By Nicholas Santiago on October 11th, 2010 10:40am Eastern Time
Everyone knows and expects quantitative easing part two to begin or occur very soon. The stock market has already factored most of the Federal Reserve Bank's action into the current stock price. Please understand that the stock market tries to stay ahead of the economy often by 3-6 months. Therefore, while it certainly looks as if QE2 has been taking place already if it does not get enacted soon this market could tumble. As we all know by now quantitative easing just means that more money will be printed and when this happens the U.S. Dollar Index will decline and lose value. Since June 7th, 2010 the U.S. Dollar Index has declined by nearly 12.0 percent. This alone will make goods such as oil, gasoline,and food more expensive for an already strapped U.S. consumer. Please remember that consumer spending accounts for 70.0 percent of the GDP in the United States.
It is well known that Ben Bernanke loves to squeeze out short sellers. I remember in 2008 when Chairman Bernanke lowered the discount rate just before the opening bell on an options expiration Friday. This caused a very sharp short covering rally. While the rally did not last very long it showed many traders that the Federal Reserve Bank Chairman Bernanke knew what he was doing. However, this time around the stock market has rallied since late August and most of the short sellers are no longer in the stock market. Short selling is a very important part of trading. When a short seller covers his position he is obligated to buy back the stock that he borrowed and sold short. This causes the major bounces higher at the lows in a market. When the short sellers are not in the market the lows will not get supported. For example, short selling was banned on the financial stocks in late 2008. These stocks did not rally for more than a few days before they collapsed and traded much lower than they normally would have. Most other economies that have banned short selling have seen major collapses in their markets. When you play with the weather the storm will usually be much worst than it's natural trend.
Where have all the short sellers gone? Traders are not stupid people. In fact, in my humble opinion traders are the smartest people around. Many traders that would normally short the stock market at important resistance levels are actually buying gold and silver. If the Federal Reserve Bank is going to keep printing money in order to keep the stock market propped higher traders will take advantage of the one asset class that will be directly affected. That asset class is the precious metals. Gold has climbed nearly 17.0 percent since July 28th, 2010. As long as the Federal Reserve continues to print U.S. Dollars, gold and silver will continue to trade higher.
These are trying times for the Federal Reserve Bank, the U.S. government, and the U.S. consumer. Eventually something has to give way as we all know you can't have your cake and eat it too. Right now the next bubble is being created. Have we not learned from former Federal Reserve Bank Chairman Alan Greenspan when he made the mistake by lowering the Fed fund's rate to 1.0 percent in 2001. This created the greatest credit bubble since the 'Great Depression'. I suppose learning from the past is just too much to ask. As for as another crisis it is likely to be around the corner.
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a unique way to trade Candlesticks in 212 pages full of examples, graphs and charts. It is a simple and easy to use method to trade candlesticks created by Sokyu Honma in the 18th century in Japan. His method, today forgotten, is simpler, easier to use and more powerful than most other candlestick trading techniques.
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“If a betting game among a certain number of participants is played long enough, eventually one player will have all the money. If there is any skill involved, it will accelerate the process of concentrating all the stakes in a few hands. Something like this happens in the market. There is a persistent overall tendency for equity to flow from the many to the few. In the long run, the majority loses. The implication for the trader is that to win you have to act like the minority. If you bring normal human habits and tendencies to trading, you’ll gravitate toward the majority and inevitably lose.”
– William Eckhardt
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By Rodrigo Campos
NEW YORK | Sun Oct 10, 2010 11:35am EDT
(Reuters) - Not even earnings from big names like Google and GE this week will be able to pull Wall Street's focus away from the possibility of more cheap cash flowing in from the Federal Reserve.
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