It’s the last day of February. The temperature is 79 degrees and a brilliant sun sails in a cloudless sky over this pristine Florida beachside village. The place is jammed. Minnesotans, Michiganders and (it seems) everyone living north of the Mason Dixon line has come to town to get a tan and escape the brutal winter. Stores on Ocean Drive are setting sales records. Hotels are at capacity. Forget about getting seated at a restaurant with less than an hour wait.
If I were a merchant, I’d be bubbling over with understandable optimism. Instead, as a trader, I’m obliged to do due diligence on the markets and the economy to establish the risk of owning investments versus hanging out in cash. Tedious work on a day like this. But I resist the temptation to grab my Kindle and walk the three blocks to the beach and veg out, in order to review my analysis and check with my colleagues to see if my bearishness on investments is off base.
Here’s what my morning work brought:
e-mail exchange with fellow trader Tom Finch:
Tom: My take on the market: We are in an Elliott C wave, the pattern is a diagonal triangle, momentum is divergent. When it is over maybe 1875 (cash S&P), we go down big. What’s yours?
Rod: The SPX breakout of the recent trading range keeps the minor, intermediate and major trend rising. How high is high? The Financial Market Cycle is in the late stage–High financial risk. Fundamentals are extreme–Over bought, Over valued and Over bullish. Technicals Marginal. Economics Borderline. (Bullish) Sentiment recent record levels. Unfavorable risk reward ratio–SPX up+/- 5-10%, down +/- 30-50%. Expect a Minsky moment soon.
Wikipedia on Minsky moment:
A Minsky moment is a sudden major collapse of asset values which is part of the credit cycle or business cycle. Such moments occur because long periods of prosperity and increasing value of investments lead to increasing speculation using borrowed money. The spiraling debt incurred in financing speculative investments leads to cash flow problems for investors. The cash generated by their assets no longer is sufficient to pay off the debt they took on to acquire them. Losses on such speculative assets prompt lenders to call in their loans. This is likely to lead to a collapse of asset values. Meanwhile, the over-indebted investors are forced to sell even their less-speculative positions to make good on their loans. However, at this point no counterparty can be found to bid at the high asking prices previously quoted. This starts a major sell-off, leading to a sudden and precipitous collapse in market-clearing asset prices, a sharp drop in market liquidity, and a severe demand for cash.
Tom: Thanks, I certainly agree with your risk/reward ratio. Cheers,
No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.