The advent of computers and the internet have brought much change to the industry. Brokers are no longer required to trade stock; anyone can trade stock for less than $10 a trade. Algo-machines now represent probably well over 30% of daily volume on any exchange in a given day. These trading software platforms place and make trades in nanoseconds and often hold stocks for no more than 16 seconds. Just ask the guys at Tradebot. When I wrote last year that the S&P would hit 1500, most experts thought I was nuts. The fundamentals weren’t there to justify it, and to some degree they were right. But the market has changed. So much in fact that technicals, and a lot of what experts have studied throughout their careers, are no longer relevant – at least not entirely.
Those who used to study technical charting patterns have never studied the effects of these machines. It’s a different world now.
On the Canadian front, the big institutions are also benefitting from the little guys. They make trades for little cost and even get a kick back from the exchange based on the amount of trades they make. When everyone is scraping for pennies, you can bet the big guys are taking advantage of every retail trader they can by short selling and manipulating the markets any which way that benefits them. This isn’t hard to do given the liquidity issues in the Canadian market which makes it really difficult for companies to thrive.
Congress has pushed the debt ceiling deadline out to mid-May to give both sides more time to pound out a budget agreement, so there are strong reasons to expect a favorable seasonal rally to continue.
There still remains a tremendous amount of cash on the sidelines earning next to nothing in savings accounts and bond funds to fuel a further rally. And as I mentioned in my letter, “Time to Sell the World,” there is evidence that previously bearish investors who took money out of the stock market after 2008 are pouring back in. I also said that once the S&P pops passed 1500, we should all be much more careful as, “we have more downside than up at these levels.“
The key to investing is to buy low and sell high; not buy high and sell higher. It may not necessarily happen this month, but I feel we’re closing in on a near-term top. I started this letter saying this is the best January for the Dow Industrials since 1994. What I didn’t tell you is that the best January in 1994 for the Dow Industrials was followed by a nasty decline of 10% the month after.
I know investors remain bullish and sentiment has been pushed higher, but it’s time to start peddling back a little and let your money breathe. Even if just a little.
The market has been up 11 of the last 12 days…
Time to Sell the World?
I believe the markets have topped in many countries around the world, including Germany, France, and the UK. That means it’s probably time to sell Europe; the U.S. is getting very close. A rise above 1475 in the S&P next week could lead us to 1490. I predicted we would peak at 1500 last year within a twelve-month time frame, and we’re awfully close to that number.
I am not saying it’s the end, but I we have more downside than up at these levels – especially in the short-term.
Next week may not be pretty for European markets. But then again, fundamentals haven’t mattered in years, why should technicals?
(Btw, Greek unemployment data was just released and it wasn’t good. The broad unemployment rate for October has been revised to a new record high of 26.8%. The youth (15-24 age group) unemployment also rose to a new all-time high of 56.6%. The ratio of those employed (3.68MM) to unemployed (1.34MM) has now dropped to a record low 2.75x. What’s even more staggering is that the total number of inactive workers (3.34MM) could soon surpass all those who are working. Inactive are those persons who are neither classified as employed nor as unemployed.)
Inflationary Dragons
Bill Gross, the world’s largest bond fund manager and one of the smartest in the business, has been very bold in his statements regarding worldwide monetary and fiscal policy, and gold.
In his most recent monthly investment outlook:
“Investors should be alert to the long-term inflationary thrust of such check writing. While they are not likely to breathe fire in 2013, the inflationary dragons lurk in the “out” years towards which long-term bond yields are measured. You should avoid them and confine your maturities and bond durations to short/intermediate targets supported by Fed policies.
In addition, be aware of PIMCO’s continued concerns about the increasing ineffectiveness of quantitative easing with regards to the real economy. Zero-bound interest rates, QE maneuvering, and “essentially costless” check writing destroy financial business models and stunt investment decisions which offer increasingly lower ROIs and ROEs.
Purchases of “paper” shares as opposed to investments in tangible productive investment assets become the likely preferred corporate choice. Those purchases may be initially supportive of stock prices but ultimately constraining of true wealth creation and real economic growth.
At some future point, risk assets – stocks, corporate and high yield bonds – must recognize the difference. Bernanke’s dreams of economic revival, which would then lead to the day that investors can earn higher returns, may be an unattainable theoretical hope, in contrast to a future reality. Japan we are not, nor is Euroland or the U.K. – just yet. But “costless” check writing does indeed have a cost and checks cannot perpetually be written for free.“
Gross said that subject to the debt ceiling, the Fed is buying everything that Treasury can issue. He warns that we have this “conglomeration of monetary and fiscal policy” as not just the US is doing this but Japan and the Eurozone is doing this also.
Gross is a bond king, not a gold investor. But even he cannot stay away from the lustre of the shiny metal.
On December 30, Gross tweeted:
“2013 Fearless Forecasts: 1) Stocks & bonds return less than 5%. 2) Unemployment stays at 7.5% or higher 3) Gold goes up……”
Gross may not always be right, and his timing not always be spot on, but he is certainly more right than wrong. And in the investment world, that makes him a superstar.
Gold bears may want to rethink their strategy…
Ivan Lo
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