The recent rally on the Dow, S&P 500 and Nasdaq is the most violent V shaped recovery in memory.
The markets fell heavily because the US Fed ended its QE3 and most people are expecting that end to new liquidity would reset the markets flooded by money trying to find a home.
Then suddenly rather than fall into a proper correction or perhaps even a crash, the market whipped around.
Happily for me I had restrained my bearishness and wasn’t short in a material way.
I am however surprised.
Market theory says the market is random. Even when its fixed its still random. You cant time the market because its random and get used to it.
No one takes notice of this even myself who believes it.
So its random and that can express itself as a Mars Attack, and this is and will continue to be a Mars Attack because Japan taking up the role of global QE master was unexpected and the outcome of it is also hard to predict.
Japan is devaluing. It has been devaluing during Abenomics and now it is on its second leg. Is the destination 120 yen to the dollar or is it 125?
In any event if you know devaluation is coming you want out and its clear not only has Japans pension fund been spewing its Yen into other currencies, so have a lot of parties in Japan.
A lot of this Yen has been going into the dollar and on into its equities.
You can forget earnings, p/e ratios, new product announcements, the US equity markets are being driven by a massive move out of the yen as the Japanese prime minister Abe drives for the mother of all reflations.
Here is a chart that says it all.
It is of the Dow, Nikkei 225, USDJPY currency pair and the Indian Sensex, to give a universal twist to the picture.
Off they all go at the same time. Of course its just possible something else caused this all to kick off at once, but for the love of Occam’s Razor, it’s the flight from the Yen for me.
Somewhat next.
The markets have gone mad. When a senior market is driving equities and that senior market is being driven by politics the foundations of a rally are built on sand.
I’m talking my own book, I’m mainly in cash.
When the Yen move is over and the money flow stops, what then?
A slump seems highly likely.
Then only Euro QE could come to the rescue but then with the German’s in the saddle it surely won’t be as violent as the Yen devaluation. For one thing if the dollar gets too high to fast, it will create a slump in any case.
So if I’m right and another big event doesn’t kick in, then the Dow will stop rising as soon as the Yen stops falling against the dollar.
Then the question is, are we back to a correction.
QE is over in the US.
There might be no retail inflation in the US but there certainly is in asset prices.
It’s a hard call. If we don’t get a correction we are going to get a bubble and a bubble never ends well.
Either way the markets are as I’ve been saying for months, in a new era.
So the future is easy to predict. Its going to be volatile.