Calm Before Another Global Market Storm?

 |  Includes: EEM, EFA, IEV, SPY
by: Peter Cooper

The calm always comes before the storm. In world financial markets, the bears are tired of calling an end to the year-long rally, while even the bulls are beginning to feel that they are skating on thin ice.

The US Treasury market weakened on a poor auction result last week. That might be seen as bullish for equities as an alternative asset class but then higher interest rates are the writing-on-the-wall for global asset prices. Rates go up and asset prices go down.

Bull dilemma

Indeed, this is the whole problem for the bulls. They know that a bubble is being inflated in stock prices by low interest rates. Traders say this is all down to after hours trading by the big banks. Volumes are light and trading thin.

So why would you wade in and commit fresh funds in such an environment? The potential downside is that new money. The potential upside is a few percentage points on the Dow. Treasuries at four per cent might look more attractive, except that the capital at risk is also a factor there.

The result is something of a stalemate with not much happening. Shorts have been almost all covered in a long rally. Nobody really wants to take on the bulls. But then nobody wants to run with them either.

Judging which way the market might turn next is surely not difficult. The bulls are running out of steam while the bears are resting. And given just how far this market appears to be manipulated it will have to be the bank trading desks who decide to put on their short positions and catch the rest of the market snoozing.

Market timing

How long will that take? If only we knew. But being positioned away from a crash is more sensible than being in the middle of it, unless you go short too.

Realistically this should not take too much longer. We know from past crashes like the one seen in 2008-9 that a rally is followed by a sharp correction, and the longer the rally the sharper should be the correction.

When the bank trading desks have killed every short then they will go short and kill the bulls. It will not be a pretty sight.

Disclosure: No positions