Market Surge Leaves Indicies In Risky Spot

Up 5% in nine trading days, the S&P500 index sits over its upper Bollinger band, typically a risky place to add shares and generally a good set-up for a sharp pull-back. The relative strength index also sits in overbought territory.

Tomorrow is turn-around-Tuesday, the first Tuesday following a Friday triple-witching day. I wouldn’t be surprised to see the beginning of a correction tomorrow or soon thereafter as the market seems to have forgotten what down feels like. There is no need to anticipate a down move (a mistake in a strong uptrend), but I’m ready with some hedges (TVIX, TZA) if the market continues with its rally but then suddenly reverses and makes a new daily low within the next few trading sessions. It feels like there is an avalanche of new money hitting the market as big money rotates out of treasuries and into stocks. I’m keenly aware that this is a central bank-induced liquidity rally in the stock market, with immense inflationary implications. The market may get really silly on the upside this year before inflation fears put an end to the optimism.

Trading tip: trade individual stocks on the merit of their own stock charts and ignore the overall market direction.

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About jstradingnotes

I spend a lot of time analyzing the economy and securities. The effort has enabled me to generate multi-thousand percent returns on my trading capital over the past twelve years. The next few years offer an incredible opportunity to take outsized gains from the markets. Large structural imbalances in the major western economies will result in enormous market volatility as the imbalances get resolved, offering generational money-making opportunities. The major imbalances are excessive sovereign debt, crazy risk concentration in major banks, and enormous derivative exposure in the financial sector. A systemic shock can easily create a default cascade through the financial system where one failure precipitates another and another and so on. Central banks are very aware of the risks, and they are filling the financial system with liquidity by printing new money, risking massive inflation in a few short years for the United States and Europe. China has 2-3 trillion in dollar exposure, and they would like to have far less for fear of continued currency devaluation (they've lost billions holding dollars as the value erodes). As the size of their holdings prevent them from rapidly liquidating their dollar assets (which includes U.S. treasuries), they are instead spending their dollars on resources (copper mines, rare earth metal mines, oil wells, etc.). Lately they have been accumulating gold assets, perhaps with a view to making the Renminbi convertible into gold and displacing the U.S. dollar as the international reserve currency. Their gold buying is enormous and presents an easy investment thesis: ride the Chinese horse and buy gold and gold stocks. In this blog, I'd like to share some of my trading ideas and insights on the markets as these exciting times unfold.
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