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Markets – Macro – Stocks – Charts – Alerts

Weekend Market Update

Friday ripped higher, but the move was really not a surprise as I had outlined a target of the $ES 1802-1803 zone with a risk upside of 1806-08 in the published daily trade plans.

IWMWhere we are now: The trend is your friend they say and remains so. On the surface nothing has really changed. Markets pull back slightly for a few days at the most and rally right back up. And this pretty much describes the depth of insight you get from pros and various services: Trend lines point up, the Fed provides easy money and stocks go up. Just blindly buy. And clearly this strategy has worked and even I, a current macro bear, was cautioning against shorts Wednesday & Thursday and was placing long trades despite the choppiness we saw. The double bottom in the DAX, the relative strength in some indices, and the lack of a new low on Day 5 of the modest decline were signaling the willingness to jump on the $5B Friday POMO train. Don’t think for a second stocks went up on Friday because of any news related items.

Per the trade plan I posted the technicals were already aligned: “Something really interesting and rare happened yesterday: We had an inside day following an outside day. That is an extremely rare pattern. While an outside day by itself is considered somewhat bearish this combination of days is very bullish.”

And so the long trades posted for clients with $ES from 1785 played nicely and the $SPY call position came in at a very nice 219% gain, a quick Gold trade from 1215 -1240 proved the icing on the cake.

So all is well for investors in 2013 right? The wealth effect is great and portfolio returns must be beaming? I don’t think so. In fact I think this narrative is very deceiving. Here’s why: The typical investor is advised to have a balanced portfolio approach, so a mix of stocks, bonds, commodities & cash. Much of the stock investments comes from investments in funds & hedge funds. Well guess what? The vast majority of hedge funds are lagging steeply behind the S&P. Equity funds will have generally done exceptionally well but any allocations to bonds and commodities will have likely put the breaks on any balanced portfolio. And cash? Well we all know what return you get for cash these days. Bottom line: unless investors were in stocks only with no hedges they are pretty much all lagging the headline ascent of the major markets.

The HeroSo what message has the Fed been sending to investors? Don’t have a balanced portfolio, don’t manage risk, abandon all caution and just go long, longer and longest. All money into stocks. Have no fear we will drive prices higher. Hence it should be no surprise that margin debt is at all time highs.

Brilliant. The Fed is creating the most dangerous investor class ever, oblivious to risk and completely trusting that the almighty Fed can do no harm and will always save the market.

TV networks, analysts, and newsletter writers are pushing an all bullish narrative, and we are told many retail investors are not in the market with tons of cash on the sidelines. While that is correct it is kind of missing the larger point.

Median IncomesMany retail investors are not in the market because they are broke. Real incomes have not recovered, most new jobs created are low paying temp jobs only, or are government related. In fact surveys I found indicate that 63%-76% of Americans live paycheck to paycheck with little security if they get ill or lose their jobs. Sorry, but that’s not a base that will create huge inflows into funds. It is true we have seen foreign inflows and sector rotation as people & funds are chasing returns at all time market highs at a time when markets at the most disconnected from long term moving averages.

So now will we just rally on as usual with Santa bringing good tidings for the rest of the year?

My analysis & trade plan for clients here.

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Categorised in: Daily Market Brief, Market Analysis

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