A GRAND FINALE!?

On the surface

 The superficial observer might say, "nothing has changed, since last week".

That is just it.  Time has passed. And one week in stock market terms is long indeed. Rarely has there been a week like the coming stirring up my apprehension as I agonise over two extreme outcomes: 

1. The rally continues - Are we going to be bamboozled by a complete negation of stock market cycles? - 
2. The correction comes - and we'll be knocked for six by a crash that ranks alongside 1998, 1987, 2002 - even the one, 80 years ago from which it took 15 years to recover?.  Drama?  You bet.

CRASH OR EXTENSION OF THE RALLY?

For complete remission of the "cyclically confirmed" downside potential, we don't need too much imagination:  If one trader can cause US indices to go into free-fall (-10% in 20 minutes, in May), we could easily envisage the world's key decision makers finding ways to do the opposite and -mustering the firmest of resolves - use every means at their disposal to stave off a "crash scenario", which has been looming large for several month. 

An artificial rally will do, like the one we have seen for US stocks, even though gains get wasted by a whimpering USD. Liquidity only sustains current market sentiments, - and heats up Asian indices, too.  

Ironically, it might be the parabolic rise in Asian, Latin American and Australian indices of recent weeks, which could become the undoing of the sterling efforts to quell unrest. Why? Asian currencies are seen rising, so are its stocks.  A double whammy is on offer for wary USD investors. 

Time is running short!

Decisions are made for the moment.

Results count in the coming November election, weighing heavily on US politician's minds. 

However, it is the potential changes the electorate might deliver that could upset the political applecart:  Till now, no one minded that new dollars are churned out by the trillions, nor that the trade deficit goes up and up.  Rather it was important to single out a common enemy, a common evil to fight (like China's reluctance to "comply" with US demands to float the Yuan). Nothing unites like a common enemy.

What if! What if the laissez-faire guys are replaced by people that worry about the dilution of the USD, the increasing indebtedness, social unrest? Gone will be the days of low interest rates, throwing trillions of bond investors into disarray.  Where will they invest then?  Do you believe the fairy tale of a risk averse investor gladly investing in the stocks instead? Because the yield is higher? Because they are so much cheaper? What a foolish notion. The only way to sell the story is to discredit the credit they are holding! Now that's cunning...



If you wanted to grasp the message in this chart created with the cosmotrend methodology, keep an open mind: you can see a top (red lined arrow, pointing down), dated for early October, then a sizeable correction (violet oval) into this week. But we can also see a much stronger deceleration in early November (an election result to unravel the bullish sentiment?) - immediately followed a sharp rally into early next year. This is just one picture for the US stock markets. It would needs lots of these for every market place to fill the puzzle. I leave you pondering...

Back to the Present

Any signs of dithering in the present rally? The "bears" certainly are much quieter these days and there is euphoria building in the bull camp, believing that they are winning the battle.

Dow Jones 5 day view

On the ground, we see every market setback being pounced on by so-called bargain hunters."Black box trading" - let the computer decide - controls the scene, with intraday volatility increasing sharply and markets becoming disjointed.  

100% correlation between all important markets is needed to keep the rally alive and well. This quality is missing, at least since last Thursday. Just two examples close to home: China continued to power ahead, and the STI worked exactly opposite to the prevailing direction, while markets globally appear to take a breather.

A turn could come anytime now, out of the blue or in a Grand Finale. For a bullish outcome, the April highs need to be exceeded convincingly in the coming days.  For the bearish scenario to unfold big time, there are several key factors, which need to find complete correlation:

1. A turnaround in the USD, and rallying move toward the 0.83 level, or in SGD terms, being able to get S$1.38-1.40 for your USD again. A temporary reversal is sufficient to unbalance the rest of the ploy. 
2. Gold prices to fall below $1338 per ounce.
3. US indices to fall below a) DJIA 10,700, b) S&P 500 1130
4. STI below 3000, AOD below 4500
5. Large cap stocks to turn down first, probably in the Asian region.

And the list goes on. I will refrain from putting too much emphasis on either outcome, as that does not alleviate the conundrum, for or against. But I do have my preference.  


Rest assured that any meaningful change in the markets will be commented in the blog over the coming days and weeks. 


Main message today: 
don't be a superficial investor. you can get the insight you need. Look around you. It's ok to bide your time! 

Happy Investing.