FOOL ME ONCE…

Stock market investors and prognosticators of various ilk have once again taken the vigorous stock market action over the past few months, and have extrapolated it to an economic recovery.

Fool me once, shame on you. Fool me twice shame on me.

The economy is not roaring. Commodity prices are and a few anointed or heavily shorted stocks are. But not the economy. Don’t believe the hype, again.  Remember, one third or more of every dollar spent or squandered in this country is done right now.

We should all now expect to live through these “cycles” of Monetary and/or Fiscal stimulus, followed by market gains, followed increased confidence and sentiment, followed by another reminder of reality and the new normal. Our reality is that we continue to live is a credit contracting environment. Until and unless the massive private debt gets restructured, any gains will be illusory and trading-oriented only. That’s good enough for me and most, but keep your expectations in check.

Bull cycles, like the one we’ve enjoyed since September, breed bull market hero’s and massive complacency. When markets sucked in the summer, nobody wanted to buy anything. Nothing. You were repeatedly told to sell stocks and buy bonds. Hundreds of billions of dollars did just that. But that is when the risk was lowest for stocks. I continually said to buy stocks throughout the “double dip”, death cross and every other silly indicator. Remember?

Now the sentiment says not to fight the Fed and to buy stocks and commodities forever. Even during the holiday season of 2008, markets stabilized and traded in a range before resuming their crash. The Fed is in complete control and front-running the market at every turn. For example, everyone says to buy commodities because the dollar must go to zero. So far the DXY remains in a bone-fide uptrend since the announcement of QEII. Plus, simultaneously,  interest rates have risen sharply. Part of the sell off in bonds is profit taking, but many want to believe that it is because the economy is roaring or that tax cuts matter. Don’t believe the hype, again.

The fact is that banks continue to suck and every single action the FED takes is designed to give them cover. Because the only way for them to make money is on the Fed’s teat, when the yield curve steepens, they make more because they still borrow from the Fed at .25 and lend to the Treasury at ever-higher rates. And rates are peaking now. So the Fed’s stated goal is not being met, yet they help the banks anyway. Does this yet prove that everything they say is a lie? Not yet? They must be one step ahead of markets to continue to be the profit center that the government needs them to be. I will continue to wait and see if any politician can figure out that the Treasury is being funded by the Federal Reserve.

We’ve talked about technical patterns not working. They do work, only later than usual, and now the major indices are in the process of making a textbook perfect double top. Will the pattern hold? Perhaps after another fun little spike higher, just to get the masses firmly on board and cap the year. THEN it will work…Be ready…

In the summer it was hard to keep accumulating in the face of ever-present weakness. But it worked perfectly. Today it is difficult to liquidate in the ever-present strength. That will be the correct strategy too.

Our tactics remains the same: Keep liquidating or raising stops. Create a taxable event now, before it goes away.

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