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We've arrived. We're exactly in the middle between here and there.
The problem with being here is the "there" part.
I'm talking about where the markets are and where they're going next. Is "there" backwards or forwards? Are we coming or going from here?
Before I give you my own forecast, and recommendation, let me say this about that…
Here are the two best forecasts I've ever heard:
- "It will fluctuate," which was what J.P. Morgan famously answered when asked what the market would do, and
- "I cannot forecast to you the action… It is a riddle, wrapped in a mystery, inside an enigma," which is what Winston Churchill famously said, not about the market, but about Russia. (The full first line is, "I cannot forecast to you the action of Russia.") But you get the picture.
American markets are touching their highs. It's as if everything is clear and sunny. It's as if forecasting is as simple as looking out the window and calling out what you see.
It's clear and sunny. Haven't you looked outside? If only it was that easy…
But when you do look outside, let's say, through a window, you only see in one direction. The question can then be asked, is the weather you're looking at coming or going, or is it here to stay?
America, and indeed the global financial markets, came to the precipice of a cliff and barely caught their balance before plummeting into an abyss so deep and black that no one knows where it would have taken us. But my guess is to Hell.
The rope that held us from going over was stimulus, massive stimulus.
That stimulus was never mopped up. It's been left out there like water on everything after the fire has been doused; and there's more coming.
The Federal Reserve, which isn't playing just 18 holes, but seems like it's playing a marathon round of swinging hard and gently, but constantly swinging, is teeing up another ball with some little marking that reads QEsquared, or something like that.
Here's my guess on what the Fed is going to do…
They're going to stop telling us what they're going to do. They're going to keep us guessing about how much of the stimulus hose they're going to unravel.
It's an election year, you know. That means they can't take sides. So, they're going to do what they do under the cover of, "We're not political; we're going to do what we're going to do in such a way that you idiots out there won't know and make a judgment call on either candidate or Party."
You see, they did that once. It became known as the Saturday night massacre. That was back in 1979, when Paul Volcker, then the Fed Chairman, on a Saturday, decided to shrink the money supply and not target interest rates as a means to kill inflation which was ravaging the economy and the country.
It worked, eventually. But it didn't work very well for incumbent Jimmy Carter (there were a lot of other things that weren't working for J.C. at that time), who bore the brunt of quickly rising rates and lost the election to a guy by the name of Ronald Reagan.
The point is, ever since then, the Fed has been aware of their power to move the electorate. So, they're going to use their apolitical posture as cover to hint that they're going to just make QE a forever program that they're going to employ until either the markets make new highs and keep going or the economy grows at 3% to 4% per year, forever.
Oh, and China is about to do some of the same unraveling of its stimulus hoses.
What does all this stimulus have to do with the market direction? Everything.
Without it, we'd be 50% lower across the board. Yes, I am saying that the markets are 50% higher than they would be without the Fed's pump priming. The same goes for the rest of the world.
But here's the problem with picking the direction, or forecasting the weather. Nature finds a way. The natural order of markets can't be messed with forever.
God help us when Mother Nature shows her wrath, and she will.
Europe is still a mess. Take away the stimulus there, and the world folds. Because China will fold, and the U.S., no longer an island, will fold too.
The problem is fiscal discipline. It's coming. And it's aimed at mopping up some, or a lot of that stimulus spillage that's been floating higher and higher spending and higher and higher deficits.
So, what's my forecast?
Either the markets will be stimulated higher, which is most likely under the present circumstances, or they will fall, once we're spanked with the fiscal discipline paddle, or we'll stay right about here in Goldilocks land – where it's not too hot, not too cold.
- Straddles. Why? Because the markets will tend to fluctuate, and right now they are a riddle, wrapped in a mystery, inside an enigma. I'd be buying straddles here – long horizon, out-of-the-money straddles.
- And I'd be selling calls on all my nice dividend-paying stocks and buying them back if they get called away and then selling a lot more calls on them.
Nothing goes up forever, especially when the hot air is rhetoric.
Be careful out there.
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About the Author
Shah Gilani is the Event Trading Specialist for Money Map Press. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains.Shah is also the proud founding editor of The Money Zone, where after eight years of development and 11 years of backtesting he has found the edge over stocks, giving his members the opportunity to rake in potential double, triple, or even quadruple-digit profits weekly with just a few quick steps. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.