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July 05, 2011 at 06:39 AM EDT
Range of Outcomes
We should always consider "the other side of the trade".  When a market reaches extremes, we should contemplate the psychological impact and the likely paths going forward. Of course, we can only do that in a qualitative way.

From a psychology standpoint/sentiment, the market is very overbought. Jason Goepfert's Sentiment Trader gives a quick look at that. But the market could still go higher, consolidate sideways with some overhead resistance, or retreat absent more money printing. I think most observers expect a more stealth kind of quantitative easing going forward as maturing debt (that the Fed owns) is recycled into new purchases.  The greatest growth outside of wartime that the US every achieved as I understand it was in the 1933-1937 period, and withdrawal of stimulus coincided with retreat. The GDP growth rates at that time were in double digits, not the midget growth engineered by the Bernanke Fed.

Even though the market is overbought, the percentage of stocks above the 40 period average isn't at a typical extreme (e.g. > 80%).

Investors don't necessarily have to see the world through Main Street's eyes. Corporation XYZ can still achieve profitability and growth by squeezing workers, laying them off, or financially engineering lower multiples through changing their balance sheets to take on more debt and buy back equity. So you, I, or our neighbor can be out of work and companies do just fine.  That's the maddening part of the process for the "hubris class" of central banker. They can't see why ZIRP doesn't work the way they feel it should.

Yesterday the Wall Street Journal had a headline about how investors are shunning old technology stocks. Contrarians might find that article attractive (here's MSFT). futures heatmap. Who needs quantitative easing? Right?

Good trading and great risk management to all.

Educational use only. Never intended as investment advice.
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