NATURAL MARKET CYCLES VS. POTENTIAL MANIPULATION BY THE FEDERAL RESERVE -
ASSESSING CURRENT TRADE RISK
Next week's Federal Reserve meeting is an important one as the Fed is supposed to announce the end of QE (quantitative easing), the bond buying program that has been supporting the U.S. stock market's nearly uninterrupted steady rise from its crash in 2008 -2009. The Fed is aware of the negative impact this could have on an already nervous and jittery market and has recently (over the last several months) been trying to calm investors with promises of not raising interest rates "too soon". This may not be enough, however, to soothe current markets as most investors are expecting interest rates to start rising by the middle of next year and possibly even sooner, and this is not so far down the road. An increasingly unstable geopolitical environment is also contributing to recent market nervousness.
There has been a lot of speculation over the last few weeks about the possibility of the Fed starting a new round of QE (which is being called QE4 by some - referencing the three previous rounds of QE in 2010, 2011, and 2012) with some financial industry participants even urging the Fed to do this. I think it would be unwise to underestimate the power of the Fed to keep the stock market buoyant, so I am taking this possibility seriously, especially as it could adversely affect our current trading positions.
There are presently strong cycle patterns as well as technical analysis and timing signals pointing to imminent significant corrections in both the broad stock market and the precious metals market (see recent blogs). A lot of this analysis is predicated on the flow of natural financial cycles in a free market, that is, a market that is not manipulated. If the Fed intervenes with QE4 (or perhaps a more covert program of intervention) it could excite Wall Street into a state of (Greenspanian) "irrational exuberance", kick equity markets into high gear and diminish or truncate any significant potential corrections (at least for now). Gold would also likely benefit from this as many precious metal investors would realize that more QE could easily lead to runaway inflation (or hyperinflation) which diminishes the value of the dollar and makes hard assets (like gold and silver) much more valuable. My point here is that our current short positions in gold and the broad stock market could be in jeopardy should the Fed consider a fourth round of QE at its meeting next week. We will watch this situation carefully and maintain tight top losses on our short positions, even at the risk of being "whipsawed" out should investors have a positive knee-jerk reaction to any Fed announcement but then quickly change their minds and become bearish.
I should note here that any blissful reaction by equity markets to the news of more QE is really quite foolish. (Of course, the stock market is known to be rather short-sighted and does not usually operate on rational thought or logic. Greed, fear, and strong emotions are its usual driving forces). Most people realize that one should not attempt to rescue someone in debt by giving them more debt. Or perhaps a better analogy would be "helping" a drug addict by giving him or her more drugs. This usually leads to the eventual demise of the addict. In the case of financial markets, more QE could lead to the demise or breaking of an already bloated bull market "bubble" and a long overdue market correction that could be abrupt, severe, and long-lasting.
ASSESSING CURRENT TRADE RISK
Next week's Federal Reserve meeting is an important one as the Fed is supposed to announce the end of QE (quantitative easing), the bond buying program that has been supporting the U.S. stock market's nearly uninterrupted steady rise from its crash in 2008 -2009. The Fed is aware of the negative impact this could have on an already nervous and jittery market and has recently (over the last several months) been trying to calm investors with promises of not raising interest rates "too soon". This may not be enough, however, to soothe current markets as most investors are expecting interest rates to start rising by the middle of next year and possibly even sooner, and this is not so far down the road. An increasingly unstable geopolitical environment is also contributing to recent market nervousness.
There has been a lot of speculation over the last few weeks about the possibility of the Fed starting a new round of QE (which is being called QE4 by some - referencing the three previous rounds of QE in 2010, 2011, and 2012) with some financial industry participants even urging the Fed to do this. I think it would be unwise to underestimate the power of the Fed to keep the stock market buoyant, so I am taking this possibility seriously, especially as it could adversely affect our current trading positions.
There are presently strong cycle patterns as well as technical analysis and timing signals pointing to imminent significant corrections in both the broad stock market and the precious metals market (see recent blogs). A lot of this analysis is predicated on the flow of natural financial cycles in a free market, that is, a market that is not manipulated. If the Fed intervenes with QE4 (or perhaps a more covert program of intervention) it could excite Wall Street into a state of (Greenspanian) "irrational exuberance", kick equity markets into high gear and diminish or truncate any significant potential corrections (at least for now). Gold would also likely benefit from this as many precious metal investors would realize that more QE could easily lead to runaway inflation (or hyperinflation) which diminishes the value of the dollar and makes hard assets (like gold and silver) much more valuable. My point here is that our current short positions in gold and the broad stock market could be in jeopardy should the Fed consider a fourth round of QE at its meeting next week. We will watch this situation carefully and maintain tight top losses on our short positions, even at the risk of being "whipsawed" out should investors have a positive knee-jerk reaction to any Fed announcement but then quickly change their minds and become bearish.
I should note here that any blissful reaction by equity markets to the news of more QE is really quite foolish. (Of course, the stock market is known to be rather short-sighted and does not usually operate on rational thought or logic. Greed, fear, and strong emotions are its usual driving forces). Most people realize that one should not attempt to rescue someone in debt by giving them more debt. Or perhaps a better analogy would be "helping" a drug addict by giving him or her more drugs. This usually leads to the eventual demise of the addict. In the case of financial markets, more QE could lead to the demise or breaking of an already bloated bull market "bubble" and a long overdue market correction that could be abrupt, severe, and long-lasting.
RSS Feed