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The markets currently seem to be suffering from a bout of amnesia as players forget all problems and unpleasant economic data. This "no memory" market (which has been with us for some time now) once again appears to be focusing on only the good economic reports. Thus it ignores such items as:
- The surprising drop in German retail sales (-1.4% vs. est. +0.8% M/M).
- The record yield level touched yesterday by Portuguese 5-year notes.
- The data series high December Italian Unemployment Rate of 8.9%.
- The missed "deadline(s)" for the conclusion of Greek PSI negotiations.
- Etc.
It also has almost no recollection of recent news items such as:
- Plunging housing data in China.
- Nearly 23% (almost 1 of 4) unemployment in Spain.
- Outlook warnings by various U.S. companies during the current earnings reporting cycle.
- I could go on but won't.
Instead, the market continues to display an amazing ability to focus on positive data points such as Germany's larger than expected drop in unemployment and yesterday's Dallas Fed report which came in well above expectations.
The market also seems to be (and has been for awhile) quite willing to focus on the hopes for nearly painless solutions to the global debt and banking difficulties.
Clearly there are some positives out there. And we are never faced with a totally one-sided situation, not even in 2007-2009. The question for me though is whether or not the current environment is similar to the January-October 2007 period during which the markets also generally climbed. Their actions certainly weren't warning of the imminent arrival of the worst Bear Market since 1929-1932. Remember also that during that period many "experts" were speaking positively about the future, including Federal Reserve Board Chairman Ben Bernanke who more than once told us that the "sub-prime issue" was an isolated case and would not become a contagion which would lead to more widely spread problems. (And we believe him now, why?)
But if a trader was aggressively bearish in January of 2007 that traders' capital could have been severely impaired if not wiped out before the bear market begin.
Therefore, I am playing for a short-term correction which I believe the probabilities favor occurring very soon. In fact it may have begun with last week's peak on Wednesday (intra-day Thursday) but we will only know for sure once we are able to look back upon current events. I will keep my capital exposure level on the moderate side and will take profits sooner rather than later.
Most importantly, I will keep in mind the lessons from the past and attempt to avoid becoming stubborn and blind to the realities of the moment. Various market metrics indicate to me that this is still a time to stand by my analysis of the market and to stand by my positions.
This game is never easy. But then again, that's why we get the big bucks.
Have a good one
Curtis Bergquist
PRO Trader Manager
P.S. The The PRO Trader Service was a top performer in 2011 and focuses on leveraged ETF's and position trading in options.
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