Stock rally forecasts a strong recovery in Q4, but glittering gold spells out risk aversion and inflation on the horizon.
By Joshua E. Stone
I heard an analyst say something profound this summer: don’t miss the market. Clearly the equity bears have done just that this summer. The question is why the market has shrugged off the bad fundamentals so many have pointed out this year. The answer might be pretty simple: the S&P 500 is a forward looking instrument. It is pricing the health of the economy about six months in advance. Not six years or even six days. According to some analysts, the recovery will be sustained by pent up consumer demand from the savings they have accumulated. At this point Wall Street seems to think the same thing or at least it must be thinking something positive about the economy for the near term.
Keeping this in perspective clearly means the bad news bears are not necessarily wrong. It does mean that those who got in the market this last year have been very happy with the results so far. The fact is by most accounts I read from, the money flow in stocks is no longer long, and the major inside traders are shorting. But they have the ability to stay solvent much longer than most of us as the market acts in what some might think an irrational way. Since the stocks have already priced in a good economy( at least much better than the last few quarters) for the last quarter of 2009, it would make sense that it would start reflecting some rising trepidation as it is now pricing in Jan and Feb of 2010. By the looks of the Sept so far, the first quarter of 2010 is shaping up rather optimistically.
This is not a surprise to those of us who have talked about Obama and how the majority trust him. Though his approval is down, he is still the most trusted politician by a few landslides. I think it’s possible the S&P might be higher than its present level around 1k by the end of the year. In short, Sept and October pullbacks will be another good opportunity to add to longs from lows of this year. The same can be said for gold, oil and the eurusd as well.
The strength of the greatest psychological bubble of all time has been quite amazing and deserves some healthy respect. I am speculating that the psychological nature of this rally may mute the usual Sept-Oct correction. The fact inside traders are mostly short now, could be a reflection of the massive risk aversion out there, especially among professionals as they tend to take more factors into account than the rest of us. They have to; it’s their job to avoid risk. I don’t think this means the inside traders are all expecting a massive meltdown in stocks this fall, only that they are prepared for a correction as historic precedent clearly shows is quite likely this Sept or Oct. If you’re interested in seeing my most recent chart analysis of the various instruments I follow and have mentioned here be sure to look at the frame on the right side of my blog entitled “What I am Looking At”.
All that said, for the bears I have this idea: Sept of next year will be the start of a whole new down cycle of data as the unemployment pains are felt and are channeled out through a massive uptick in foreclosures. If not this Sept-Oct then perhaps the target rich environment will manifest itself next year.
That cycle could be very bad for equities, even lower lows than 2008-09 in stocks might happen. This is the logical conclusion if you look at history for a reference. For example, most recessionary rallies last about two years. That means this rally is in its infancy if the historical pattern is repeating itself as usual.
Since the stocks are predicting an economic recovery by year end and perhaps for the beginning of 2009 already, this brings us to the pressing issue of how is the President going to deal with the crash of the dollar? First of all I think were going to have to see a much bigger loss in the dollar before it gets the Administration’s attention. I guess the fact that it is worth 8/100ths of what it was since the mighty days of the 1800`s is not a loud enough alarm for these drunken sailors in Washington DC. Or perhaps that’s part of the plan. The Administration is on record as not being concerned about inflation anytime soon. I also don’t think the Administration has factored in China properly. China though amazingly progressive for its nature has been doing things their way nevertheless. It is costing everyone. How much will it cost eventually? No matter what happens it will cost a lot, some plans I have read that speculate on revaluing the currencies could put gold well above $2,500, perhaps twice that even. The recovery is strong at this point, but very bad retail sales out of Australia for August could be just a precursor of what’s to come next year in the way of deflation for the rest of the globe if something is not done about the crash of the dollar.
Right now everyone is looking at gold, and its fourth attempt in history to peg 1k. I think it will easily break this level to settle back in above 1k by year end. I have heard other analyst expect this too. My speculation at this point is the dollar will fall a lot more between now and Nov, sparking some debate at least if not action by the Administration to address the crises. The response might very well be worldwide and coordinated. Some analysts are saying they will ban spot forex all together and create at least one or two other new “reserve” currencies alongside the dollar. Many scoff at this idea, the arguments are it’s too hard to get everyone to agree, the logistics are to massive etc. What these same critics might be forgetting is the fact that Obama is the most trusted and liked politician of our time, and if he says follow me, they will follow. They have no choice, they don’t trust anyone else more than they do him, and so who else can they listen to or follow? If you have any doubt about this, watch how some version of the healthcare bill is passed soon, and after that cap and trade. I am not saying all this will happen for sure, I am just reporting on the fact that a few analysts have created a buzz on just these subjects and their implications for the economy and the people.
I guess a reminder is in order here: according to the mass on the left and even Alan Greenspan eluded to it, capitalism is a bad love story and its time to fix it. We have a saying where I come from: “if the wheel is not broken don’t fix it.” When I look at China and Europe I am not a believer in socialism or communism that’s for sure. If anything Russia and China have proven that capitalism does not mix well with government control. There is actually a word for that kind of a system: fascism.
Perhaps I am wrong, perhaps the American people have seen the light and smelled the coffee, and will not be taken in anymore, by Obama or anyone but a bunch on fresh new faces in the House and Senate in 2010. One would think this is the case since even fringe bloggers like me have proven to have more credibility or be more accurate to say the least. There is more than one example of the blogosphere having more credibility than the mainstream media or the current Administration. For instance I reported early this year that many analysts were forecasting unemployment to reach double digits by year end.
I figure another reminder is in order here: the people were promised that unemployment would not go higher than 8% this year by this very Administration that everyone has so much faith and trust in.
Yes We Can!
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