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I got a great comment this week from reader Steve on my post about why the appointment of new Fed Chair Jay Powell just doesn't matter.
Lee your commentary is always intended to be fact based and well informed. Thanks. It does appear at the moment that your shorting call based upon liquidity is too early. You originally discussed having a small short position and we have had the short-term LAMP red for weeks. Further, your commentary discussed huge financing requirements for the US Treasury based upon TBA advice. And – diminishing foreign demand for U.S. treasuries. Therefore, where is commensurate the liquidity crunch and the pull back in stock prices.? So far, just seeing record high after record high. For now, it appears that the liquidity crunch is non-existent and at best temporary – if the markets significantly retrench, the Fed will again go back to Q/E. Look at the BoJ – they have expanded their bank balance sheet to 70% of GDP. The US can do the same. Grateful for your view. Thanks.
I read Steve's comment just before Thanksgiving, and I knew right away I wouldn't be able to enjoy Turkey Day until I had addressed it. Steve's comment touches on a number of important issues – some of which I've alluded to in recent posts, but others not.
First, I can't stress enough that shorting stocks or indexes must finally be based on technical analysis. Liquidity establishes context, but the charts rule. If you are not a chart trader, then I would suggest finding a good technical charting service to guide you before you even think of trying short-term trading.
There are several experts right here at Money Map Press, including D.R. Barton, Jr., and Shah Gilani, who can help you with that. You should be comfortable with their approach before you start trading. It's a risky, high-intensity business that requires some time and attention.
I also offer a short-term trading service at my site, The Wall Street Examiner, if you are interested.
Let Me Be Clear – This Market Is Running on Speculative Fumes
The short-term LAMPP signal does look wrong, but there's some nuance that at least excuses that mid-September signal a bit. Since that time, my trade setup screening algorithm has produced almost as many shorts as longs, until the last week. During the mid-September to mid-November period, trades on the short side did just as well as long-side picks. The market averages rallied, but cyclical momentum and breadth weakened sharply, allowing profits to be made on the short side in the right stocks. The shorts actually outperformed the longs for a couple of weeks. That was not the case before September, when only longs were profitable.
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Over the last week, there has been a massive shift back to the long side. Whether that will prove to be a false start remains to be seen, but we should know within the week after Thanksgiving. The period from then until Christmas is normally strong. If the market falters instead, it could be a sign that the jig is up.
There has been an enormous increase in Treasury supply since mid-October. I expected that to depress the markets. It has not. That appears due to a couple of things. One is a massive influx of cash from Europe and Japan, as their central banks continue to print money and then punish it for staying in their home markets with negative interest rates. That drives the big institutions to instantly shift cash to Wall Street by purchasing U.S. Treasuries and U.S. stocks. That adds to liquidity in the U.S. market.
The second factor is an increased use of margin and other types of leverage as the rally proceeds. That's dangerous.
About the Author
Financial Analyst, 50-year charting expert, finance + real estate pro, and market analyst; published and edited the Wall Street Examiner since 2000.