What Mr. Market Is Telling Us

With all do respect to the flamboyancy and arrogance of Mr. Market (an irrational man, with a disposition for brashly telling you on a whim, the worth of a viable company's market capitalisation) he is now telling us one simple thing. EMBRACE RISK! The global flow chart for capital is showing this very phenomenon now. Fiat dollars are being sold and rolled out into almost every risk asset imaginable. The fastest place to put all this capital to work at is within the equity / currency / commodity markets. Viable businesses in the real economy are seeing some forms of lending returning to their disposal (perhaps not on the terms they would like.) However, most of the money at this point in time is only being pushed into the capital markets. By forcing artificially low interest rates on money market instruments, investors are being forced to take on risk in order to capture some price appreciation. Indeed this price appreciation could go on far longer than anyone is willing to concede at this point in time. It doesn't make sense to the rational thinker. A jobless recovery. How does that work?

Well, by forcing capital off the sidelines into the waiting hands of risk; Mr. Market is able to repair the otherwise impaired portfolios that make up the entire equities universe. In doing this folks begin to get "uptick fever" again. The notion of confidence reappears within this emboldened group of investors, and then real economy decisions begin to get made. Partnerships are entered into, LLCs are formed, charitable contributions are made, tax incentives are created, and slowly but surely American business begins to re surge from the funk. Does it happen overnight? Nope. It takes time. And Mr. Market is usually the determining factor of the primary trend, so it's best not to fade his collective wisdom.

Dollar and Treasury watchers fear of an oncoming currency/debt crisis is prevalent. Rates on treasuries are too low and the steady fall of the dollar undermines our recovery. However, rates are just right for those seeking mortgages and signaling to me that capital is still better put to work in risk assets. The decline of the dollar actually fuels this move to risk, as most materials are priced in dollars. Foreign demand increases in our goods and services as their currencies give them an embedded leverage that was unavailable before now. And we begin to export our way to recovery. Except this time maybe we won't export all of our jobs. The potential for a Rust Belt revival could become self apparent. This all can go on for a while without hyperinflation kicking in as deflation remains the primary concern. The beginnings of the Fed Funds rate being raised again will not end this cycle immediately, but will be a warning that the emphasis on CAPITAL vs RISK should become our focus again. Last time the move was from 1% to 5.25%. 425 basis points higher until the risk appetite was killed. This time should see a sharper rise.

So how long will it last this time is the $2 question? The best answer is to just follow Mr. Market's lead. To fight against him is to fight in a losing battle. He'll tip his hat to us at some point in the future and let us know when he's favoring an approach to capital preservation again. It's best to look at the weekly charts to get a less noisy picture of where we're going for now. Here's a hint: think up! For the time being Mr. Market is paying up for stocks. We should listen, and follow his lead.

*** The 50sma on the weekly chart of the SPY has bottomed, and is now hooking upward; increasing by .30 last week. This is very positive from a support standpoint, and should continue to aid in the beginnings of a new uptrend.