``A good trader has to have three things: a chronic inability to accept things at face value, to feel continuously unsettled, and to have humility.” -Michael H. Steinhardt, American investor and philanthropist
The September “syndrome” struck again!
But this time it hadn’t been what the mainstream had expected. Instead, it had been what we had been expecting.
Coming into September we pounded on the table that 2009 won’t be 2008; where US banking system went apoplectic from which the world endured a consequent “sudden stop” and where global economic activities went into a freeze-frame or a virtual standstill-our Posttraumatic Stress Disorder (PTSD).
2009 will most likely produce a different seasonal pattern, we asserted.
It would probably center on the US dollar’s weakness and gold’s strength which should also provide support to stock markets especially in Asia and Emerging Markets, as we suggested in The US Dollar Index’s Seasonality As Barometer For Stocks, Gold As Our Seasonal Barometer, Gold As Our Seasonal Barometer (For Stocks) II and Gold and the September Stock Market Seasonality Syndrome.
Well, all these have been captured in Figure 1.
Figure 1: A US Dollar Meltdown Equals Rising Gold And Stock Markets
The US dollar Index’s meltdown has had a mirror or inverse effect on Gold (surged to close at record highs), global stock markets (DJW) and Emerging Market stocks (EEM).
So far this has only shown how the mainstream had been looking at the wrong angle and had been very much fixated with traditional metrics but has significantly been caught disoriented by overlooking the genuine dynamics of the market.
Worst, they have relied on cognitive biases, such as the hindsight bias (rear view mirror syndrome), the focusing effect and anchoring, as foundations for their analysis.
For instance, deflation advocates have used China’s recent crash as evidence to advance their cause (a case of selective perception).
However we averred that the directions of the US dollar will likely determine the degree of the correction in China’s Shanghai index (SSEC), as we wrote in Will China’s Stock Market Correction Spread Globally?, ``if the US dollar fails to rally while global stocks weaken, then any correction, thus, will likely be mild and short.”
The Shanghai Index has advanced by 4.5% this week and will most likely follow the path of Russia’s RTSI, see figure 2.
Figure 2: Bulls Recapture Russia RTSI, Shanghai To Follow
Earlier Russia’s RTSI had corrected by 30% but has now entirely reclaimed the losses.
With a bullish reverse head and shoulder (chart) pattern along with a sustained feebleness in the US dollar, the likelihood is that the RTSI will make a significant breakthrough soon (if not by next week).
Moreover, many have called for a major correction due emerging markets attributing overvaluation levels.
For example this news from Bloomberg underscores on such extravagance, ``Developing-nation stocks rose, driving the MSCI Emerging Markets Index to its most expensive level in nine years, as Indian software makers rallied and higher oil prices boosted the revenue potential of economies sustained by exports.
``The MSCI Emerging Markets Index increased 0.8 percent to 887.05 at 5:01 p.m. in New York, pushing valuations to 20 times reported earnings for the first time since June 29, 2000, according to data compiled by Bloomberg”
While we basically agree with the concept that “markets have risen too fast and too soon”, that would be interpreted as looking at the markets from the lens of the mainstream.
Again, excessive dependence on conventional metrics will likely persist to befuddle mainstream analysis.
In addition, they seem to forget that in major trends, whether in bullmarkets or in bearmarkets, momentum can lead to trend overextensions.
Of course the principal error has been that the mainstream has all underestimated the impact of government printing press on the financial and economic sphere.
