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Monday, March 30, 2015

Daily update 3/30 Quicksilver Markets

We broke the string of no back to back up days.  Interestingly enough the streak ended at 28 days which is the same as the last two longest streaks since WWII.  According to Bespoke those streaks were in 1970 (bear market) and 1994 (multi-month correction).  It certainly is not what strong up trends are made of.


Quite a sizable up day, but a also a sizable drop in volume.  Breadth was a strong +70%.  New highs picked up a bit to 151.  Still nothing to write home about.  So far the bounce still looks like the dead cat variety.  We will see what happens tomorrow.  The early part of April has been negative the last few years.  Last year was pretty vicious.  Will that pattern repeat?  Strength in Asia and Europe brought out the buyers in the U.S. today, but will they keep on buying.  The current pullback has not really gotten very oversold like most of the time when we hit the 100 DMA.  I just don't think there will be enough fuel to send us higher this time.


The futures now have green bars so what little over sold condition we had has been alleviated.   We stopped today at the 100 SMA.  That could be significant resistance.  There was not enough upside to make a positive DI cross yet.  If we roll over here it seems likely to go through that last low to me.  If we get a confirmed break on the upside of the 100 SMA it could get the bulls back in control.

Given how hard it has been to get two up days in a row, three might be asking a bit too much.  The bears may want to take advantage of those higher prices to sell into.  If the bears show up tomorrow we will have to see how much damage they do.  If not too bad the bulls might try for more up.  It is just hard to say with the way we keep changing directions this year.  Evey time the market is ready to break out or break down it reverses.

The Office of Financial Research (OFR) was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  Here is what they say about themselves.

Our job is to shine a light in the dark corners of the financial system to see where risks are going, assess how much of a threat they might pose, and provide policymakers with financial analysis, information, and evaluation of policy tools to mitigate them.

There recent report Quicksilver Markets was quite interesting.  If you are a longer term investor I suggest taking a few minutes to read it.  Many of the charts in there I have shown on this blog.  There are also some charts I have not seen before.  This table of valuation and returns was interesting.  They put the circles on there, not me.

Here is their conclusion:

Markets can change rapidly and unpredictably. When these changes occur they are sharpest and     most damaging when asset valuations are at extreme highs.  High valuations have important implications for expected investment returns and, potentially, for financial stability.

Today’s market environment is different in many ways from the period preceding the Great        Recession, because regulators and market participants have made adjustments to enhance financial stability since the financial crisis. In that time, stock returns have been exceptional and market volatility generally subdued. Today, many market strategists see the bull market extending throughout 2015.

However, quicksilver markets can turn from tranquil to turbulent in short order. It is worth noting that in 2006 volatility was low and companies were generating record profit margins, until the business cycle came to an abrupt halt due to events that many people had not anticipated. Although investor appetite for equities may remain robust in the near term, because of positive equity fundamentals and low yields in other asset classes, history shows high valuations carry inherent risk.

I would like to know more about what adjustments market participants have made to enhance financial stability.  From what I can see leverage has never been higher.  At any rate the government is telling you the stock market is over valued and carries "inherent risk".  It is not just crack pots like me telling you the market is a risky place these days.

Bob

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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.