Friday, September 17, 2010

Will Stocks Continue to Rally After Quadruple Witch?

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Today is one of four days during the year when index futures, index options, stock options and stock futures all expire. The market has rallied throughout September into the quadruple witch, but will it continue to do so?

As has been the case with every rally since the bottom in 2009, volume this September has been below average on the Dow Industrials. Low volume is an indicator of lack of enthusiasm for a trend and indicates the trend is likely to reverse soon. Nevertheless, stocks have managed to defy the lack of buying support and hold up for almost a year and a half now. This is theoretically impossible in a free market. It is very possible in a manipulated market however where one or a few large players control the game. In such circumstances, some tip sheet on Federal Reserve liquidity pumping would be the best guide to be used for trading stocks.

The mainstream media has been giving the rally as much support as possible as well. Weekly unemployment claims which invariably fall around holiday weeks, not surprisingly went down the week before and after Labor Day. Instead of reporting this as business as usual, the cheerleading media claimed it was new evidence of an improving economy. Retail sales supposedly had a minor jump in August, although the report was not credible. The smoking gun was the auto component which barely declined over August 2009 when Cash for Clunkers was giving auto sales a huge boost. Independent industry sources showed a huge drop in sales year over year, but somehow government statisticians know nothing about it. Both reports were replete with missing data, so some component numbers were merely wishful thinking estimates. The mainstream media didn't manage to report this key information. A consumer confidence survey today indicated confidence dropped to its lowest level since August 2009. The cause for the drop was consumers getting really gloomy about the future prospects for the economy. Apparently they are increasingly tuning out the information they are getting from the government/media complex and believing what they see with their own eyes instead.

So even though the economy is continuing to deteriorate, government statisticians are doing their best to hide this from the public. The mainstream media is doing its best to help them out by not questioning any number they produce no matter how unreliable or unbelievable it is. The Fed and other central banks and treasuries (think the one trillion dollar euro-TARP program) are doing their best to keep the world financial system afloat in a sea of liquidity. The most obvious evidence for this is a range of assets - stocks, bonds, and commodities - are all rising at once. This happens if there is more money in the system, otherwise traders would need to sell one asset in order to get funds to buy another. When they can bid up every asset, there has to be more available money and less risk aversion, which makes no sense given all the problems that currently exist.

Given the current environment, stocks can certainly continue to go up. Investors should assume the Fed will do everything possible until at least the election on November 2nd to make the market look good. There is no free lunch however. While liquidity driven markets can go higher and last longer than anyone thinks possible, they can also drop faster and much further than anyone would imagine. And this can take place suddenly. Constantly keeping the liquidity trough full also risks massive and sudden inflation. Don't expect to hear about this from the mainstream media though because they will be too busy telling you not to worry because everyone knows that liquidity fattened pigs can fly - or at least that's what the latest government report said.

Disclosure: No positions

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

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