Worried? Concerned? As an options trader the answer is no. Whether or not the market goes up or down there is always a trade to be made. No, I am not worried or concerned.
As someone who thinks stocks need to keep heading higher to prevent the Central Bank house of cards from collapsing.... yes I am a little worried.
Why? One of my favorite charts is breaking down, and the implications could mean the market seeing a sharp correction in the months ahead.
In 2008 and 2009 I was bearish on the market. Even as stocks began their once in a lifetime Bull Market in March of 2009, I was not a believer. If I only knew back then what I know now.... That sounds like the lyrics from a great song....
If I only understood just how determined the Central Banks would be. That the Central Banks would spend 6+ years embarking on unprecedented monetary policy to 'reinvigorate' the global economy. That every single headwind and dip would be just another opportunity to buy stocks. Eventually I came to my senses.... thank goodness. And to the perma-bear(s) out there who have endured this historic bear market and are still alive to write and paper trade about it... I salute you.
I was wrong at first to think the FED would fail to re-inflate asset prices. Wrong to think that years of cheap money would lead to runaway inflation. The opposite has proven to be true. The global economy is more at risk for deflation than inflation. The US Dollar that looked headed toward a complete collapse has instead rallied far beyond the expectations of most. While US Dollar strength can be blamed upon the end of QE and some decent economic numbers, the main culprit is the Monetary policy of all the other central banks. The Japanese have devalued their currency some 40%+ vs. the US Dollar since Abenomics began in November 2012. The ECB has talked the Euro down from $1.50 to near parity VS. The US Dollar.
Low interest rates continue to rule the day. ZIRP (Zero% Interest Rate Policy) and NIRP (Negative% Interest Rate Policy) is fueling a corporate share buyback frenzy the likes we have never seen before. The Central Banks are forcing everyone into risky assets, even the corporations themselves. Ben Bernanke could not have been anymore clear about this. He said it himself. His cards were all out facing the other players. Love or hate Ben Bernancke, he was as clear as day to what was going to transpire. But with any unprecedented action(s) the consequences are unknown.
In this ass backwards world we live in the traders bidding up shares of the stock you want to buy is more than likely the company itself. In the four months Apple Inc spends enough, just buying back its own stock, to solve World hunger. Imagine that. The efficient use of capital for these large corporations is buying back their own stock and issuing ever growing dividends to their shareholders. They give back to themselves. It's one giant circle jerk lining the pockets of executives, directors, and board members.
Now that I've got that off my chest perhaps I can tell you why (not my option trader self but my central bank house of cards self) I am worried.
One simple chart:
A key breakdown in $TLT. If prices don't quickly get back over $122 support, I think $TLT is heading toward a breakdown to the $97.50 level. What does that mean?
The bond market is telling you one thing right now. Higher interest rates. Guess what corporations won't be able to do as much of if interest rates rise? Buy back their own stock. Guess what they won't be handing out more of if interest rates rise? Dividends. If interest rates start to spiral out of control.......
Certainly this isn't something that hasn't been thought of before. It bears watching. Since March 2009 this market hasn't met a headwind it didn't like. This could be just another one. Or it may never even materialize. Tomorrow we could awake to double negative interest rates over seas. NIRP to the 3rd power. Shake and Bake . Awake with Cake. Take my Fake. Stop the Rhymes... for Goodness Sake. And yet again bonds in the US will fly off the shelves quicker than a Double Shackburger made from hand Fed cows feeding on non fertilized bright green grass with access to 8 hours a day of Netflix.
Watch them bonds. Rising rates will curb the rate of everything, including corporate earnings. Which will likely cause a big stock market correction.
But I'm not worried. Up or down. Let's get this market moving. I love those moves.
As it stands now the S&P500 is coiling up for a sharp spike or spunk (?). Is this going to coincide with a continued bond sell-off? If so stocks will see a correction lower - wow that's genius. On the flip side, if bonds settle down, stocks will spike to new record highs - yep that's the way the cookie crumbles. I am wearing my Captain Ambiguous Costume tonight and its not even Halloween.
The "I'm always right" red and green arrows:
I'll let you know exactly how it turns out - the minute after it happens.
One thought on “What… Me Worry?”
Nicely said Mr. UPB