BlowOff Top? and Gold

The recent advances in the market look stretched as the S&P is up slightly on the week. Concerns are rising that the speculators have taken over the market. In fact, margin debt at the NYSE has now reached an all time high at $401 Billion. Expectations that a weaker economy will keep the Fed’s foot on the accelerator have speculators in a tizzy and portfolio/hedge fund managers playing along. Market returns may become even more convex as the year end approaches. Professional money managers that are underperforming may chase the market higher as they try and keep apace. Managers well in the black for the year may be inclined to sell at the slightest hint of trouble. What goes up must go higher and what comes down may go even lower. Newtonian Markets will continue until acted upon by an equal and opposite force. Recent pattern has the market trending higher for a 15-18 day period and then lower for a 15 day period. We are now on Day 12 of the most recent up cycle. Market could start to cycle off next week as it seems to be struggling at new highs.

New market highs are coupled with consternation that the economy may be slowing as evidenced by the price of WTI Crude which has broken support at $100 a barrel. Bond yields which were advancing and looking to pierce the 3% level on the 10 year US Treasury are now trying to push down through 2.5%. The move lower in bond yields coupled with gold’s recent ascent are portraying an accommodative Fed but lower oil prices mean the Fed may be contending with a weaker economy.

Where are valuations? Margin debt is at an all time high as speculators run about. Byron Wien, noted bull and Vice Chairmen of investment firm Blackstone, thinks that although the market may head higher he is not all-in on the bull parade. He told investors in his October commentary: “I have learned over the years that it is a good idea to be at least somewhat defensive when most others think almost everything is headed in the right direction.” –Blackstone Vice Chairman Byron Wien. (H/t to Katie Young over at CNBC.)

Concerns on valuations from the corner office caught our eye this week when Texas Instruments CFO Kevin March had this comment in response to a question on more acquisitions by TI in their latest earnings conference call this week. Given the valuations that we presently see with many companies out there that might be an attractive addition to our portfolio, it’s difficult for us to look at what we might have to pay for some of those acquisitions and actually get a reasonable return on the investment for our shareholders.”

Valuations and the market look stretched as significant resistance levels have been met. However, the possibility does exist for a speculative blow off top given attitudes towards continued support from the easy money policies of the FOMC.

Keep an eye on the Far East. China and Japan were down big overnight. China may be trying to rein in inflation and withdrawing excess supplies of cash out of the system. Is this temporary or a new longer term move? Japan’s struggles may be more currency related. Precious metals may begin to play a larger role.

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.

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Published in: on October 25, 2013 at 10:22 am  Leave a Comment  
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