Friday, February 11, 2011

Market Madness

Awesome news out of Egypt.  The people peacefully demonstrated.  Using the word protest in regards to what happened in Egypt is simply wrong.  They confronted a harsh regime and showed that in the end, the people, not the government hold the power.  Truly awesome and inspirational.  This then begs the question what country is next?  What government is most concerned seeing how easily Egypt was toppled?

Back to the madness of the equity markets.  Markets are rallying and the "excuse" will be the end to the crisis in Egypt.  Problem with that is markets never sold off due to Egypt. This market is truly broken right now.  Overbought conditions used to be worked off through healthy corrections, but not anymore.  Friday afternoon in the face of geopolitical risk would see sell offs, but not anymore.  Negative news would be priced in but not anymore.

At some point the jubilation of the Fed put will turn into the reality of a weak Fed hand. For those trading beyond a few hours, it is so important to keep focused on the issues facing the global economy.  We know of the geopolitical risk which will now only grow larger.  We know of the horrible labor markets, margin pressure, deteriorating home prices in the US.  The list goes on and although the message is tiring, the issues are still very real.

At some point the Fed hand will be revealed.  The power of the free market is just that.  It is free.  You can only hold up a mirage for a limited amount of time.  The emperor has no clothes.  

What is very interesting the past few weeks and what should greatly concern the Fed and Treasury is the lack of a flight to safety into the USD and Treasuries.  Cheap financing was always a shock event away but based on price action of late in the face of Egypt, that appears to be changing.  QE3 is highly questionable, contrary to what the theorist may say (in fact how many even understand what QE is yet talk about how it is here to stay).  QE2 saw the rally begin three months ahead of the actual buying.  Could QE2 end from a market standpoint in March as a result?

The only way to sum up the equity markets right now is graphically.  For those who have questioned this market we are in the car above.  We are stuck while the car below, oblivious to what is going on continues to drive forward.

Stay focused, manage risk and someday reality will be back in focus.  I think?


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