Is the Zeppelin popping?
I just love ironic situations where the ‘truth’ is couched in opposite terms. In the market, the truth currently is that stocks will have a very decent 2014 – not spectacular like last year, but not a terrible one. Here is a Bloomberg article where the big hedge fund hitters at Davos give their (honest?) appraisal of stocks for this year. They are overwhelmingly bullish (quel surprise, since they are all trend followers) with the two biggest managers leading the charge.
I just had to post this quote from John Paulson “The US economy hasn’t taken off. It’s doing OK. I’m hopeful that growth will pick up...”
This man heads up a $20 Billion fund and he’s hopeful?
Doesn’t that say it all? – the stock market rally is built on hope (as if we didn’t know). And we all know that hope is a very dangerous reason to do anything. He knows the economy isn’t great, but is massively long anyway. I have some tulip bulbs I would like to sell him.
The irony is this: I am watching the Dow get smashed and is down well over 100 pips in minutes. As Robert Prechter says, markets climb a Wall of Worry and descend a Slope of Hope.
Incidentally, the average hedge fund made a gain last year of 7.4% against the 25% Dow gain and the 32% in the S&P. Would you trust the judgment of a hedge fund manager?
The problem for fund managers is that they have to be mostly long. If not, they would lose their job. The current rally is thus a self-fulfilling prophesy. That is, it will continue until the money runs out! And that is why we should keep an eye on the money supply data. But at some stage, profit-taking will swamp new buying and the market will begin a cascade move down – and it could be under way this week. And all it would take is a series of disappointing company results, or a sharp increase in interest rates, say.
An additional irony: on the day GDP forecasts for the UK, USA and other major economies are being bullishly ramped up, stocks fell heavily. Another case of Buy the Rumour, Sell the News? Is this about as good as it gets?
With a few thousand pips off the Dow, people will ask what were they thinking of, buying shares at such crazy valuations. Plus ca change.
There are many societal changes going on today that point to a coming bear market collapse, and I will cover some of them in my next WR.
US STOCK MARKET
This just in – in addition to all the usual sentiment indicators that point to historic bullishness, latest option put/call ratios are at multi-year lows. Option traders are filling their boots with calls right after a five-year bull market. There are a few voices in the wilderness advising hedging portfolios with puts, but these are being drowned out by the bulls. The Dow chart is looking interesting (following my MoneyWeek email yesterday):
MIND THE GAP
The 2 January gap now looks even more unlikely to be filled – and that would set the seal of the start of the Big Collapse. The key level is the 16,250 low and then I can say we are in a third wave down taking the market to at least the 16,000 – 16,100 level.