Stock Market Outlook

If it appears from my writings that I am heavily into stock market, that would be true in the past. But, currently I am in a time out mode. For this reason, so far on this blog I refrained from making a market call. The closest comment I made on market direction was in early February when I warned about warning shots being fired. Of course, if anything, that post served as a contrarian indicator. The market was up for 8-weeks in a row since then. This is almost as much an anomaly as the the relentless sell-off in October-November 2008 and February-March 2009.

First a little background on my stock market experience

All these years I observed one thing: Markets are not efficient. Period. They are heavily manipulated by the big money interests – investment banks and large hedge funds. Even with this knowledge, I was able to profitably navigate the market. There was occasional intervention in the markets by the government during Asian contagion, LTCM crisis, and 9/11. Now it is more open and a daily event. As with many, when government tinkers with whatever is left of free-markets, it is nearly impossible to value things either on fundamental or technical basis. That is the dilemma I am in now.

I frequently get asked to give an opinion on individual stocks or advise on investments. I try to avoid doing that completely. In my 15-year blogging experience, I have talked more about markets in general and individual several stocks in particular. However, for about a year I completely stopped talking about markets. For, after nearly 18 years of stellar record, since March 09  I am not able to gauge the markets – meaning, I have been very wrong since March 09. For instance, two months ago I said on this board about “warning shots” and possible decline. That almost was a contrarian indicator. For the next eight weeks, the markets were up – almost on a daily basis. While I admit being totally wrong, this type of market behavior is bizarre. I guess that is what will happen when the government blesses large market participants with an assurance that they won’t let the markets fall. If the markets were to be ‘free-wheeling’ they will not and should not go straight up or down. The wheel is rigged.

Currently I myself am in a time-out mode. Even when I talked about stocks and markets, whatever little advise I dispensed was to some close friends only.

I don’t give advise for various reasons:

1. I am not a licensed investment adviser
2. I shudder at the thought of being responsible for someone else’ losses.

Here are a couple of good calls I made in the past (check dates):

• The week before Lehman filed for bankruptcy: September 11, 2008: Game Over

  Game over. With this LEH bailout news I think We will see a major Crash next week. If not next week, the week of options expiry in October.Point swings/trading range in S&P this week:
  Monday: 33 points (37 points with the gap)
  Tuesday: 44 points (45 points with the gap)
  Wednesday: 22 points
  Thursday: 38 points

  These are huge percentage moves for S&P 500. These swings are indicative of a major move immediately ahead of us – possibly next week. Up? or Down? I think down.

• October 05, 2008 – Get ready for Jaw Dropping Action in Markets

  • Bottomline:The picture looks really, really bleak. Massive coordinated effort to save banks and markets could begin as early as Monday. Treasuries are indicating a 50-75 bps interest rate cut. Don’t go overboard with shorts because a massive short-squeeze may be (will be) orchestrated with a global coordinated effort. On the other side of the trade are the most powerful Central Banks in the world, the governments of major countries in the world. Expect manipulation and rule changes as it unfolds. Remember that you are no match to them.

    Chances are, most of the people who are correctly bearish for the right reasons can and will lose a lot of money in this market. I am trying to be not one of them. I have the following guiding principles:

    1. I want to protect my capital (sell and ask questions later)
    2. Couple of years worth of moves will occur in hours. I want to try to take advantage of the situation. But, I won’t hesitate to take quick profits

Now for the list of bad calls – More than half a dozen bad calls since March 2009.  The bottomline is this: I was more wrong than right in the last 1 1/2 years;

Current Market Outlook

As of today’s data, I believe that the world stock markets are heading towards a steep correction in the next 3 months.  My analysis is mainly based on published sentiment indicators, some anecdotes and early signs of credit market dislocations. FYI, Greece problems have not gone away. If anything, Greece’s credit problems got worse. Now, we are beginning to see a surge in CDS premiums for Bank of America and Goldman Sachs.

If I were long stocks, any stocks, I would get out NOW. To be conservative, I would be in full cash.

In the interest of full disclosure, For several months I am either in full cash or short US financial institutions. I am warming up to short the market even more. Also, I have had fairly good success with trading and investing in the past. But, I also managed to a lot of foolish things and lose big.

caveat emptor.