In a regular bull market the rise in share prices is backed by general growth in economy, wage growth, falling unemployment and all good things. In a bear market, it is the opposite. There is recession or fear of recession, credit is unavailable, unemployment is high and mood is gloomy. That is what fundamental analysis tells us.
If that is correct, where do you think the world is today? Is it in a growth phase or declining phase? There is no Nobel Prize for guessing the correct answer. But the question is if the world economy is in a declining stage, why the stock prices keep getting higher. The answer to that riddle is found in the continuous flow of liquidity injected by the CBs of the world. They are trying to solve the problem of solvency with more liquidity. In the process, they are buying time, hoping somehow, miracle will happen, growth will return and we will return to the goldilocks economy.
What do the small investors do in such a situation? If we short the market now, we will see that for the next one year or so, stock prices zooming higher and at some point we will be forced to cover our short position. So the best course of action may be to run with the hare and hunt with the hound.
Many do not believe that the stock market can be manipulated. They argue that it is so big, how can anyone manipulate it. But the fact is the big Ponzi scheme that is stock market is utterly rigged by the fifty TBTFBs of the world who control 90% of the trading and most of it through black pool trading which we never know. These are the same powerful bunch who borrow money from the FED or ECB at zero % rate of interest and then give back the same money to the FED at 3% ( buying treasuries). Thus, the Fed monetizes the debt at back door and banksters make risk free money from the tax payers.
As there is no immediate trend, they set up the market and create volatility. For the last two weeks they have created an expectation of a bull market where prices just keep going up. Slowly all the bears are throwing in the towel and joining the buy program. Equity mutual funds are again seeing inflow of money. Retail is now afraid that they might miss the bus and are too eager to join. The free cash levels of the equity mutual funds are at all time low. Rydex money market funds have only $669 million now vs. $1.5 billion at October 2011 market bottom. The game plan is working. While retail is buying at the top, someone is selling these shares to them. You can again guess who are that someone. Today the believers of the rally are saying that one day sale does not derail such a strong bullish move. While they would be correct in a normal market, this market is anything but normal.
When almost everyone is in, then the Boyz will take out the carpet under our feet. For the next two/ three week, we will see that a bearish environment will be created. ZH, CNBC will be filled with stories how Europe is falling apart. The retail will again sell cheap.
This pattern will be repeated many times in 2012 and if we can remember this game plan and play accordingly, we can come out alive in this market. Timing will be the key. As an individual trader we are pitted against these behemoths that have the best brains, best technologies and almost unlimited resources at their disposal. Our only chance is to find a quantifiable edge. That may be cycle analysis, TA, COT report, Liquidity analysis, market sentiment analysis or whatever works. Sometimes nothing seems to work, like now. But even in such situation two eternal drivers of the stock market work. Greed and Fear.
Today morning when the markets opened higher and kept going higher, those who were on the sideline, joined the buy express. Those who were short, closed their short to cut down further losses. And now the almost entire Fed rally has been wiped off. Will they buy the dips tomorrow? May be we will see some buying in the morning just to convince the doubters.
But the evil plan is: wash, rinse, repeat.