My job is to explain the deeper aspects of psychology in the market. We don’t have a bubble yet but markets are having a high time topping because we can’t get to pure euphoria. Think about it. When markets truly top, which for us was 2000 and 2007, was there bad news in the days leading up to the peak? I don’t remember any. I don’t remember scandal and there certainly wasn’t a major war brewing at that time. Here, we came into October with the threat of a black swan as the government shut down. They didn’t default, so people had a knee-jerk happy pill reaction. I get that. But it’s the indigestion markets had to deal with that prevented all out euphoria. That took up the first half of the month.
OK, the Tea Party did its thing; we know their stance on Obamacare. Now Obamacare gets rolled out and it’s not working for the industry of going to your doctor. Think about these people who are getting cancellation notices. What if they get sick as they shop for new coverage? What if they can’t afford the new coverage? What about the media finally covering this stuff? This is enough indigestion to rob the market of the fuel it needs to top. I’ve never seen anything quite like it. I’m not commenting on whether you are a Democrat or Republican, whether you like Obamacare or not. My take is you turn on the television and there’s enough aggravation to go around just watching how this unfolds, and I think it impacts the ability of the stock market to come to the kind of happiness emotion that can’t sustain, and that emotion causes a top.
That brings us to the 89-day peak off the June low. We had a Fed meeting and markets drooped. Do you have a better word? Media pundits blamed it on the idea traders were fearful of tapering. Did you read the Fed statement? They said fiscal policy is a drag on the economy. I have news for you; they aren’t tapering until the President and Congress learn to get along. Because this Congress expires in a year, it might never happen. How long have they been tapering? Long enough, but I support it as the antidote to the inability for the Congress to do anything constructive that helps the President.
As you know, I’m a huge proponent of infrastructure spending. I do stand corrected because the other day on the anniversary of super storm Sandy I did hear Mayor Bloomberg talk about their plans to shore up the coast line. Never mind not much has been done yet, I do think he is serious. But as of this writing they’ve done nothing about the 69,000 bridges in need of repair. Until that happens, you might not see any meaningful employment materialize. I understand they are creating anywhere from 150-200,000 jobs per month but too many of these jobs are either in retail or hospitality (bartenders and waiters). I’d be surprised if they taper at all before the mid-term elections.
Is that enough for you? The point here is the market came off the 89-day high and pundits attributed it to the Fed, while the Fed gave us no real indication anything is going change. I realize I’m spending a lot of time talking about psychology. We are exploring it because I can’t remember a time since I’ve been involved in markets where you had such a low VIX for such extended period of time yet markets couldn’t tie down that elusive peak. I’m going back to the 1980’s. You might have had conditions like these in the 70’s but the VIX is there was such a thing couldn’t possibly have been this low.
That gets us to the dollar which has finally achieved our bearish aggressive targets and come straight up off the bottom. Look at this parabolic move off the bottom. It’s already tested the peak of the period during the government shutdown. It’s a form of a squeeze but how much of a squeeze could it really after such an extended down wave? It’s not like this is a surprise. Dollar bears knew the party had to end at some point.
But here’s my take on why this parabolic move happened. At the low, it started violating the lower trend line for 2013 and I actually think Dollar bears got greedy and thought it could break down yet again after it was already oversold. That’s called going to the well one too many times. When it didn’t happen they were forced to cover. Now all of the parabolic action has taken a good amount of sellers out of the market. Prices should back and fill this week. When no real selling comes in then you could expect to see some buying action.
I’m expecting corrective stock market activity in November. Why? Mostly because very few people are looking for that but upon deeper observation we are about 4 weeks away from the traditional start of the Santa Claus rally. You’d have a hard time selling me on a December correction due to seasonal factors. So if we haven’t corrected to this point in a bigger way and we don’t do it in December then exactly when should we have a correction? The time is now and for a real bubble to materialize we likely need to enter a news sequence where we have no bad or frustrating news. Does anyone really believe that will happen? Let’s say for whatever reason in an ideal world we hear nothing about the debt ceiling, government shut down or Obamacare for the next 2 weeks. I’ve been reading Debkafile reports out of Israel which suggest the Iranians will have enough uranium to build a bomb within 4 weeks. When they don’t talk domestic news the geopolitical scene somehow manages to fill the void. I sincerely doubt the market is going to drop based on fears of Iran getting nukes but it could impact the oil market. The WTI market has been close to a free-fall and at some point is going to find a bottom. Is it conceivable it finds a low due to fears of an Iranian nuclear weapon or the threat that Israel will take it out? Since perception is everything I rule nothing out.
All of that being said, my view of things right now is I’m looking for that elusive selling to finally kick in this month, sooner than later. I’m looking for the Dollar to continue its move off the low and also believe the stock market will settle into an inverse relationship with the Greenback.