16 June 2009

Short selling opportunity in stocks?

Seems like a B top to me..

Geithner is in China, attempting to gain increased support for US paper markets. And he may get this support at the expense of the IMF’s gold, which would be the trade off. Such a move would increase Chinese gold reserves substantially in short order, giving them what they want, in exchange for heightened support of US Treasury purchases, which would help to keep interest rates low. If successful, this could help stocks out temporarily in tracing out a more elongated recovery pattern than would be the case under a 1929 to 1932 sequential repeat (see Figure 1). The jury is still out in this regard however, meaning although it’s always possible a stronger bounce higher will prevail, as you will see below it’s not a higher probability based on thoughtful analysis.

Naturally such an outcome would be frustrating for stock market bears with fundamental factors worsening every day. Companies are cutting dividends because earnings are crashing, however right now this doesn’t appear to matter if one is simply looking at stock market performance and not how prices are being artificially jammed higher. Of course manipulations never work for very long, so even if Geithner is successful in wooing the Chinese back into stepped up support of US paper, such efforts will undoubtedly prove futile in the end, as is always the case. This perspective makes a great deal of sense when one realizes that with an estimated $2 trillion in deficits this year the necessary Treasury buying will need to be four times that of last year alone. So you see even though money supply measures are not correctly reflecting this stepped up largesse, as stepped up monetization is occurring already, never the less an exploding monetary base is with us, making the stock market’s lack of response to this condition scary to say the least.

Is this because the bureaucracy wishes to hide the inflation? Perhaps, however as you know from our previous work on this subject matter, money supply growth rates are only part of the equation in equity markets, with the other half of the formula being speculation trends. And as I was alluding to above, with speculators bullish on future prospects for stocks, while it’s always possible the bulls get their way longer, difficulty associated with levitating equity prices should become increasingly apparent as options expiry approaches in three weeks, where at some point such efforts are should fail if history is a good guide. So, while price managers might go the full distance in supporting stocks until Geithner heads home on Tuesday to make it appear the administration is in control (when in actuality they got lucky), with all the shorts blown out of the market now it’s going to be very difficult for these jokers to keep this act up with little buying coming from an increasingly bankrupt public.

This, along with sentiment related considerations is why a sharp decline that would mirror the 1929 to 1932 sequence is still possible if prices start dropping in earnest this week.


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