Don’t think : JUST DO WHAT THE MARKET TELLS YOU NO MATTER WHAT

So, we’ve had another five day 1000 point romp through the Chutes & Ladders of “Stock Market Fantasy Land”, similar to the “Magical Mystery Rally” of late June. Except instead of happening in the last few days of the quarter this little sprint has occurred in the first few days of the next quarter.

The media and traders cite the Nationalization of a shitty Belgian bank who needs a $90 billion backstop as the main reason. Remember Bear Sterns? They only needed a $30 billion backstop. How many banks are there in Europe? Nationalizing one may give the market a chance to breath a sign of relief. But a thousand points? Nah.

The beginning of the quarter and the calendar is clearly a reason for the exaggerated move. Lot’s of festive or destructive market movements just so happen to occur around the same quarter-beginning/end timetable. Coincidence? I think not.

How about this? Ten year bond yields dropped to new all-time lows, near 1.75% as Operation Twist began in earnest. But just like when QE2 began, bond yields have reversed and have now moved sharply higher. The money is finding a home in stocks. You see, there is this little model called the “FED Interest Rate Portfolio Model” or some such nonsense that says whenever yields drop below inflation or some other measure, that stocks should be bought. This model assumes that yields move in relation to economic activity or lack thereof . BUT THE MODEL IS BROKEN BECAUSE INTEREST RATES ARE NO LONGER DICTATED BY THE MARKETPLACE. Interest rates are pegged by Central Banks like some third-world currency and the markets welcome it! It is really quite an amazing phenomenon.

So, for the seventh time in eight weeks, the markets have traversed another thousand points in our wide and volatile trading range and each time sentiment and belief swings on a dime. Just last week we were on the precipice of an economic meldown and equity market crash. Then, after another massive rally where yearly gains are made in hours, sentiment swings again and hope reigns supreme.

The real key to our market’s recovery is simply a reallocation from bonds to stocks. In five days the yield of the Ten Year Treasury is up almost 24% from 1.75 % to 2.17%. That is money coming out of bonds and moving into stocks. Just the opposite of a few weeks ago when yields were plunging as money was plowing into the safety of Treasuries and out of stocks. And interestingly, other than oil prices, most commodity and precious metal prices are not making their usual recovery-type gains.

These moves look like something important is happening because they are so fast and all-encompassing. But illiquidity and extreme herd movement is the hallmark of our ETF/HFT addled market at this point in time. Nothing has changed except for one bank, and I still haven’t figured out how the $90 billion will be created.

The only game-changer is that the Chinese are now actively buying the equity of their largest public companies. So now everyone thinks that every little Chinese reverse merger stock is free to buy. Just be careful with them because most are as worthless as they were two weeks ago. The Chinese government won’t be buying little companies on the American market, I can assure you.

Next up is the top of our trading range in the SPX 1220 area. We broke down from the lows and reversed higher last week. Next will be a breakout, failure and reversal except from the top of the trading range. No Virginia, we are not about to break out to new yearly highs and bail out the Wall Street Complex. Not yet anyway.

But for today at least, hope still lives!

 

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