LION63 said:
RogueTrader,
I know I am bearish and have often taken flack for uttering what some call the unthinkable, but do you not think that 7450 is a bit extreme? For the record, I stated at the turn of the year that the DOW will hit 7450 or less and I still stand by that view.
I will also be using options to back the view as the potential losses are known an quantifiable at the outset. I cannot stand sleepless nights.
Lion I don't see it as extreme, dramatic yes, but not extreme at all. The market has risen quite strongly in the face of a steadily deteriorating envoironment. I believe the US has a lot of problems that have the potential to negatively impact the market quite significantly.
There are questions about the real strength of the economy. Unemployment may not be as good as it sounds. "The current low U.S. unemployment rate probably understates the true level of joblessness by 1 to 3 percentage points", says Katharine Bradbury, the senior economist at the Boston Federal Reserve. "Millions of potential workers who dropped out of the labor force during the recession four years ago have not returned as expected and are thus not counted in the official unemployment statistics. "
Inflation is low, which is a good thing, unless you have a recession. Core inflation is below 2%. There are many observers who think the economy will soften in the latter half of this year. I'd agree with that view. Raising rates while the economy is in the process of softening can help bring about a recession. And a recession today (or an economy only growing 1-2%) with inflation so low would almost certainly bring back the deflationary scares of 2002.
Oil and energy prices are beginning to have an effect upon consumer spending and are certainly a drag on growth.
The low interest rate envoironment has fostered a significant rise in the price of homes, if not a housing bubble in certain areas. The Fed, as they should be, is concerned about adding fuel to the flames. Allowing a real housing bubble to develop because of an overly stimulative Fed policy would create real problems when it burst. Significantly falling housing prices in the US is a problem that the Fed has few, if any, tools to deal with. When housing bubbles burst they are generally accompanied by foreclosures and thus oversupply on the housing market. Because of the large number of houses that are being bought for investment purposes with little or no money down (in some areas as much as 20% of homes are bought for investment/flipping purposes), a cycle of foreclosure would be difficult to stop with interest-rate cuts alone.
The Fed has major problems ahead of it imho. On the one hand they are aware of the potential housing bubble, and one of the ways to try and combat that is the steady rise in rates, but at the same time they have to be careful not to slow the economy too much.
One of the tricks in trading as I'm sure you know is getting the timing right, if the Fed pauses on interest rates that may give stocks a bit of a rally, but I don't think that will be overly significant and will retreat quickly as the market becomes aware the Fed paused because of a softening economy. That won't be at the next rate decission on August 09th, but they may modify their language in that statement to drop the "measured" phrase.
The DOW I'm unsure of at the moment as regards upside potential gien that it has been lagging, as such there may not be much more than 100-200 points The SPX I think has a good shot at 1253 since that is only 23 points from here depending on how it holds up on the next correction, and I would not expect any higher than that. I am however aware that a market can rise more than you think when you start trying to pick tops, hence the use of options, as you say they define your risk up front. in this situation I think you will just need enough time to allow things to unfold. I believe when the move down truly gets under way we are likely to experience a significant price shock to the downside which will be exacerbated by the current complacency among investors The forward looking forcast of companies this earnings run will be interesting. GE have already warned that they will likely be below consensus.
