What is holding the DJII up with all the bad news?
From: Jim Sinclair
Date: Friday, November 1, 2002
[spelling errors corrected by the jackass]
Question:
This rally seems to have no end to it. The market in equities eats all the bad news and keep chugging along. Is this a new bull market for general equities? Bloomberg TV seems to think so. All the people interviewed see a higher market and no new lows.
Answer:
What is happening now is positioning. Many of the traders are getting positioned for a Federal Reserve reduction in the key lending rate of 1/2 percent next week by buying equities and the equity futures.
Today, the futures in equity indexes led the indexes up all day. The assumption is that the equities market will rally wildly on that news of a Fed cut in rates. Then in the spirit of the greater fool theory, those that buy today, Friday, will be able to sell next week at much higher prices. This is the thesis that has been holding the equities market ever since the event of the 200-pt DJII intra-day drop and then recovery on the news the consumers expectations were significantly lower. Well, there are few other points to consider.
1. The bull play seems a hair too easy.
2. A drop of the 1/2% by the Fed is a clear admission that the recovery has flopped.
3. The Fed may well do nothing in the face of the drop in the value of intermediate and long bonds.
4. The US dollar continues to act like it is being significantly liquidated at every positive opportunity in a manner that seems quite spirited. That is not the way the dollar should act, if we are on the eve of another leg in the equities rally. [can you say CIRCLE JERK?]
5. We have been doing nothing but reducing the interest rates and it has not resulted in the expected economic recovery. More reductions in the cost of money is not the medicine required to jump start this economy. A defibrillator attached to the Niagara Mohawk Power plant is a good idea.
I tend to think that, assuming the Fed does act by cutting rates at least 1/2 point, it will provide the opportunity to sell the market for a drop that will take the DJII to a lower low than we have previously experienced.
God help the equities market, if the Fed acts and the market does practically nothing. Of course if the Fed fails to act, the market will drop and the talking heads will promise action at next month's meeting if not sooner. Probable hope of an interest rate cut is stronger medicine than a cut itself. How perverse the mind of the market is.
[the bolded sentence has been my point exactly lately]
A great deal of the liquidity from the expansion of monetary aggregates that had entered the commodity market has exited to play the equities on the recent huge rally. Fed action will, in all probability, mark the point wherein the liquidity exits the equities and heads back into the commodity market. That is the play I am looking for -- not the highly touted buy 'em Friday and clean up next week play on financial TV. Actually, I still like buying Gold & Coffee on each reaction when TA warranted.
[sell the news, babycakes]
