We Stand Upon Shaky Ground


Junior member
15 1
“Equities have historically traded at a discount to GDP except for two times in the last 50 years,” he said. “In the late 1990′s we traded at 148 percent over GDP, and in 2007 we traded at 118 percent over. Unfortunately, both times were followed by a serious correction. We are now at 110 percent.”

-Jack Bouroudjian, CEO of financial services holding company Bull and Bear Partners

At the moment, market participants are indeed playing a game of musical chairs. Large pools of investable wealth get circulated around a rather limited sphere of asset classes. From a scaled-out viewpoint, it’s relatively easy to see the flow of capital as it makes its way from one means of short-term appreciation to another.

It’s also exceedingly easy to see just who decides to stop the music.

I’ve said many times before – analysis of day-to-day price fluctuations reveals that directional movements are largely a function of the Fed’s liquidity injections.

Yesterday was further proof that the very words from even non-voting members of the Fed carry enormous weight in equity price-action as well. Since the beginning of last week, we’d digested a considerable amount of hawkish sentiment from Fed members. The markets didn’t exactly tank, but subdued negative moves in most of the recent trading sessions spoke to heightened expectations of a September taper.

Yesterday’s trading even had the makings of a continued retracement towards the mean…and then Atlanta Fed President Dennis Lockhart entered stage right.

You see, all the markets really needed was a warm body behind a microphone making semi-dovish comments. Don’t tell us what we need to hear. Tell us the music’s gonna play all night long.

Lie to me.

I think the absolute exuberance on behalf of equities speaks for itself – not to mention action in the FX, credit and bond markets. Just how perverse was the reversal in trading towards the end of yesterday? Remember that we experienced not a single piece of good news on the economic front, yet capital flowed with abandon away from negative territory with abandon.

I don’t want to become too opinionated, but a widening disparity between equities and their respective industries within the economy just begs for a correction. According to zerohedge, average industry sector correlations to the S&P 500 have dropped to 69.9%, by far the lowest observation for over two years.

The laws of physics don’t apply to price action as they do to gravity-bound matter. But what has gone up, in this case, can most easily fall down. In the very near-term, I can see equities shrugging off negative sentiment, with the S&P maybe even holding its own above 1710. But September will be a month of reckoning.

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Active member
157 2
People have been screaming, "doom! doom!" since... well, before there was even a Dow. It goes up, it goes down. It's all the same to me. (Someone ought to do a Motorhead 'parady'/cover...)


Well-known member
257 9
People have been screaming, "doom! doom!" since... well, before there was even a Dow. It goes up, it goes down. It's all the same to me.

Well said. I think the first lesson I learned was to ignore the noise. Of course I don't hold overnight positions. I stopped using anything but the current day intraday data and so now I can finally concentrate on what's important.

If the DOW crashes then I'll finally be let loose of my other day job is all. A good thing I think!

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