I’ve been a bear most of the year and for a bear, the market is presenting a confusing picture.
Something major has changed in the market and most people would point at the end of QE as the cause.
However that is clearly not the whole story and perhaps not the story at all as the market has rallied into the FOMC statement and the statement was what we were all lead to expect in the first place.
The market went into a tailspin at the end of September and not just equities, Oil too. Gold is also not a pretty picture and signally volatility in the markets in general has exploded.
On its own exploding volatility is not a good sign, because volatility is risk, which is uncertainty. For a bull market with certainty to become a market with dramatically rising uncertainty, strongly implies that the market may have changed is no longer a bull anymore.
Dramatic increases of volatility, is a bearish factor because floods of new uncertainty is not an element to bolster confidence for buying.
That aside the US equity markets have come storming back.
It is easy to say this rally simply means the bull still lives, but the UK and European markets have not stormed back.
Oil is still flat on its back.
As if this is not enough, the dollar has gone rampant and the Euro has swooned.
Can we synthesis into a single picture?
Good luck, because the linkages of old have become fragile and there is a general decoupling between instruments you would normally expect to track each other closely.
Thursday (30/10/14) for example the Nasdaq and the S&P 500 took time to catch up with the rampant Dow where you would normally expect there to be near lock step. The European equity markets have decoupled from the US markets in terms of the rebound leaving them not even half the way back in relation to the US.
There is trouble in the paradise of market correlations.
This means big things are afoot.
What is it?
It’s the dollar. It has to be.
It’s the rising dollar and interest rates will follow.
The end of QE was the end of the era of the credit crunch and now in the next few years a new, new normal will take hold.
So for me, this means I need to try and forget I know what I know. I need to start tearing down all my assumption with a view to building a new model.
I still think we are in for a bear market, but I park that as old thinking. Old thinking may be right, but I have that model.
It is more important for me to realize that in a new era I could need a new model.
The old model says we are going into a significant bear market now. There was an opportunity for a short sharp shock, but the participants are religious believers in the “fed put” so we will have to suffer a drawn out “sell the rallies” bear market for an extended period. The bear will be a result of a shift back to free markets, no longer rigged by central banks mandated to rescue an economy no longer in acute crisis. Without out free money asset values will begin to drift down towards a less heady valuation. November 2014 will substantiate or falsify this idea.
If however the market skips by this month of volatility like a one-time only psychotic episode and continues to power up, it is time to ask fundamental questions about the new phase of the markets, now we are in a post great-recession environment.
Now the US fiscal deficit is back under control and the new measures of inflation successfully obscuring the dilution of the trillions in the US deficit, maybe the new, new normal can support sky high valuations.
“Unconventional l monetary policies” are now “conventional” no central bank is going to revert to the past ways of doing business, so perhaps these new measures and their further development will change the rules of engagement. Can a US will a lull in its perpetual war sustain a big economic renaissance?
When you predict a correction, it happens on cue but then half way along, turns on its heels and does the exact opposite of what you expect, you can’t simply leave assumptions unquestioned.
The impact of the end of QE and a strong dollar is unclear, but one thing is for sure.
The credit crunch “can” everyone was moaning was being kicked down the road has been successfully punted for miles and now has been picked up and thrown in the trashcan.
It has been a job well done. We should applaud it as the alternative was to terrible to even contemplate.
However in my head I cannot yet believe the market will plough on up regardless without at least one old school check.
However I’m where I need to be, sat on a large pile of cashed out winnings and that where I’m will stay until the smoke clears.
I don’t believe that will be long.
Update: I wrote this on Thursday night and already a lot of smoke has cleared. Bingo Japan QE. Is this rally all about a gigantic dollar carry trade? The yen collapsed against the dollar and the Nikkei 225 went through the roof.
Once again, the forces driving stocks are not stock-market forces but politics, economics and interest rates. That an explosive mix and one that’s bound to be vigorously shaken. Expect trouble ahead.