Market Pulse

I read Morgan Stanley’s Global Economic Forum like a Bible. With senior staffs all over the developed countries contributing daily to the forum, it delivers the best fundamental overview of the global economy. While timely economic data never proves to be an excellent market timing tool, it does provide a good general direction of where the markets will end in the long run.

In the short run, the markets are controlled by the herd. Currently, the herd is led by the hedge funds – the unregulated hedge funds are busy inflating all asset classes with their almost-free leveraged money.

In the long run, the markets always fall back to where the fundamental treads -- they will adjust themselves back to where they belong, and, most times, fall further, a classic case of extreme on both ends.

The problem is when and how the markets normalize themselves. Just exactly when will the markets show fear for the debt bubble mentioned by Mr. Roach and Dr. Faber, and how much adjustment will be required to normalize the markets?

At this very moment, the markets are still living in euphoria, as Jim Jubak admonished the longs and shorts that “a bubble expands far longer than anyone expects.” But, maybe we are near the end, or it had already busted in a vacuum (silent pop) and we are just not “admitting the cycle is over.”

If Mr. Roach is right on “history tells us that carry trades end when central bank tightening cycles begin,” then the BEAR case wins. The markets will drop 10 to 14% in a short period of time after June 24th hitting the Fibonacci levels.

Although markets seldom play out like the professionally drawn story boards, they do rhyme well. The best way to manage your risk now is to stay out of the market. There is no reason trying to squeeze every penny out of them.

In summary, while the majority of S&P500 companies did well last quarter, reporting earnings well exceeding expectations, the majority of consumers are overextended in debts. The bond market may have escaped the “carry trade” thanks to the extra month head start awarded by the Fed Chairman Alan Greenspan, “carry trades” from the consumer sector, the biggest indebted sector, may pop when the Fed starts the ‘rates’ train.

VIX is still low showing no fear, with the closing sell signal issued on 5/27. Short-term trader should stay on the side line, waiting for the extreme bearishness signal from VIX to open new long positions.

posted by jason @ 2:44 PM