I moved to the sidelines Tuesday Aug 21 after being bullish the US stock market for the past couple of months. I posted a note on my blog Tuesday Aug 21 about my "change of heart."
On Aug 20 I had said that I would remain long until the market told me that it was no longer going up...well, I think we got a signal that the short term rally is running out of steam. I did NOT go short...the trend remains up from the June 4, 2012 lows, the Oct 4, 2011 lows and the March 2009 lows...as my long time friend Dennis Gartman says, "In a bull market there are only three different positions you can have, long, really long or aside."
The "psychological set-up" for what looks to be at least a short term top had several parts:
1) the VIX, the fear index, had closed at a 5 year weekly low close Aug 17...no worries mate,
2) the DJI had closed Aug 17 at its highest weekly close since Dec 2007,
3) the DJI had rallied ~10% from the June 4 lows...on very low volume and could easily have been seen as short-term overbought,
4) the story of Apple's rising market cap was becoming increasingly public...the "news" that it had eclipsed the previous All Time High Market Cap set by Microsoft years ago hit the "front pages" all over the world on Monday...and on Tuesday APPL jumped to new all time highs early in the day...dragging the overall market with it...and then turned lower...taking the overall market down,
5) the S+P 500 share index briefly traded to new highs for the year on Tues Aug 21, and to its best levels since May 2008, but then turned lower,
6) The Spanish and Italian stock markets turned lower early Tuesday, after being the hottest stock markets in the world since Draghi's famous, "We will do whatever it takes" comment July 26,
7) US bond yields, which had been trending higher since July 26, turned lower Tues Aug 21.
The DJI dropped 300 points from Tuesday's highs to Friday's lows. It rallied back Friday on media comment suggesting that QE3 is coming soon....and perhaps also rallied back on short covering after a quick 3 day drop...the market has, after all, been climbing a wall of worry for nearly 3 months...the 300 point drop in the DJI may have been only a brief correction.
QE3: There was a lot of speculation this past week about QE3...especially following the release of the Fed minutes on Wednesday. There were public comments from Fed members and lots of media comment. The timing of QE3 is particularly in question with the Jackson Hole meetings at the end of this week and the November elections looming....it would seem that if the Fed is going to start QE3 they have to act soon.
In precious metals the sequence of the rallies had Platinum first out of the gate (Aug 16) with specific impetus from the violence at the South African mine, then Silver broke out (Aug 20) and lastly Gold broke out (Aug 21.) The PMs had been in a narrowing range for the past few months and a breakout appeared imminent. The upside breakout in gold on rising open interest is positive...but I was not a buyer...either I was too slow to see the opportunity or a little suspicious of the move in the thin markets of late August ...or both.
Trading: I start this week virtually flat in my short term trading accounts...looking for worthwhile trading opportunities...and hoping to trade what the market is doing...rather than what I think it should be doing!
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Victor Adair is a Senior Vice President and Derivatives Portfolio Manager at Union Securities Ltd. Victor began trading financial markets over 40 years ago and has held a number of senior positions during his long career as a commodity and stockbroker. He provides daily market commentary on CKNW AM 980 radio Vancouver and is nationally syndicated on Mike Campbell's weekly Moneytalks radio show. Victor's trading focus is primarily on the currency, precious metal, interest rate and stock index markets and his clients are high net worth individuals and corporations.
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