Trading the stock markets has become, as much about guessing what the next news piece will be from the European Central Bank or the White House as it has market knowledge. News driven markets are notoriously tough to trade. This can be seen in lower trading volumes as market participants wait on the sidelines for things to sort themselves out and then rush in all at once when they think the market has given them an answer. Patience is the better part of valor. Successfully trading news event driven markets means having a sound strategy waiting to be put into action once the dust begins to clear. I think this is one of those times and this is the plan I’ll be implementing.
The debt ceiling and the Greek debt problems are hanging like a black cloud over the stock markets. Many believe that a resolution of these issues will lead to a reactionary stock market rally. I hope this is true because I’ll be selling stock index futures based on the assumption that a post debt ceiling resolution rally will be short lived and that the sell side of the market will be the proper side to trade from.
There are a few reasons for this. First of all, I believe that we have been in a secular bear market since the financial meltdown of ’08. Starting with that assumption, we have seen corporate profit margins soar since the market bottomed. However, most of this has been due to cost cutting of both labor and financing. As a result, corporate earnings are at their highest margin since their peak in ’06. This means that it is unrealistic to expect corporate profit margins to continue to rise.
Secondly, if we consider this a bear market rally, which I do, we have measurable statistics that say the stock market has NEVER rallied four straight years within the context of a secular bear market. We are in the third year of a rally, which already puts us into the 17% probability area. Furthermore, the average gain for consecutive up years in a bear market rally is 42%. The Dow is currently trading around 12,500. This is a cumulative gain of 43% from the ’09 close on a year over year basis. This puts us at the tail end of a bear market rally by historical measures.
Thirdly, we face structurally high unemployment here in the U.S. We need to average 115,000 new jobs every month just to maintain 9% unemployment. We averaged 78,000 per month throughout 2010. We are slightly ahead of pace in 2011 averaging 124,000. However, to lower the unemployment rate by 1%, we would need to average 240,000 per month for an entire year. The best decade ever for job growth was the technology driven 90’s when we averaged 181,000 per month for the decade.
Declining tax receipts based on lower corporate profits, lower employment numbers and disgruntled consumer sentiment combined with legislatively burdensome small business policies leaves little room for new hiring and small business growth. The last twelve months has seen the weakest small business growth in more than a decade.
Without another technological revolution or the mass renovation of our countries’ infrastructure, we will continue to fall behind developing nations.
These are the fundamental forces at work behind the constant news reports of who’s to blame for the last failed debt ceiling proposal and why I’ll be looking to sell the market. Therefore, when it is finally resolved, and I believe it will be. I expect the market to rally as a sigh of relief brings fresh money to the market like lambs to the wolf.
This blog is published by Andy
Waldock. Andy Waldock is a trader, analyst, broker and asset manager.
Therefore, Andy Waldock may have positions for himself, his family, or, his
clients in any market discussed. The blog is meant for educational purposes and
to develop a dialogue among those with an interest in the commodity markets.
The commodity markets employ a high degree of leverage and may not be suitable
for all investors. There is substantial risk of loss in investing in futures.