In March, when the market broke down, I believed that was a warning shot across the bow of financial markets. In July and August, a cannon ball was fired over the hull. Now, I believe, we are setting up for a shot that could sink the ship.
I have always maintained that "something bad will happen" by the end of 2008, with that something probably occurring in the spring where we usually get a 20%-25% sell-off. Nothing that has occurred over the past few weeks has dissuaded me of my opinion, unless that dislocation occurs sooner, although I think the programs will push us higher into the new year.
Recent market action could be construed as bullish by some. After all, a whole lot of bad news has been thrown our way the past few days, yet the market has shown resilience.
Since Sunday, the market has been either down or up slightly mid-day, only for it to rally beginning after 2:00pm when the program traders hit the buttons to buy the market en mass. I believe this has occurred mainly for near-term technical reasons, as you can see below.
Support is at 1490 for the S&P 500. Every time we've approached it, the programs kick in and buy, and Tuesday was no different.
I believe the momentum program traders at the hedge funds are ruling this market. It is remarkable how the same things that have been going up every day continue to go up, and the same things that are going down every day, continue to go down. The remarkable ascent of oil, gold, silver, the Canadian dollar, China stocks, Brazilian stocks, agricultural stocks, the euro, Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL), Research in Motion (RIMM),and so on, just keep steadily rising whereas the financial stocks, and the dollar continue to fall. To me, the programs that buy stocks simply because they keep going up and sell stocks simply because they keep going down are moving markets right now. And they will continue to do so until it stops working. Then, when it stops working, they will all push the sell buttons at the same time, and the dislocations we experienced in the spring and the summer will resume.
Investors certainly think that another such dislocation could be in the offing. The VIX is rising, and lows on the VIX keep getting higher and higher.
A frenzy is occurring in specific asset markets. The trillion dollar market cap of Petro-China (NYSE:PTR) is exhibit number one, but examples abound all over, and I dislike this market immensely.
I have begun to liquidate positions, including selling Canadian dollars. I expect to continue to do so in the near future.