Monday, July 26, 2010

The S&P 500 and other major indices have been crossing the 200-day moving average. Will this be the catalyst for increased buying? Or are we just completing a head and shoulders topping formation with an ominous descending neckline?

There can be no doubt that corporate earnings have been impressive. Even a perma-bear such as myself has restrained myself from adding shorts so far on this move. In fact, a month or so ago, I even purchased a bunch of C at $3.67. It felt right at the time and wasn't really based on any technical studies. It's just that I've been following the markets since the 70s and markets have rhythms, which after awhile, you just feel.

I'd like to short the stocks now but I want to see if some extra upside might kick in. Lots of news coming this week including GDP and Durable Goods on top of earnings. Perhaps finally we will stop being a derivative play of Europe and start acting on our own.

One thing that troubles me still though is rates. If rates and the SPX were acting as they should be, that is, being correlated, we would also see rates breaking above 3.5% but no, they are languishing at the 3% mark, and threatening to drop to 2.50% on the next wave down.
A strong pop for stocks might start pulling some money out of the treasuries and into stocks. With the little volume in stocks, it's evident that only the institutions are pushing stocks around, as evidenced by the 1,000 point collapse in early May. I certainly wouldn't recommend stocks for anyone after that event. It shows that any wealth in the market could be wiped out in seconds. I was short the market then and was watching it, tick by tick from my home in Mexico. But instead of jumping for joy at making a killing, I was spooked! It was as if the machines had taken over Wall Street. I've seen this Terminator movie many times in the past. It was even proposed in a Tom Clancy book, I believe it was Executive Decision, when a computer code got placed into the market system and when activated, collapsed the US financial system.
Anyway, I heard one proposal that as long as short term rates remain near 0%, all of the other rates will continue to be arbitraged down and that is one reason for the continuing decline in longer term rates. Or perhaps there is just no belief in the US stock market while President Obama is in power. Will we have to wait until November elections to see some pop in interest rates? Or are they really reflecting a new reality? DEFLATION.

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