The Reuters/University of Michigan index of consumer sentiment fell to 66.0 in November, down from 70.6 in October. Analysts had been hoping to see the measure rise as high as 72 in the latest report.
Source: WSJ
After a brief selloff from the “bad news”, it became good news for the market.
Notice how the Dollar dropped right after the report and the market moved higher. The forces at work this morning are the same forces that moved the market higher after last week’s (un)employment report.
The traders moving this market don’t care about fundamentals nor do they even care about technicals. The catalyst moving the market up and down is confidence in whether the Fed will continue to weaken the Dollar. Numbers such as this weak sentiment reading translate to a lower probability that the Fed will raise interest rates anytime soon. This translates to a higher likelihood that the Dollar carry trade stays in place for an extended period of time. So the market moves higher.
It is all just further proof that the fundamentals moving the market higher is financial engineering rather than real economic activity.
It makes it a very difficult market to trade because you don’t want to step in front of the Dollar carry trade and short the market. Traders that have done this in 2009 have been huge losers. However, when this Government Bubble bursts it is going to end very badly like all bubbles.
It is very similar to 1999. Shorts got killed shorting Internet stocks but it was difficult to buy them because intelligent traders knew it was all a sham. Traders are now in a similar predicament.
One option is to simply not trade the market and step aside.
The other option is to watch the Dollar and ETFs such as DBV. When the Dollar approaches resistance (such as the 50-day SMA) a long position in a large cap ETF such as DIA can be added. A little can be added each time this occurs. If the Dollar does breakout over the 50-day SMA, the long index position can be closed.
If the Dollar reverses in the short term, you’ll lose a little money. However, if the decline continues into 2010 it provides a way to participate in the Government Bubble.
You can also wait for the Government Bubble to blow up and short the market when the carry trade ends. I think this is a fine strategy as well. The main disadvantage to that strategy is that these bubbles often last longer than people expect. Sometimes you have to dream the impossible. What if the Government Bubble stays in place in 2010 and even into 2011? It could end up being a lot of lost opportunity. Moreover, an unwind of the Government Bubble doesn’t mean a crash will occur. It might just mean that $SPX goes back to 850-900. So all the waiting may not turn into a big reward.
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danny42nd
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rosocecasita
