Headlines all over "panic" "chaos" ect. Why? I will tell you why this is definitely a needed correction and new short-term trading range in 3 parts:
1. Quantitative Easing: those 2 feared words spoken by the Bernank himself. It was almost a year ago he made that speech in Jackson Hole WY that inflated equity markets so much, while devaluing our base currency $US. Devaluing the dollar leads to higher profits (cheaper exports to large corporations) and easier money to be passed around. Basically this was a market band-aid stimulus package. Printing more currency will not solve our problem, we don’t want to be paying $100 for a loaf of bread now do we?
Shown above is a 1 yr $SPY chart (Exchange Traded Fund that tracks S&P 500). circled in Red is the Speech made by Ben Bernanke in Jackson Hole about the second round of QE. This bond-buying program ended June 30th, since then we have seen downside. Circled in blue is price action in the last 2 weeks. Is 1,050 real market value? At these rates, it appears we are heading for that level.
2. Unemployment Rate and jobs: Well now, when Obama came into office he was all about “jobs, jobs, jobs” but I have not seen any yet. With the Non-Farm Payroll report coming out tomorrow at 8:30AM, I expect a minimal gain or loss. Revisions will most likely make this another losing month; especially the all-important but always missed birth/death adjustment. No job growth= no economic growth = lower market prices, it is not really that hard. You can’t survive an economy on 10% unemployment, it doesn’t work and that is why we are tanking.
Pictured above are the non-farm payroll reports from the decline in 2008 into current June 2011
This is the main adjustment number for Non-Farm Payrolls, Birth/Death. Quoted from Investopedia: “A figure that represents the net number of jobs provided from newly started businesses (births) and business closings (deaths) during a period of time, typically a month in conjunction with government-sponsored jobs reports.” Basically a Positive Birth/Death you would subtract from NFP # and Negative Birth/Death you add to NFP #, these positive revisions negate the NFP #
3. High-Frequency Trading, machines, bots, algos, HFT’s whatever you want to call them, they rule the market. We have definitely seen this the past few days when $ES_F will flail around +-5 handles at a time, you know that’s a program doing that, no human in retail, or the institutional guys on the floor can do that. There are times when I still wonder why these things are still legal? I know I’m not really a fan of government intervention in these markets, but some of these stocks, ETF’s ect. are people’s (including mine) IRA’s and income that they live off of. I believe the determination and guts to invest in this market should be rewarding, but at times, have some rough patches. High yielding accounts are still holding up well for those who want safety.
One last note, I have been analyzing these markets and trading them since the Summer of ’08, and I know what is like on days like today. September of ’08 was a real bloodbath; no one really knew where the bottom was. It is highly unlikely we will see Dow 6.5K and S&P 666 (<-yes the omen low) because that would basically mean corporations are earning no money and are trading almost all cash. I’m long in a new trading range in the indexes. Stay alert, but most of all, enjoy life, go home and crack one open on the bad days to relax and let yourself know you made it out alive.