It’s only too obvious, isn’t it? The markets are showing some cracks in the armor as the end of QE2 is upon us. Should be no surprise really. In 2010 when the first round easy money ended the indices were hammered mercilessly (last summer) until the deflationary forces proved too difficult to overcome. It was then that markets went into a tailspin, spurred on by the ‘flash crash’ as the SPX fell some 17% from May 1-July 1 to bottom at 1010. At that point enough was enough as the next round of easing came to fruition. The objective was to provide enough stimulus to boost hiring while not creating enough inflation to be a problem. The best laid plans of mice and men. Well, there was a bit of interruption on the way to nirvana. Oil shocks, unrest in MENA and the devastating earthquake in Japan derailed the idea.
Charts Are Speaking
Earnings season is coming into view and when we come back from the July 4 holiday that will be the main focus. The lynchpin of market rallies and support has been good corporate earnings and strong balance sheets. We would like to get good clue as to where the economy may be headed – this is the best way to for us to gauge it. Recent reports from FedEx, Oracle, Agrium, Ulta Salon and Bed Bath and Beyond point to continued strength in their varied businesses. While some may surprise to the downside – we recently saw that with Research in Motion and they paid for it – using the recent slowing and other things as a convenient excuse won’t cut it for not executing well. Take a look at the chart below.
Momentum is Psychological
Markets move with liquidity and that movement is subject to emotional swings. After all, do you want to tlet the market get hammered as it did in 2008 without being aware? Of course not, but in this world of trading our memory is short term, in fact we lack any remembrance from day to day. That being said, we should be mindful and aware that news cuts both ways. We’ve seen a slew of negative news hitting the economy and the market in the belly. While it’s rational to wait for data before making a decision some just cannot wait. These days our markets become victim to the ‘risk on’/’risk off’ paradigm. This sort of back/forth activity can really shake confidence in markets, but we ride out the moves based on the psychology of the day.