Sep 7 2011

Equity markets gapped up on no volume today to halt a few day Europe-emanating skid that threatened to get ugly. The big indexes are now in a “bear flag” pattern – the sharp drop to early Aug, followed by a choppy wide upwards channel. Traditionally, these are continuation patterns – not reversals. The thinking is that a sharp drop gets too oversold. Gets ahead of the bad news that is being anticipated. So the market drifts choppily upward for a few weeks on no news – and then fails on some bit of “good” news. And then another whoosh down. The key here is time. We are four weeks into the flag. Flags should be resolved within eight weeks. My SWAG for the “good news event” that fails is the Sep 21 FOMC meeting. Could be something earlier – (a G7 meeting this weekend?) The market is expecting to be saved by central bank liquidity – and here in the US the delusion that nothing in Europe will really affect the US. That is precisely the sort of expectation that deserves to be shattered. These flag patterns are even uglier in Europe. There it looks more like someone hanging on to a cliff with their fingernails. Asia doesn’t look very good either. And everything is completely correlated – except Indonesia which isn’t exactly where I’m gonna ride out any storm.


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