Romney Shock Sends Markets Spilling

Wasnt in the Game Plan.Wasn’t in the Game Plan.


“Buy the rumor, sell the news.” That seems to be the recurring theme of 2012. Buy the QE3 whispers and then sell the momentous Federal Reserve announcement. Buy the campaign rhetoric and then sell the landslide victory. This delivered us an Election Day rally of 150 points in the Dow and then the 450 point meltdown that followed.

This is further proof that the markets are increasingly becoming dominated by short-term traders, both the high-frequency and the old-fashioned, analogue kind, at the expense of traditional end investors. As if you needed any further evidence of this?

Except that this time, there is much more than meets the eye. For a start, you don’t discount the impact of the election result in a couple of days. This is more like a two to three month event that the markets need to digest. I believe that the markets are delivering us the mother of all fake outs, breaking 200-day moving averages left, right, and center to suck in distressed sellers, and that the next big move in risk assets is up.

I’ll give you three pieces of evidence to bolster my case. First, look at the volatility Index (VIX). If we really have entered a true, extended bear market, the (VIX) would be at $25 on its way to $50. Instead, we have made it from $14 to $18 and appear to be failing there. Market makers don’t believe in an impending (VIX) spike for two seconds and they are selling like crazy.

Second, look at the price of gold. If we were truly headed for a complete liquidation of risk assets, the barbarous relic would be melting its way down to $1,500 an ounce or lower. Instead, it has been rising every day.

Finally, the most interesting thing that happened last week was how little the Japanese yen has moved against the dollar. If risk assets were headed for utter collapse, the yen would be roaring its way to ¥76 or higher. What we got was a feeble move from ¥80.8 to ¥79.3, or from $122 to $123.60 in the (FXY), barely a palpitation, given the epoch-making events that have occurred.

This could simply be reflecting the rapidly-deteriorating fundamentals in Japan that I have been banging the table about for months (click here for The Fat Lady is Singing for the Japanese Yen.). Signaling the end of the world it is not. In fact, the (FXY) November $124-$127 bear put spread I have on looks like it will expire at its maximum point of profitability on Friday.

The bottom line for all of this is that we are just seeing a market correction, not a major collapse, that the medium-term trend is still up, and that you should probably be buying here and not selling. I stand by my equity scenario which I sent to you last week (click here for My 2012-13 Stock Market Forecast ).

What was the reason for last week’s sudden jag downward? I have just traveled across the heartland of America, with stops in Dallas, Houston, Orlando, and Tampa. The Obama win came as a complete shock to virtually everyone in these cities, as it was for most of the Republican Party, especially for those in the investment community.

They were positioned for the new Romney world, which means they were loaded to the gills with coal, energy, and financial stocks. These holdings now suddenly have to be dumped. It’s no accident that last week the coal stocks, such as Arch Coal (ACI) and Peabody Energy (BTU), fell at triple the rate of the general market.

On top of that, the increase in capital gains taxes in 2013 which they thought would never happen in a Romney administration was suddenly placed squarely on the table in front of them. Apple (AAPL) had become not only the largest holding of many managers, thanks to the fever of the past year. It also possessed the largest unrealized capital gain. These factors combined to generate only one conclusion: sell! This is why other big gainers for the year, like Disney (DIS) and Google (GOOG), also took it in the shorts. The more shares rose earlier in the year, the harder they fell after the election.

Article source: http://feedproxy.google.com/~r/resourceinvestornews/~3/sP6iG07IoqA/romney-shock-sends-markets-spilling

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