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After digesting the sharp power surge from the October lows during the month of December, where the markets appeared content with gliding into year-end without much fanfare, both investors and traders alike, returned from the long Holiday break with a skip in their step and in a festive spirit. So much so, that the three major averages, DJIA, COMP and S&P 500 all managed to print 4 ½ year high’s within the first two weeks of the 06’ campaign on healthy breadth and solid volume. Thus, unlike the “Santa Claus” rally which arrived a bit premature in 05’ (mid-October through November), the 06’ “January Effect” is right on schedule, evidenced by the quick start out of the gates. When examining the 3-year weekly charts below, we see that the major indices have broken out of their December digestive zones. While the DJIA has some work to do in order to overcome the two-year quagmire, both the COMP and S&P 500 have apparently cleared the hurdle. Furthermore, all three indices are trading comfortably above their respective 50 and 200-day moving averages, while a trend of higher lows and higher highs can be observed, which portrays favorable technical conditions until or unless proven otherwise.
Thus, while one must respect the trend and heed the language of the marketplace, one may be wondering, what gives? Well, the answer from our perch seems clear and can be summed-up in a word, “LIQUIDITY”, and plenty of it. When central banks worldwide are printing fiat paper money at alarming annualized rates (6-14% in 05’), depending on the geographic region, is it any wonder that all boats are rising? And we ask ourselves the question, why? What do the Federales see that has provoked such reckless and irresponsible behavior? Is this all an attempt to keep the world afloat and provide consumers with an artificial “feel good” wealth simulative? Or, is it potentially something much larger, where the unsuspecting public, who have been placated to the point of disinterest, are kept in the dark? We don’t know. With thoughts of Ben Bernanke replacing Mr. Greenspan as head of the Fed at the end of the month, vacant positions at various US Regional Banks, the Iranian oil bourse scheduled to open in March and geopolitical “noise” growing louder by the day, not to mention Mid-Term elections at home in the latter part of the year, there appears to be many moving parts and perhaps more importantly, many unanswered questions with respect to both the economic and geopolitical environment. How will it all play out? Only in time will we know. However, if the present action in both the gold and silver markets are any indication, we may be witnessing the early warning signs of an impending accident. While our disposition has been for some time and remains, a defensive posture due to our perceived problematic backdrop of burgeoning federal deficits, record personal bankruptcies, an extended consumer lacking in savings, a plethora of political indictments, an expensive war, geo-political concerns, $60+ oil, the systematic destruction of the purchasing power of the US dollar, thank you Mr. Chairman and posse, a complacent investor and a massive housing (credit) bubble, just to name a few, the markets have been capable of not only diverting a potential storm, yet quite the contraire, where everything seemingly floats higher. While it’s the time of year where many pundits, analysts and economists grace the landscape with predictions, projections and forecasts with respect to future market and economic performance, seldom do the markets co-operate and validate the prognosticators. The reasons for such are many, however, unexpected and unanticipated events, the great UNKNOWNS, are more than likely to be the causes for producing the forks in the road. And as we enter a new year for the financial markets, the potential risks appear to outweigh the rewards, once again. Will the quick start prevail and further mojo ensue, or will investors find themselves bobbing for air stuck in quicksand? Stay tuned for the results. Therefore, discipline, patience and selectivity, much like the past two years, should continue to serve those well, who can exude such characteristics.
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INFORMATION The opinions of FSU contributors do not necessarily reflect those of Financial Sense. |
