It's nice to be right on the money. On June 4, I told Forbes that investors would be wise to increase their cash position, get out of margin accounts where possible, and be prepared for the slide. The slide is here. The Dow is down nearly 1,000 points from its high on May 28.
Over the last four weeks, it's down less than 5%, despite all the fear of Fed tapering. Is that all she's got? Or are we going lower?
In my long career on Wall Street, I have never witnessed a liquidity momentum driven rally of this magnitude in the equity markets. I am very concerned for the long-term health of this market. I am concerned simply because no one in this market cares about fundamentals anymore. The overbought conditions, combined with the use of excessive leverage or margin debt poses catastrophic consequences to not only investor's wealth, but the overall economy, and I've said that here at Seeking Alpha before and in the last issue of my macro economic newsletter Straight Money Analysis. Nervous investors are truly standing on shaky ground. Those are just some of the reason I am increasingly of the belief that the current bull market in equities is now close to ending.
Three factors that will drive the market going forward
The stock market continues to drive to higher valuations despite skepticism on the part of the investing public over whether or not many of the market's asset classes represent true value. Moving forward, I believe the stock market will be driven by three factors:
1) Shifting concern over the bond market as bond prices have been falling.
2) Mounting concern about the dollar moving forward. Whether or not we are now beginning to see the ending of QE. Finally, what will the dollar and Fed policy will mean to our trade issues.
3) Investors are closely watching the direction they believe crude oil prices will move. From here, $100.00 per barrel oil is a real and distinct possibility in the months ahead.
Fed tapering will end this bull market. How low we go after that is anybody's guess. But it is hard to see at this point how the market will push higher when the reason for its gains since 2008 have largely been because of monetary stimulus.
Reassuring comments from the Federal Reserve are pushing the stock market higher. When James Bullard, head of the Fed's St. Louis branch, told an audience in Germany at the end of last month that the Fed ought to stick with its bond-buying effort to bolster the economic recovery, the markets surged. However, opinions at the Fed about when to apply the brakes on monetary expansion are not unanimous. But as we have indicated, the majority consensus at the Fed, including that of chairman Bernanke, is firmly on the side of maintaining enough liquidity to keep the economy afloat. This is a calming reassurance to Wall Street but an ominous prospect to savers and all whose interests are hedged in dollar denominated assets.
It was February of this year when Fed Chairman Bernanke said he saw no bubble in the equity market, even though the stock market was at a five-year high then and even higher today. He told a congressional hearing at that time that low interest rates "could encourage excessive risk-taking," but he assured lawmakers that he's closely watching for bubbles. That is exactly what former Fed Chairman Greenspan said about some of the largest and most dangerous asset bubbles in history when he ran the Fed. During his time, the Fed's monetary policies fueled the housing bubble, which when it burst, ended up creating the greatest economic contraction since the Great Depression. While this trouble was brewing Greenspan said he saw no bubbles; only "froth." We should learn from history and not allow ourselves to get too emotional in these markets.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.