Hey traders, I wrote a little bit of an editorial today for or clients that was largely void of charts, but laid out some key talking points for the markets - it appears below:
Good morning traders/Aspenites. Markets continue to digest the break lower on Wednesday, which is normal, but this is merely the calm before a full return to volatility. Consider this: while the lows set on Wednesday at 1343 in the S&P's satisfy one of the minimum downside targets we had set out over the last week or two we do not believe it is the start of a sustained push lower - just the opposite. The whole 1340/10 support zone is likely the area in which a larger degree Wave 4 will complete and markets will move briskly higher from there. That, to us, is where the volatility will come in - markets break lower from current levels, all the reactionary traders/investors pile in and just like that - markets reverse. We will be on board this train should that scenario play out, if so, we will kill it here in May.
This forecast of course discounts some of the poor economic/political news that continues on a day-to-day basis, but that is what markets do. One thing I learned, the hard way, is to never underestimate the central banks. While any rational person could conclude that things in Europe could get worse still and thus drag markets lower, investors/traders have come to expect a rescue in the form of 'easy money' from central banks. This of course is rocket fuel for the bulls and to not factor in that possibility would be foolish. Consider this, the ECB, unlike the Fed, does not have the ability to print money, everything they have done thus far has been based on rates and other quantitative measures. However, dire times call for dire measures and we should never rule out what politicians will do. If austerity has already been kicked to the side who says that that the ECB cannot alter policy and drag out the printing press? The quote below from John Taylor at FX Concepts sums it up nicely:
"At the same time, as a manager of corporate risk and an absolute return manager, I have to be ready for the government intervention that is sure to come. As you might guess, we are not too optimistic about the Eurozone authorities’ chances of final success, but the bad news will continue and eventually they will do something dramatic. The road to hell is paved with good intentions of governments, but they make for a volatile ride."
The reality currently is that the patient has largely been stabilized since the financial crisis but the fact is, it was, and continues to be a big mess. There are subtle signs that the purging of the excess' is still at hand. Uncertainty breeds volatility and as John Taylor goes on to say,
"interest rates are at zero, fiscal budgets are stretched to the maximum, total national financial liabilities are at a breaking point and national monetary bases are a multiple of the highest they have ever been. Quite simply, there are no good borrowers. No one wants to loan anyone any money. Fiscal consolidation must be carried out, and that tends to mean recession and loss of wealth, which will negatively impact financial markets."
We must be careful not to position on this theme, but keep it in the back of our mind and overlay it on top of the EW forecast - not the other way around. This reduces the possibility of being surprised by the market - never a fun thing cause the joke is nearly always on you. In the end, this may sort itself out with hardly wimper - there is no way to know. As we always say:
trade what you see; not what you think. Adhere to those words and you will keep yourself out of trouble for the most part and live to trade another day. -DF-
