Friday, September 11, 2009

Market Complacency ... Rates Falling!

I have been recently discussing how market volatility has reversed down. This generally indicates that price trends will decline. Notice how the much watched VIX index is dropping to new lows for the move. This index measures the levels of premiums in the Standard and Poors 500 options. It generally declines as markets move up but when markets reverse, look out. It soars. What it might be telling you now is that PUT OPTIONS on the market are very cheap! Again, the market continues to move higher, defying any attempts for corrections.

This is very worrisome for investment advisers who have not believed in the move and remain underinvested. They must come in to the market or lose their job. This is the predicament you face as a mutual fund investor. If you talk to them (after the fact), you will find that their market outlooks had generally been correct however, you could not maintain their bearish positions with the market advancing every day. Eventually, they had to go "all in", usually at the top. It's tough managing money....

I read a report recently how the market will lag and might not exceed previous highs because 6% of 401(k) investors stopped contributing. Yes, I guess this is how the market works. As long as money is flowing into the markets, they are going to rise. As long as the Federal Reserve continues to flood the economy with new dollars, the prices of assets will rise. When the money flow stops, then prices will fall. At this point, I wouldn't be surprised if markets didn't make new highs. When governments as large as the US begin manipulating things and guaranteeing things, there is no limit on how high things can go.


I have to admit I haven't been paying too much attention to the stock market these days. I admit that I don't understand it and when I don't understand it, I don't want to be a part of it. Not only that, but I like to play some and hate these trends that seem to go on endlessly. Nothing goes one way forever. Even Bernie Madoff's Ponzi scheme eventually came to an end. The money ran out. New investors dried up and redemptions overwhelmed the system.


While I have been mostly out of the market after reaping 15% gains in the first few months, I still am playing for fun. I have ADM, AMAT, MRK and WMT long term call options against BA and JBHT long term put options with a long position in DXD, the Ultra Short Dow ETF. It continues to go ever lower looking similar to the VIX chart but every 10% or so down, I add on to the position. You know, nothing goes up forever and when the last dollar is in and the game ends, I'm going to be so happy with my puts and DXDs. But in the end, it doesn't matter. I have achieved my financial goals by taking 15% gains in stocks and 30% gains in futures off the table and await next year when I again seek to achieve realistic and obtainable financial goals.


Even though the S&P and Dow averages continue to gain, momentum in these indices is definitely declining. But this is not the case for interest rates. They continue to fall and are gaining momentum on the downside, meaning notes and bonds will rise. They move inversely to interest rates.


I have been pointing out the divergence of rates and the stock market lately because it is a serious thing. Rising stock prices and rising bond prices give off two different stories of the economy. Rising stocks indicate that the economy is vibrant, strong, growing. When this is happening, the demand for money increases as businesses want to borrow money to grow. Pretty logical, huh?

When interest rates fall though, it shows a lack of demand for money and perhaps a strong demand for safety. As an investor, you must choose which market you wish to believe. Is the economy strong? Can you expect to get more than the some 50% the market has already moved? Or is the market weak, as interest rates suggest, and should you be moving out of the market and into notes and bonds?


You all pay all your money in fees to advisers and mutual fund managers so you are getting what you believe is the best that money can buy. I hope you are guided well. But if you have a doubt as to what you might want to be doing, you can always contact me to get a realistic analysis of your current situation.

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