participants. I think this is why the Dow is lagging and the Nasdaq is hitting new highs. Geopolitical noise is starting to affect company fundamentals in Europe and I suspect earnings revisions down will commence soon on multi-national firms affected by Russian sanctions. This market is very resilient but it should be interesting to see if can handle going cold turkey from free basing QE rocks. How low do we go? That remains to be seen but a correction of 10% or greater is needed if you are a bull or bear because the longer this advance goes on without an unwinding of some of this froth the greater the chance of an epic crash that will make 1987 look like child’s play. I think everyone should be rooting for a pull back.
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An hour after I wrote this Ukraine and Russia cut a deal for a cease fire. Very good news! Markets never top on bad news.
It will be interesting to see if current earnings begin to matter again
Thanks for the update Bluestar. Any thoughts on the dollar lately? In your interviews on cycle man a few months ago you mentioned to keep an eye if it starts breaking out. I think it’s up about 4-5% since then.
Yes the dollar going higher may be a sign of de-leveraging or a lack of other alternatives. I am keeping an eye on it.