Wednesday, November 30, 2011

We are in uncertain times -- nothing is certain. And, I might add, in many instances things are not as they seem......

Always remember, price is what you pay but value is what you get!

Today's government interventions -

* The actions were introduced not to stimulate growth but in order to prevent a crisis in liquidity.
* The problems of solvency remain very much in place and will be unaffected by the dollar swap action.
* The last time funding costs of dollar swaps were reduced was back on June 29, 2011. Over the next week the S&P 500 rose by about 57 handles, from 1295 to 1353. Less than seven days later, all of the gains were erased and the S&P fell all the way back to 1100 by the first week of August.

In no way do I expect such an extreme downturn, but I want to point out the historical precedent.

If George Lindsay's technical observation proves correct, the S&P 500 should embark on a sharp move higher.

By means of background, technical analyst George Lindsay coined his 23-step "Three Peaks and a Domed House" technical pattern and gained celebrity because it pointed to a market peak in late 1968 -- and the largest stock market correction since World War II followed in the years after.

The sharp downturn in stock prices in July (matching Stages 9 to 10) that followed provided an almost perfect fit to Lindsay's observed technical configuration.

But now (after possibly moving from Stage 1 to Stage 19), a positive setup and phase (from Stages 20 to 23) might be in order.

If the pattern of Lindsay's "Three Peaks and a Domed House" continues, a sharp upside move in the stock indices appears possible.

Central banks around the world lowered dollar swap rates, and futures exploded to the upside.

The Fed, ECB, Bank of Japan, Bank of England, SNB Bank of Canada all lowered swap rates in an attempt to address worldwide liquidity concerns. In other words, throwing more dollars at the debt problem. In still other words, papering over (print, print, print) the debt.

No one ever said that investing in the market would be fun.

No one ever said that investing in the market would be easy.

There is an inevitability that we will be moving toward some sort of solution to the eurozone's debt crisis and that the U.S. stock market has discounted a downturn in the domestic economy.

For the time being, those looking at technical signs and/or price behavior might be whipsawed by the market's lack of predictability, absence of memory (from day to day) and enormous volatility.

Understandably, many are freaked out by the above three market conditions -- it has been manifested in continued massive outflows of domestic equity funds and further de-risking of the hedge fund community. But these sentiment conditions are not new. Retail investors have taken out over $400 billion from equity funds over the past four years -- the pace of outflows has recently accelerated -- and hedge funds have been de-risking for two years. Sentiment extremes such as this are more often seen at market bottoms than at market tops.

Volatility represents the reality of the marketplace and, to some degree, has become (understandable) a distraction to those investors that trade/invest based on price momentum.

But opportunistic trading requires the fortitude of buying in panics (and sometimes selling into euphoria), and intermediate- to longer-term investing produces returns when investors are greedy while others are fearful.