Volatile (Choppy) and Weak (Consolidation) Market for the Summer Months

Volatile (Choppy) and Weak (Consolidation) Market for the Summer Months
(Peter Tran, 6/24/2013)

In my previous article, I addressed my market views for two different time dimensions. The first one dealt with the strategic view (LT): where we currently are in the U.S. investment cycle. The second one had to do with the immediate tactical view (ST) of a market correction. You can access this article here.

Now that the market correction has already commenced, I want to map out my MT market view for the summer months in this commentary. It will be served as my basic and coherent framework for this period. When new developments unfold, I will fine-tune my view accordingly. When dealing with a nondeterministic (no crystal ball) investment world, it’s important to form my market analysis based on a coherent and flexible framework. It serves multiple purposes: (a) increases the odds of being right and (b) allows to identify errors quickly. “Making money isn’t about only being right. It’s an incomplete formula. Making money is about being aware early that you are either absolutely right or absolutely wrong.” – Peter Tran

Based on recent developments, the market will likely be in a volatile (choppy) and trendless (consolidation) trading environment. Listen to the market and let it tell us the trading range.

Reasons:

  • Tapering rhetoric. Weeks before the current market correction started, the Fed had already voiced its concern about the speculative nature of the market. The Fed just wanted to release some speculative air out of the asset bubbles that had been created. Typically, in this phase of the investment cycle, the Fed begins to initiate its tightening monetary policy. Since the Fed’s monetary hands are tied in the current cycle, it anchored its monetary target to the unemployment rate. Furthermore, the US economy is currently in a stalled mode while the global economy is slowing down. The Fed has turned to its communication tool to jawbone the market to release some speculative air. This implies that it will require either a rapid deterioration in the economic data or a deeper market dislocation before the Fed changes its current policy posture (especially its current economic outlook is on the optimistic side). Volatile market formula = (hope for easing) + (mixed policy signals to keep the market at bait).
  • China balance growth policy. China is wrestling with its own credit excesses, especially the shadow banking issue. Policymakers are focused on executing policy directives of balanced economic growth. It’s a polite way of saying that we will begin to rein in credit excesses. The implication is that it will heighten global economic risk and volatility. How aggressive do they plan to implement the policy? How determine are they to follow it through? Will they be successful? Given its key economic growth engine (exports) is slowing down, and credit excesses have been accumulated at monstrous level (penetrated all key economic sectors), China will likely engineer a gradual credit crunch in the ST. Otherwise, it might risk setting off a full-blown crisis. Eventually, it will be forced back into the reflationary policy game again.
  • Coming earning season.
  • Fiscal issues. Market should begin to discount this event sometime in the summer before the new fiscal year after the Labor Day Holiday.
  • EU debt crisis. A lot of European debt that is coming due this summer. With the breakdown in Eurozone talks on a banking union and rising interest rate environment, at least in the ST, the Europe debt issue might flare up again. Recently, the Greek problem is resurfacing along with the Italian political instability.
  • Geopolitical risk. Middle East tension. Watch development in Syria.

Now that I have developed a MT framework and market view, I will be listening to the market closely for either a confirmation or rejection (making adjustment quickly) as new events unfold.

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