Stock Market And ETF Outlook: Bullish Sentiment At Extreme Levels?
Here’s your market outlook for Thursday, November 4, 2010
Instratrader Indicators:
Red Flag: We Expect Lower Prices Ahead
Daily Technical Sentiment Indicators: Bullish
Short Term Market Condition: Overbought
It certainly has been an exciting week so far. And more still to come with tomorrow’s non-farm payrolls report.
The election went pretty much as forecast with the Republicans regaining the house and nearly taking back the Senate. The U.S. electorate seems to me to be like a kid with ADHD. Two years ago we “threw the bums out” and yesterday we brought the same bums back.
People say gridlock is good. I would disagree. We are in the midst of an ongoing global financial crisis and I think visionary leadership would do us more good than gridlock. Furthermore, as Dr. Bernanke said last summer, “central bankers alone cannot solve the world’s economic problems,” but it seems that he will continue to be flying solo as Congress and the President squabble and the 2012 Presidential Campaign got underway today.
Which brings us to “QE2″ or quantatative easing, part 2. The widely awaited announcement came in at $600 billion between now and June which was considerably lower than many estimates which ran as high as $1 Trillion or more, but above the $500 billion floated by several economists and Fed members.
My view on this is well known and that is that quantatative easing is unlikely to help the economy in any significant way. A much larger QE1 failed to spur job growth or meaningful economic growth and so it’s hard to make an argument that the rewards outweigh the risks. The risks and outcomes of this strategy are completely unknown except for the fact that further devaluation of the dollar won’t make us any friends around the world.
Finally today, and almost unnoticed, problems seem to be flaring in Ireland where bonds tumbled and the yield on their 10 year bond hit record highs and costs to insure Irish debt spiked to record highs, as well. You can remember back to earlier this year when similar action shook Europe and global markets and so one can only speculate on what the fallout of this will be. So far the Euro has managed to remain firm, unlike in the spring, but this is just a problem that won’t seem to go away.
On the technical front, markets remain vastly overbought and bullish sentiment is at extreme levels that typically precede significant corrections. Indexes are overextended above their moving averages to points similar to previous significant corrections and money continues flowing from equities on the part of both retail investors and pension funds.
The Republicans have won and QE 2 has set sail but in spite of all the happy talk and optimism, signficant downside risks remain.
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All this does is reward traders on the right side of the trade, it does nothing for the economy; here’s why:
1) The problem is too much overhead in America; we have a government we can not afford. Problem not solved and will not be solved for at least a decade, IF we were to start cutting government today and keep doing it for a decade.
2) The problem is local in nature; too much city, county and state involvement and expenses to be in business. Business owners are not rewarded for risk; the yield curve for someone starting a business is to low. There are too many fees, new laws and regulations every year usurping income from the private sector.
3) During the expansion leading to this mess, government expanded almost exponentially when it should have been contracting. Business has been crowded out by government and with governments unlimited ability to tax and borrow, they have created a credit vacuum in the private sector.
4) The political will to resolve these problems does not exist and politicians are not businessmen as they should be; they are just shuffling from one elected job to another working around term limits to stay employed. There is no requirement to be an effective politician; voting is not an effective feedback method when transparency and accountability are replaced with rhetoric, hubris and greed.