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Calm before the storm in global financial markets again?

with 2 comments

The calm always comes before the storm. In world financial markets the bears are tired of calling an end to the year-long rally, while even the bulls are beginning to feel that they are skating on thin ice.

The US treasury market weakened on a poor auction result last week. That might be seen as bullish for equities as an alternative asset class but then higher interest rates are the writing-on-the-wall for global asset prices. Rates go up and asset prices go down.

Bull dilemma

Indeed, this is the whole problem for the bulls. They know that a bubble is being inflated in stock prices by low interest rates. Traders say this is all down to after hours trading by the big banks. Volumes are light and trading thin.

So why would you wade in and commit fresh funds in such an environment? The potential downside is that new money. The potential upside is a few percentage points on the Dow. Treasuries at four per cent might look more attractive, except that the capital at risk is also a factor there.

The result is something of a stalemate with not much happening. Shorts have been almost all covered in a long rally. Nobody really wants to take on the bulls. But then nobody wants to run with them either.

Judging which way the market might turn next is surely not difficult. The bulls are running out of steam while the bears are resting. And given just how far this market appears to be manipulated it will have to be the bank trading desks who decide to put on their short positions and catch the rest of the market snoozing.

Market timing

How long will that take? If only we knew. But being positioned away from a crash is more sensible than being in the middle of it, unless you go short too.

Realistically this should not take too much longer. We know from past crashes like the one seen in 2008-9 that a rally is followed by a sharp correction, and the longer the rally the sharper should be the correction.

When the bank trading desks have killed every short then they will go short and kill the bulls. It will not be a pretty sight.

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Written by Peter Cooper

March 28, 2010 at 9:32 am

2 Responses

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  1. The market will continue to go up until the Federal Reserve is forced to raise interest rates. That might be sometime next year. Various Fed officials have said that low rates will last for at least another 6 months.
    Eventually, the debt bomb will probably explode, but there is no way to know when that will happen. It could take years, even a decade. Things might be fine until peak oil starts to bite, probably during the second half of this decade. That will depend on how much oil Iraq can produce, and the growth of Chinese and Indian oil demand. If things go well in Iraq,(a big ‘if’) and they do achieve their goal of becoming the largest oil exporter, the Dow could be at 25,000 in 2019. It is not impossible, unlikely, but not impossible.
    Remember, we can do all kinds of creative things with money and finance, but we can’t make one more drop of crude oil.

    Ed Note: so the market is going up in a straight line, no corrections, just up and up? why then did it have such a horrible crash in the first place? what were those creative bankers doing then? a sucker’s rally is not done until the last sucker is paid up!

    Bill Simpson in Slidell

    March 30, 2010 at 1:31 am

  2. Peter, you have been calling this correction for months now!
    Are you another Bear that is throwing in the towel?
    Or are you sticking with your short calls?
    They must be hurting…;-)
    Is now the time to capitulate or to double down with double short ETFs on emerging and US markets?
    What about commodities?
    Will they get it in the neck like last time?
    what about a USD rally?

    Even the news flow & blog info feels like we are on summer holidays with nothing substantial.
    What will be the catalyst?

    Ed Note: Please have a look back through the stories and you will find out! But yes this correction has been an awful long time coming. Perhaps I should give up and then the market will no doubt crash. Go short I suppose because being long is madness at this stage.

    sandman

    March 28, 2010 at 10:36 am


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