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Navarro's Market Rap: Jiminy Cricket's Virtuous Cycle
Last week, I indicated that the risk-to-reward no longer favors the short side, and Santa is visible on the horizon. With the Nasdaq finally breaking into positive territory for the year, odds are no good for a continuation of the rally through the usual holiday season.
As Davio mulls on this as well, it seems paradoxical for the bulls to be running fast when there are so many obvious headwinds – oil, interest rates, budget and trade deficits, hollowing out of manufacturing base. But short term, falling oil prices and robust productivity coupled with a continued and strong interest from foreigners in capitalizing our debts make for a Jiminy Cricket-like virtuous cycle.
The Week Ahead: Inflation in the Spotlight
The PPI and CPI will take center stage as potential market movers. If the core ever starts to move up, batten down your bearish hatches. Retail sales and industrial production will also be watched carefully.
Peter's Portfolio: Shorts and Longs
Closed my QQQQ short and went long on the breakout. Closed dog
PHMD. Holding AIRN, AMKR, ARTX, ASTM, DSS,
LVLT, SVA, VISG, CPTCQ. Look for the Q to come off CPTC soon and for some institutional investors to maybe step in. But nothing in this portfolio to get rich on.
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Hedging Your Bets With Matt
Davio
I am no bond expert, but the rapidly narrowing gap between the 10-year T-Note and the Fed Funds Target indicates a serious problem ahead unless the 10-year Note yields rally quite a bit. I have based my investment outlook and strategies on the view that long bonds would weaken further and that any rally like this one will be relatively short-lived.
Regardless of how high and how long the present rally in U.S. equity prices continues, my primary interest today is in trying to figure out why it is happening. The answer to that question will help me assess whether or not to change my strategy. There are a few obvious answers.
1. Traders of U.S. stocks have been aware that many foreign equity markets (Russia, Japan, India, for instance) have had bullish break-outs earlier in the year, which has resulted in performance envy. This appears to be a circumstance that is similar to 1982, where the Canadian equity bear terminated in May, and the U.S. cycle terminated in August, when the Canadian market was starting its second bullish phase in the bull market that persisted from 1982 through to 1987.
2. Corporate earnings have remained strong in spite of considerable burdens such as higher raw material and shipping costs, and diminished consumer purchasing power.
3. Energy prices in US have weakened to the point where traders believe there will be a turn in economic data related to price inflation, which many believe represents the most significant burden to producers and consumers.
4. The rhetoric of the sell-side is starting to break down the aversion to risk of a large segment of investors known as value style investors.
I think these are the reasons why the equity market is rallying. Is this enough of a reason (or reasons) to take on greater market risk at a time that risks related to price inflation, interest rates, growing debt, foreign currency imbalances, real estate bubbles, economic stagnation, war, and so forth, are growing? You decide.
CHART OF THE WEEK
This chart shows that although we appear to be "breaking out" according to every grandmother involved in the markets, there may be something more subtle to be concerned about. This historical chart of the ARMS ratio with the Dow shows that every time the ARMS gets up at these levels, we are generally near the top. Could it be different this time?
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