From this morning's Quick Takes Pro newsletter. The answer to a letter to the editor.
Your worries over the market's dysfunction are echoed everywhere. However, the market may be manipulated by the Fed and gamed by the algos (algorithmic trading) and taken off line in dark pools but sooner or later the free market will come back and purge itself of this nonsense. We have already seen how QE is getting less effective and shorter-lived. Inflation must come back by definition and indeed we are seeing it rise under the radar. True, commodities are falling hard but sooner or later debt is going to crush us.
Australia has already made a move to trade with China without having to convert to US dollars first. We know the Middle East has already floated the idea of selling oil in euros or even their own currency. Money and business will eventually move to where it is most productive and the flight from high tax and regulation states to low tax/reg states is clear. Sooner or later (we like that phrase) it will start to leave the US altogether.
But for now, the only thing that has worked is following the trend and taking a blind leap of faith that the trend - which is still up on the S&P 500 - will always be intact. Of course, we know that cannot be true. But it is true until it isn't.
As a technical analyst, seeing cherished indicators fail all the time is frustrating. Watching pattern breakouts/breakdown fail all the time is worse. Only the trend followers are happy these days and only in they chose the stocks that look different from the others. For example, look at UTX in the Dow vs. XOM. One was a steady climber. The other formed patterns and was completely frustrating. And then look at HPQ, which was a steady climber - until it wasn't.
There is no shame in taking it easy, cutting back trading and lowering risk. As for the question of who is selling gold stocks at five-year lows, blame the trend followers. However, sooner or later (there we go again) value investors will find them. Technical traders will spot extreme bearish sentiment and oversold conditions.
QE will end one day. And when it does, look out below. Interest rates will soar and gold will take off. The disconnect between stocks and the fundamentals can stay in place longer than we can remain solvent (who said that?) but it will return one day. The longer it takes, the worse the snap back will be.