They call it the Christmas rally. I call it the calm before the storm. VIX was at 17.39 on December 16th while put/call ratios signal extreme bullish positioning. All this while the muni-bond markets were getting hit and risk of defaults were talked about all last week. With a rise of unemployment to 9.8% in November(9.6% for the 4 months before)and 1.3 million discouraged workers and 2.5 million marginally detached workers, I don't see why a US equity rally is sustainable with the current situation.
This rally is a direct cause of QE2 as Bernanke has the FED buying more T-bills causing the dollar to rally and gold to also sink back... all relative to EU's debt crises. Yields are also supposed to go down because of Quantitative Easing..Why aren't they? This subsequently increases the cost of borrowing and makes it more difficult for potential home buyers.
5 minutes in front of a Bloomberg terminal and I'm convinced my last weeks call that the US equity markets may start crashing from 3% to 30% in the next 40 days and extend to 4 months isn't as ridiculous as it sounds. I'll quote:
Analysts at Citi FX says stocks might sell off in Jan: charts of post - Christmas suggest 'that 2011 will not be a good year for the equity market,' just as they suggested 2010 would be OK. Their favored technical comparisons are 'the spooky chart' of 1929-1939,'1966-1976, and the 1906-1909 period. Average market fall in these periods is -48% over 19 months. So beware Jan 3, 2011!
I think those Citi Analysts are also referring to the Hindenburg omen!
Citi also warned of a "fresh wave of bank failures and sovereign defaults in Europe unless the EU lenders come up with a credible response to the crises."
Lesson: If you have a systemic risk...solve it and don't avoid it with liquidity. I'll be waiting for the Dominoes to fall.
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