BarroMetrics Views: S&P, 2014-05-22 Top (2)?
The post I wrote on May 22 did not publish (I must have clicked the wrong button – sorry). So here is a bonus on Memorial Day (2 posts to read). I trust my US readers will have a fab holiday.
In the May 22 post, I took the view that what is driving the stock markets is the belief that the FED will protect us against any severe decline. This belief is distorting the price mechanism to the extent that we are left with the strategy of ‘just buy on any dip’ or ‘stay out’.
In Markets And The Fork In The Road, Mike Gayed, makes the point that “…..I noted to advisors that there is a real lack of appreciation for just how bizarre this market environment has been. Behaviorally, everything except large-caps and emerging markets have acted like a correction already took place. Small-caps (IWM) suffered an alpha crash, momentum names not clobbered, and everyone hid out in low beta sectors. Meanwhile, headlines about the Dow (DIA) and S&P 500 have masked what was true and severe deterioration within the market”.
And, in When Does the Story Break? (you need to scroll down past the pictures to get to the article), Ben Hunt lays out his idea on what will cause a break in the belief. This article is well worth your while to read.
Basically, Ben takes the view that the breech will not come from any US source – that the catalyst will come either from Europe or China. In this I only partially agree. There is one more catalyst looming on the horizon, a longer-term catalyst, perhaps BUT a definite belief breaching catalyst: FACTA. This legislation is coming into effect on July 1. And, while the IRS has said it will ‘grant a 6-month extension’ for compliance for some foreign financial institutions, in my part of the world, we are already seeing some the possible effects e.g. a refusal to accept US citizens as clients.
In the longer-term, history may well prove FACTA to bring about exposure that the FED is subject to the same economic laws as us mere mortals.