If you step back and just reflect on the numbers, the stock market makes no sense. Why would so many buy to push prices up, and the next day, so many sell to lower prices? It would behoove one to remember the market adage, "to take the most amount of money from the most amount of people in the shortest amount of time."
Big Picture
This is why I take the big picture approach, but use charting to make trades. The most important word in that sentence is "trades." Investing for life in a forever stock is just a market ploy. Nothing lasts. Always use a stop on trades. Know where you would like to enter and exit before you make your first move. With that said and a guideline, here is how I see the market in the near term.
There is one indicator that both fundamental and technical traders both use, the Dollar. Price action on the dollar is affected by many aspects from the Fed all the ways down to Main St. How much disposal dollars do ordinary citizens have? Keep in mind that commodities are still priced in dollars. So, when the value of the dollar is up, people have more disposable money and conversely when it is down, less to spend.
If you haven't noticed, the dollar has risen from .79 cents to over .86 cents. This is huge. The market does not like a strong dollar, not that .86 cents is strong, but any uptrend hurts S & P 500 companies that have outsourced because those foreign dollars are worth less. The consumer benefits, and he has also become a smart shopper. He wants discounts and this Christmas shopping season will demonstrate this change in consumer attitudes. Retail will produce sales, but not profits as margins shrink.
These type of inflection points are nothing new for the market. During the early 70s, oil prices were low. A gallon of gas only cost .31 cents. Yes, that is true. OPEC was suffering from inflation without getting higher prices for their oil. In addition, politics entered the equation. OPEC cut production. Prices doubled. That was then, this is now.
China
is the elephant in the room. Their government decrees that GDP should grow at 7.5%, however it is not. The same leaders thought that domestic growth would pick up and continue the target level. It has not, and they are definitely in a housing bubble. What to do? The speculation is a devaluing of the Yuan. This will spur exports, regardless of the international fall out with other currencies. If this happens, the dollar will get even stronger.
EU
is under duress, but the euro should bounce from the recent lows up to 130, however at that point, I see it resuming its fall, giving yet more strength to the dollar. So, the dollar will retrace a little and then, rise to around .89 cents. It could go higher.
What It Means?
As stated above the market hates a strong dollar even though it is best for the consumer. The small cap index has already dropped 10% and if the Dow would correlate to the Russell Index that means the dow would sink to around 15,000. In addition I have some fundamental reasons why this downtrend will continue.
Population
For society to produce, it needs to create demand. In America today and every day for the next sixteen years, 10,000 baby boomers are subtracting by collecting from Social Security. You hear about job growth and the recovery to the tune of 200,000 every month this year. It sounds impressive until you understand this important aspect. During the recovery period our population has grown by 14 million, maybe more. No one knows for sure with all the illegals. Therefore, we create 1.6 million jobs, but 12.4 million people need jobs. We are way, way short and that is why long-term unemployment is still 12 million. Not to mention the 4.6 million who are collecting on disability which is another part of social security or the 47 million collecting food stamps and adding all this together the working population is at a decades low of 62% which means 38% of the population is not contributing. Again, our population is well over 300 million and 38% of it is unemployed and that, is a lot of people not to mention that within the employed there is a record number of part time workers. The bottom line is disposal income is shrinking as our economy produces less.
QE
is suppose to end this month and even though interest rates are at historical lows, the perception will be to the negative bias. Beside controlling short term rates the Federal Reserve released their Survey of Consumer Finances(SCF). It reveals that the middle class has suffered both low wage growth and net asset losses during the so-called recovery. Wages for them are down 12% and net worth by 38% in the last six years. Keep in mind that the CPI used to adjust those results is skewed. If it included food and energy the results would be worse. This is the structure within our economy and all the talk is just that, talk. These bipolar swings will continue. It is the market telling you that a change is coming like dark clouds before a storm.
One last thought. Gold has increased in tonnage on average by 1.5% since 2002. Fiat money by central bankers has multiplied from a low in Japan of 8.4% to all the rest with double digit figures: US Fed grew money supply by 16.9%, Bank of England by 20.5% and China by another 20.7%. So, which is the rarest? Which has retained its value? Which is why I say, End the Fed!
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