QE2 anticipation rally brings stocks back to resistance (again)

Stock and commodity markets have seen a dramatic bounce the past month. As we survey the charts this morning we are clearly approaching another interim test as several indices flirt with overhead resistance. This has been a question of some buying the rumour of QE2 coming. One obvious risk here is that it doesn't. (There is much public disagreement on QE2 merits.) Another risk is that it does happen, but those who bought the rumour will also be quick to sell the news.
Markets today are hyped up on speculation rather than compelling growth prospects. That said if there is sufficient follow-through and some sectors and indices do manage to break out over the next couple of weeks, tactical investors may well get some cautious buys. Bulls will taunt that investors should not fight the tape. A more useful and intelligent statement is that investors should stay true to their own rule set. If we get buys on our rules we should buy. But only where we also have our sights clearly focused on our pre-defined exit rules as well. On most objective criteria, over the medium term there appear to be mostly downside risks from current prices. As Money Manager John Hussman points out cogently in his excellent weekly letter today, allowing for the possibility of further short-term gains, in the medium term, valuation metrics today are at levels likely to end in more investor losses ahead:

“…but at least for now, investors evidently could not care less. Had investors been correct in ignoring the ultimately disastrous risks of the dot-com bubble, the tech bubble, the housing bubble, and the overleveraging of U.S. financial institutions that preceded the recent credit crisis, we would concede that the market's wisdom on these issues should take precedence over our own concerns. But in our view, those disasters were predictable. Likewise, as noted above, the persistent willingness of investors to misprice stocks is exactly why they have gone nowhere for over a decade. We'd love to be bulls, scampering happily about. But that would be helped if stocks were priced appropriately and if there was not a large anvil suspended on a fraying string overhead.
We strongly believe that price and volume behavior conveys information, but that belief does not extend to the dogma that they do so perfectly, or that prices are “sufficient statistics” for the overall state of the world (which would make analyzing additional data useless). Rather, our view is that the stock market is substantially overvalued here, and that investors continue to be diverted from the big picture by the clown carnival of short-term news and investing-as-sport that is celebrated on financial television. “

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6 Responses to QE2 anticipation rally brings stocks back to resistance (again)

  1. Anonymous says:

    If you trade pure technical s your a buyer of this market with tight stops below. the market is not rational so trying to explain it's behaviour will leave you pulling your hair out.

  2. Anonymous says:

    People have been saying since May 2009 that the market was due for a big correction. Quite frankly I don't believe anybody's predictions anymore and am staying clear of the market until some sanity returns, which may be never.

  3. Anonymous says:

    Financial Times: “Global Clash Over Economy. Global economic co-operation was in disarray and further battles in the currency war looked likely after the weekend’s international meetings of finance ministers and central bankers broke up with no resolutions. . . . Mohamed El-Erian, chief executive of Pimco, the world’s largest bond investor, said: “A once promised global response has now been replaced by inadequate coordinated national economic policies and growing frictions among countries.”
    Wall Street Journal: “Rally Leaves Financials Behind. Amid the stock market’s gains for the quarter, one notable group was left behind – financial companies. After years in which financial stocks drove the performance of the broader market, their diverging profit is causing some investors to wonder if it’s time to rethink the truism that as financial markets go, so goes the market.”

  4. Anonymous says:

    What about gold? It has smashed through all resistance yet you remain negative.

  5. Anonymous says:

    “How is the average investor to compete with the Wall Street giants who seem to make or break markets according to fickle sentiment, superior research, rocket scientist-based program/high-frequency trading, etc. …?
    Well, perhaps the best way is to emulate some of the trading principles used by the pundits of yesteryear who beat the stock market no matter the emotions and mechanics of the institutional herd. For instance:
    Bernard Baruch – Some 70 years ago, he would research a stock, buy it, and then each time the stock rose 10% from his purchase price, buy an additional amount equal to his first purchase. If the stock began declining he would sell everything he had bought when the drop equaled 10% of its top price …
    Baron Rothschild – His success formula was centered on the famous quote attributed to him – “I never buy at the bottom and I always sell too soon.” …
    Jesse Livermore – This legendary speculator profited enormously by calling the various 1921 – 1927 advances correctly. In 1929 he reasoned that the market was overvalued, but finally gave up and became bullish near the top in the fall of that infamous year.
    He quickly cut his losses, however, and switched to the “short side.” Livermore listed three major points for his success:
    1. Sensitivity to mob psychology
    2. Willingness to take a loss
    3. Liquidity, meaning that stock positions should not be taken that cannot be sold in 15 minutes “At the market” …
    Addison Cammack – A stockbroker from Kentucky who swore by the two-point stop-loss rule. “If you’re wrong,” he said, “you might as well be wrong by two points as ten.” He followed this method successfully and was one of the few bears to make a fortune on Wall Street and keep it …
    Interestingly, all of these disciplines have one thing in common. They all adhere to Benjamin Graham’s mantra, “The essence of portfolio management is the management of RISKS, not the management of RETURNS. Well-managed portfolios start with this precept.”
    Managing the “risk;” what a novel concept, but unpracticed by many investors. To be sure, typically when portfolio values start to erode investors seem to chant, “It’s time in the market not timing the market; or, it’s a strategic not a tactical strategy.” Such mantras cost S&P 500 index investors more than 50% in portfolio value from the October 2007 high into the March 2009 low. However, if that same index investor “listened” to the cautionary signals the stock market was flashing in November 2007, and hedged that “long” index portfolio for the downside, the loss would have been less than 10%.
    Unfortunately, many investors continue to shun stocks, having not managed the downside risk, leaving them of a mindset that you can’t make money in the stock market anymore. My response is “hogwash!”
    P.S. – Have I got you thinking about what trading strategy to follow? Well, I’ve been holding the best system for last. Here is the one sure-fire formula for success. “Don’t gamble, take all your savings and buy some good stocks. If they go up, sell them; if they don’t go up, don’t buy them!” – Will Rogers

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