The market has been the most volatile I have seen it since I started trading almost two years ago. Perhaps I have taken on the tone of a permabear around late summer as I keep pounding the table on how this rally at some point is likely to end and drop hard. Im really not a permabear. I will make money going long or short but I try to have a longterm vision.
Perhaps it was my foray into several hype stocks such as 3D printing, making a fortune only to watch it evaporate in a blazing crash,or buying TTWO before they made a $Billion only to watch their share price drop that has turned me into a cynic. But being in these stocks taught me an important lesson early on and that is to Never believe the hype and never believe investors are rational. What goes up must eventually come down. Assume everything is a pump and dump including the market because it pretty much is. Thats just how the market operates. Something goes up, starts gaining steam, the early money gets rich as latecomers and momentum chasers start piling in fueling the rising prices. At some point it becomes the greater fool theory. Reflexivity kicks in as peoples shortsidedness and perception that because something is going up it will continue to go up forever. This works on the downside and it works on all time frames. Just look at message board stocktwits. After an up day everyone is all bulled up. After a down day everyone is all beared up. At some point that early money is going to start to sell however. Its all imaginary paper gains and losses until you close your position. So then the price begins to drop and all of a sudden the latecomers are underwater and panicked that it will never go up again so they sell and the chain of dominos that spent months or years being setup begins to get knocked down at high velocity.
I'm not sure if markets have always had some sort of underlying factor behind movement up or down but in this one the Federal Reserve has a disgusting amount of sway in market direction. Every fed meeting they say almost nothing and the market goes crazy. I have been pounding the table for such a long time that Quantative Easing has been the life support of the bull rally. I don't think anybody could argue that it has been economic strength that has bounced us to new All Time Highs after the depths of the financial crises. The chart of the Feds Balance Sheet /SPY truly says all that you need to know about the rally.
I hear alot of Bulls arguing that the ending of QE has been known about for months and is priced in. How in the world is that possible when the balance sheet continues to expand? The last known day of POMO is next monday, only after the real end of asset buying will we see if the lack of $Billions of asset purchases weekly affect markets and normalize them to way they should be, buyers and sellers in search of price discovery.
Average Americans are not doing so hot financially. 50% of Americans make under $27k a year. Buybacks remain rampant. I heard many Bulls championing Caterpillars earnings as a bellwether of global growth ignoring the fact that their revenues were stagnant and the increase of EPS was mostly the result of $Billions in stock buybacks.
Monday is the last week of POMO in QE3. If it really ends I am convinced that the feds ponzi scheme bull rally is done for. There is a fed meeting on tuesday however, if they announce another round of QE I will become more bullish than you can imagine because Quantitative Easings ability to levitate asset prices in the face of everything else grounded in reality is astounding.
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