This very blunt and honest interview with trader Alessio Rastani went viral on the Internet yesterday due to his lack of pulling punches when talking about the current market environment. He made some important points that I've highlighted below and made some of my own comments:
1. The current market environment is ruled by fear
This is a key point to understand when observing the extremely volatile and erratic nature in the movement of the market right now. When so much uncertainty overhangs the market it's impossible for traders and investors to establish positions with conviction, unless they are just blindly buying and holding (and hoping!) for the long term.
2. The smart money doesn't buy this rescue plan
The smart money isn't going to get hoodwinked into believing anything coming from any of the governments involved is going to "solve the problem". Instead the smart money is either on the sidelines (see the big surge in long term treasuries and the U.S. dollar recently) or is positioning on the short side. Basically the smart money is being mindful that we have a trend change on our hands, and when the bear market gets worse they want to be positioned accordingly.
3. It doesn't matter what else happens, the trend is going to play itself out
When the reporter asks him "Well what else could happen fundamentally that would make investors feel more comfortable?", he responds by saying "It doesn't matter!". This was the key point in the interview I believe. He's basically saying he's going to simply do what the market tells him to do, and not worry about what is currently happening in the news. This is the essence of trend following, listening to the message of the market and positioning accordingly. So since he believes the trend is down, he's going to 1) not be swayed by the news and 2) just keep following the trend.
4. The government doesn't rule the world, Goldman Sachs rules the world
I don't think he literally means Goldman Sachs really rules the world, he's basically reiterating the fact that the government ultimately has little control over where the market is going to go. If the market wants a default by Greece it's going to get it. Remember all the band-aids the government tried in 2008 as markets continued to meltdown? Investing based on the hope that somehow they'll get things right this time around is probably not a good idea either.
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About one month ago I got the chance to appear on the podcast FridayMarketMonitor with Walter Traversy and Pina Bernardi. I'm a little late in providing a link to the podcast, but to be honest my views of the market haven't changed at all since the interview, so I think it's still worthwhile to check out. Here's the link to the podcast, and to their website:
Back then I said that I was most bullish on gold stocks, for a number of technical reasons that I've outlined in recent articles on the site. I also was looking for a retest of 1260 on the S&P 500 which would help confirm a bear market on a failure to hold that level. So far during this consolidation the S&P 500 has managed to tag 1230, but it's still trapped in a very volatile consolidation. The latest twist is the recent sharp surge in the dollar and breakdown in the Euro, which I covered in my most recent article. As I said in the article I view that as more bearish news for the stock market going forward.
Getting back to the FridayMarketMonitor, I enjoyed their show since it has more of a slant towards technical analysis, which you don't normally find in most financial podcasts. Here's a link to their archived shows if you'd like to check them out:
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Back in July I wrote an article discussing the fact that the Euro had failed so far to come under pressure during this wave of the European debt crisis. In fact it was still in a technical uptrend since bottoming in 2010 after the first wave of the Euro crisis. Last week the picture for the Euro changed significantly as it fell -3.90% for the week and fell out of a trading range between 140 and 145. The breakdown out of this trading range could be the beginning of a new Stage 4 downtrend for the Euro, as it is now trading below its 30-week moving average which has also turned lower.
The U.S. dollar conversely has broken out of its trading range and could be on the verge of a new Stage 2 uptrend. This will undoubtedly have an impact on other sectors of the market, as the dollar has shown to be negatively correlated to most asset classes since the 2008 financial crisis. Chris Puplava from Financial Sense just wrote a good article showing some of the correlations of the dollar to other asset classes. Most sectors of the stock market appear to have a negative correlation in the -0.40 to -0.50 range to the U.S. dollar, which could be characterized as a moderate negative correlation. What this basically means is that they don't always move in the opposite direction of each other, but have shown a tendency to move in opposite directions. Since most sectors of the stock market have transitioned into a Stage 4 downtrend it is not very helpful to the stock market to now have a rising dollar.
Gold actually has a negative correlation of less than -0.20 to the dollar, which means that gold has shown a weaker tendency to move in the opposite direction of the dollar than the stock market. This runs contrary to a lot of common thinking that gold always runs counter to the action in the U.S. dollar. Relatively speaking, this weaker negative correlation is good news for gold since gold has been the leading sector of the market over the last few months. Gold is currently consolidating under the 1900 level which it needs to take out for its uptrend to remain intact.
Two other charts worth paying attention to now that the dollar is attempting to rally is copper and the commodities index. Both have been consolidating in a Stage 3 instead of breaking down with the rest of the market. But a rallying dollar could potentially be the push needed to transition them into a Stage 4.
This potential structural shift in the movement of the U.S. dollar is bearish for the stock market. The stock market didn't really need this bad news, since it has already broadly transitioned into a Stage 4 downtrend across most sectors of the market. Stan Weinstein, who outlined the Stage Analysis method in the book Secrets For Profiting In Bull And Bear Markets, says in the book that above all else, do not buy or hold anything in a Stage 4. I definitely agree with that statement, as the only way to lose significant money in the market is to stay on the wrong side of the market and build up losses. As a trend follower the number one job is to listen to the message of the market, which includes the bearish potential outcome of a trend change in the dollar.