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Are we nearing the top of the March 2009 cyclical rally, which is part of the secular bear market that began in 2000?
Monthly chart of the SPX, it is approaching major resistance at the 50MA at about the 1200 level.
Daily chart of the SPX , both the rate of change and money flow index, started to fall about mid September, as the market continued to rally. This suggests that the "smart money" was selling into the rally.
Daily chart of the VIX w/ 5period RSI, the VIX is approaching 6 months lows and very oversold readings.
I hear what you're saying, but "investors" seem to be high on "QE2hopium" for the time being. Hard to tell if QE2 has been fully priced into the market, but when it is ...look out below.
"it's one of those tea cup and handle things, we're going all the way to 2500!"
For that to happen, QE2 would have to be a an enormous success, i.e., have a positive effect on the real economy and a positive effect on money supply and the velocity of money so that it could create inflation.
QE1 failed to reverse deflation and failed to create job growth or create new business investment, because the money went into the coffers of the banks, which failed to lend it out. Money supply actually shrank, as investors continued to deleverage.
All QE2 is going to accomplish is to push more money into bloated bank reserve accounts. Adding more reserves to a banking system that already has more reserves than it can use has no net effect on the money supply. It's like Bill Gates making more money and expecting that his lifestyle will become bigger.
The market may be rallying for the moment as investors front run the Fed, but as Hendrix wrote, the real economy is "like a castle made of sand" and sandcastles all fall into the sea...eventually.
QE2 will be a big failure. Institutional investors know that, mom and pop invstors don't. Mom and pop may even pick up their ira/401k/mutual fund investments while the portolio manager buys stocks to put the money to work, the pm is selling vol on top to hedge.
but here's the problem. I would say 8 out of 10 institutional investors agree with you, QE2 will be a big failure. but now a big surprise, QE2 is not as bad (whatever reason). guess what, those 8 out of 10 institutional investors will have to cover the shorts or chasing the markets. and mom and pop live happily ever after.
The funds are not 'shorting' the market. They're covering their exposure but selling calls versus the underlying long posions. As they can deliver the long vs. the short call, they're risking not participating on an extended rally. I think SPX 1200 will be a big tell. If we rocket higher after closing above it, they're getting back in vs. short 1200 calls. I think resistance will hold and we won't get there, but time will tell.
