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Stimulation Valley and Deep Swim

|Includes: DJ, QQQ, SPXL, SPDR S&P 500 Trust ETF (SPY)

The main reason why I am still bullish about the market still stands.

I am talking about the monetary stimulus valley. So long as the economy of the empire continues having latent deflationary risks, the policy-makers—Ben Shalom and Obama, in this case—will not abandon their reflationary efforts.

It is true that the situation regarding the budget of the United States is a rather delicate issue, that it has no consistency throughout time, and that something must be done about it. But there is one thing that goes beyond the emotional or intelectual analysis, whether it is of necessity or desire: I am talking about the natural instinct for survival.

Being severe on the budget, in a strict way, to reduce it, to adjust it, to retouch it, and whatever wants to be done with it, means political suicide, considering the context of the American economy right now.

In case they touch it now, there would be a risk of reviving the crisis experienced not long ago, and that is not a risk they would like to take, especially considering that the real estate market has not recovered yet and the unemployment reaches a rate of over 10 per cent. They can pave the way for doing it in a future, so that the negative impact (on the economy) of increasing the rates and reducing the budget will be as low as possible. But to do this nowadays is unacceptable, it is political suicide.

According to the Office of Management and Budget, the American deficit for 2010 will be 10.5 per cent of the GDP. About 3.2 per cent of that per cent corresponds to recession; the rest reflects what remains of the TARP, monetary stimulus packages and the government support to the real estate market.

They plan to reduce the deficit to 4 per cent by 2015, not due to policy implementation, but to the own nature of the stimulus plans being over by that moment, as well as would be the temporal tax reductions that had been implemented by the administration of Bush Junior.

Our two musketeers are well aware that the local economy of their valley remains fragile, still very unstable. After everything experienced during the latest years, they will not run the risk of falling into a deflationary and recession spiral, with serious risks of sinking into a depression. It is for that reason that our brave policy-makers retain the monetary stimulus, maintain low rates, continue to inject liquidity into the market and suggest every new idea they come up with in order to stimulate the economy.

I have no doubt that they will follow this pathway at least until the economy in the valley gets back in a positive track, rather wide and strong, safe, and with little latent risk. Only then will they take care of other issues of the valley, when their instinct and initiative to survive have calmed down, and the necessities, desires, emotions and ideas reign again in their daily routine.

From a technical analysis point of view, this recovery has yet not become as robust and proportionate as it was the market fall between 2007 and 2009. If we believe that life naturally balances—as well our personal lives as the financial markets that represent so many emotions of the entire group of agents— the market is on the course of doing it, but there still is a long way to go.

Thus, it is unsurprising that the representative pulling the strings of the valley economy presided by Obama, Ben Shalom, has restated the announcement of the interest rates remaining low, at least until the end of the year. It is a sign that the economic conditions still guarantees that the Federal Reserve would have to keep the low levels of the Federal Fund Rate for a long period.

These sorts of announcements are not random but rather well thought. When the economy leader makes such a statement, he seeks to reduce uncertainty. Hence, he generates certain trust in the agents within the market, tells them everything is fine, that the stimulus remains.

He seeks to eliminate their fear, or at least to reduce it, in order for them to take the risk of swimming into the deep ocean. Because we witnessed the storm of the century. And almost everyone left the waters and took refuge in solid ground.

The few of us remaining swam along the coast, where the tide is low and we are able to escape fast towards solid ground if we consider it necessary. And now, our captain tells us to run the risk, to go back to the depths!


Disclosure: No Positions