QE3 may help, but markets plead for confidence

Correction on the horizon?

Stock index, chart, technical analysis Stock index, chart, technical analysis

Did we get beyond QE3? We had a fair amount of feedback on that and those of you who disagree use the classroom approach to economics. Some of you are of the opinion that flooding the market with Treasuries is going to lead to a killer inflation. That is one scenario. But true inflation usually comes from an overheated economy and we are light years away from that. My concern as previously mentioned is leadership being paralyzed into doing nothing. We know for a fact that fiscal policy is dead in the water until the election is over. What is required at all cost is a restoration of confidence.

We have an incredibly strange condition as a result of this move by the FED. On the one hand we have an incredibly low VIX which puts us in danger of a serious intermediate level correction. But in the long term the serious doubt in the ability of Bernanke and his decision making puts serious skepticism not only in the economy but in the stock market as well. If you take a deep breath and serious think this one out you’ll see this is a long term bullish indicator to the stock market.

Why? Think about it. We may be at market highs but does the current environment even remotely remind you of the previous 2 market tops? Does this environment remind you of 2000? How about 2007? Just because a market comes to high does it make it a top. I think we are years away from the top of the stock market. Here we are, nearly 4 years off the bottom if you look at the November 21, 2008 NDX sequence. Remember that 1937 was the end of a 5 year bull market and we had a virtual secondary double top in 38 and 39. We topped in 37 for many of the same reasons we are debating right now. Roosevelt suddenly gave in to the budget hawks and tried to Hooverize the budget prematurely throwing the country into Great Depression II. The same thing could happen here but the moral to the story is the 42 bottom really was nothing more than a test of the 37/38 low and 1932 was never taken out. We have the same potential HERE if we find a peak in the middle of October.

But the saving grace to the market as a whole over the long term which nobody is talking about but me is all of the skepticism towards QE3. I find it fascinating how a whole generation fails to study history and is so willing to repeat it.

Another week closer to the election, right? The polling data is all over the map but generally has the President in the lead which doesn’t surprise at all. What does surprise is the way the challenger is going down. One writer on the Huffington Post (no friend to the GOP anyway) calls Romney the least popular candidate in recent history. Is it the luck of the draw the GOP didn’t have a really powerful candidate this time? I can think of a couple who might be doing better at this stage of the game. Christie would be one but for whatever reason didn’t want the job and I also think Mayor Guliani would have done much better but his personal issues ruled him out. The public didn’t like Newt but had he been the nominee I think he’d be more competitive. But it’s probably academic given the stock market is up these past 4 years which gives Obama the edge. But the next time we get together it will be October and we could be days away from the inflection point where Romney can no longer catch up.

Last week was a week the market started laboring for real even as it hits new highs. What I’m most concerned about right now is the Transports. The NDX is at new highs and you can chalk it up to AAPL. Apple had better calculations in terms of the symmetries a week earlier and was still carried forward by the momentum. But the bearish divergence with the Transports is something market justice will deal with at some point in time.

The other problem is China which set a new low for the week and took out the magic 45 square root. It had bounced off 45.04 and had a promising start. Now the great fear according to a CNBC report is that China indeed will end up with a hard landing. Well, it only took them a year and a half to come to that conclusion. That’s constructive because once the scribes start talking hard landing, that’s the beginning of the end to the big bear market. Thankfully we are beyond the phase where the media, traders and analysts are talking soft landing. The only time you want a soft landing is when you are on the plane. In economics there is no such thing.

Next page: Euro vs. dollar calculations

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