Reflections on the Past Week

Earlier this week I had shared my opinion that the markets would not get the stimulus they wanted from the US Federal Reserve (Uncle Ben) nor from the European Central Bank (the newly minted “Uncle Mario”). And after that the markets would leak.

I was right – until Friday morning. The markets did not get what they wanted and they did start leaking a bit after the Fed meeting yielded no news on Wednesday, and they leaked more after the ECB yielded no big news on Thursday. However, early Friday morning, European markets were in launch mode which propelled US markets higher.

I had mentioned that even though the news was bad, economic activity was weak worldwide, and buyers were jittery, that there is A LOT of cash sitting on the sidelines that wanted to be invested. And some of that money went into buying on Friday. Two things might be at work here – sellers weren’t too aggressive and there may be something real brewing at the ECB. Let’s address each of these:

1. Volume was lighter on exchanges on Friday meaning the market rose but not because a higher than average amount of people or buying power was used (that’s what you want to see in a real up-move – buying with LOTS of interest, or volume). So the markets could have risen because sellers were not interested in selling (as markets bump into old highs or old lows, they seem to lose steam and go in the other direction, meaning for example Friday, as the market neared recent lows on Thursday, sellers stop selling making it easier for buyers to push up markets – and vice-versa).

What we need to see is confirmation – not just Monday but perhaps Thursday or Friday of next week we need another strong up day with volume to confirm Friday’s move. If not, well then perhaps we leak again.

2. The ECB might really be working on something. Friday’s rally cranked up in Europe first. Perhaps insiders there know the ECB is close to some kind of plan that would be bullish for markets. Perhaps Mario Draghi’s vague language on Thursday was just buying time to line up his “ducks.”

Either way, we can’t know for sure until some more time has passed. And as Bill Fleckenstein said in his Thursday Daily Rap, you “pay up for more certainty.” So if the market is going to move higher and you want to be certain before you buy, you will likely buy at higher prices.

Why Doesn’t the Market Just Fall?

And that explains why markets keep popping when we get near lows. Some people want to time the absolute bottom (and many traders do this, accepting small losses if they’re wrong until they’re right) and get right in at any hint of a rally. Markets go back down (at least in the “Central Bank Era”) when no news comes from government. Sad indeed.

I like Hedge Fund Manager David Einhorn’s idea best – have central bankers come out and just tell the world, we will not give the world any more financial¬† “jelly donuts”, clean out and start over based on fundamentals and real market-only supply and demand. Unfortunately, it won’t happen until it’s forced to happen and therefore, markets will just be jumpy reactionary children to the candy given or held back by governments and central banks.