Stocks Approach Critical Levels

I’m sure most of you recognize that once market sentiment gets extremely bearish, we rally powerfully. Well this is just the way markets work; they tend to revert to the mean. The S&P downgrades U.S. debt and people think the world is ending. Of course after markets rally people totally forget how fearful they were when the downgrade news came out. The S&P totally blew the housing crisis and their views are just not that important in the grand scheme of things. Their understanding of the crisis is limited, and if their recommendations were actually implemented, we would be in a lot of trouble.

Treasuries have fallen as stocks have risen, and this inverse relationship will be powerful in the next cycle. If you are bearish on the debt situation in the U.S. and U.S. Treasuries, then you almost by definition have to be a bull in stocks. Bonds are probably the number one variable that will drive stocks to new highs.


Better than expected retail sales figures may provide stocks the boost they need. The 75-day moving average capped the rally a couple of days ago, and it will be the next critical level for stocks. Investors will get bullish again and in their eyes the worst will be over (for the 100th time). After a period of relative calm, it will be time for another sharp sell-off. I’m not too sure we are at the ultimate base from which stocks will rally- there still may be some more downside.


These short-term fluctuations are important only if you are a trader. If you are long-term investor, they are more or less immaterial. The fact remains that Treasuries have been in a bull market for 30 years and it is time for them to enter a bear market just on a cyclical basis. The debt crisis is just icing on the cake on a trade that should be obvious to everyone, but for some reason isn’t. In the similar vein, stocks have consolidated for over a decade, and they are building up energy for the upside. Short-term fluctuations shouldn’t cause you to lose focus of these larger themes.

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  • Angie

    Hi Moses,
    Thank you for updating your view as the market rallied from its low last week in the 10500s in Dows.  This time I actually sold a small positions into the rally since I want to raise some cash for the next sell-off.
    Would you recommend be patient and wait for the next sell-off as this road in stock rally is def. not a smooth ride and it’s still very possible to see stocks under 11000, and as you mentioned, potentially going under 10000 or even to 9000 or 8000?

    Also any recommendation on gold? I bought a very small position 2, 3 weeks ago and was hoping to get more as gold sinks. But it hasn’t really moved that much.  Should I buy at current levels or just wait for another sell-off?

    • Moses

      Hi Angie,
      Not sure about stocks yet. As I stated, if we pass the 75-day, then I will lean bullish. But until then, there’s no clear direction.

      The same holds for gold. $1600 is the line in the sand on the downside, and about $1730 is the line in the sand on the upside. Until either is breached, gold is directionless too. 


  • Brad

    I don’t understand why if I’m bearish on the debt situation (which I am), I should be bullish on stocks. When the other shoe drops in Greece and they default, leading to other countries in the EU to default as well, all markets are going to take a major haircut. After the dust settles, I can see getting back on the horse and putting some money to work in the markets, but until these major debt delimmas are addressed, I’m anything but a bull. If you’re taking a macro view, I can see your point, but why would I risk capital when there are so many economic land mines?

    • Brad

      And, my view applies to the US debt situation as well….

    • Moses

      Well in the short-term stocks may fall, but there will be an opportunity to buy. Everyone is seeing the same risks and assume stocks have to fall; they don’t recognize that bond money has to go somewhere. If Europe and Japan have essentially collapsed and the U.S. bond market is in the midst of collapse, then crudely U.S. stocks and things like gold are the place to be. The dollar will be negatively affected by a major bond event in the U.S., and this in itself will support stocks to an extent.

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