Just What Is The Market Addicted To

David Frost // Market Outlook


July 30  

Today was one of those seemingly all important days for the markets.

All the players were sitting on their perch eagerly awaiting the numbers.  After all, the GDP will determine how the Fed reacts and whether or not they will continue dropping money out of helicopters.  (Where does all that money go?)

Before the market opened, we had the second quarter GDP number released by the Bureau of Economic Analysis.  (BEA)

Now of course this number, similar to the employment number is derived from the land of make believe.

While they are measuring some activity somewhere, they certainly aren’t able to monitor the entire economic activity of each and every business in the country.

That said, if you go to the BEA webpage that explains how GDP is calculated, then you would give yourself a good belly laugh.

It’s all based on estimates, assumptions and statistical smoothing.

How do we know this number can’t possibly be correct?

Because it gets revised every single time.  Even today, the first quarter number that everyone claims was low because of the weather was revised upward meaning the weather wasn’t as bad on the economy as they thought.

It’s nonsense.  However, the market participants pay attention to it, make decisions from the data and ultimately invest based on what they believe to be reliable information – even if it’s not.

We make our decisions based on the market movements, the chart patterns and the price levels.  Our methods are far more predictable than theirs since our numbers don’t get revised, they’re either right or wrong, and either way, we know fast.

Later in the day, about 2:00 PM EST the all mighty Federal Reserve releases their latest and greatest policy statement.

Here’s where it’s easy to get confused.

The futures market is higher early in the morning.  GDP is released and the market takes off to the upside.  The opening bell comes along and prices remain high.  However, within half an hour prices retreat back down and head lower.

Everyone looks dumbfounded at first, until they realize – Well if GDP is higher then the Fed will continue to taper leading to less free money and higher interest rates down the road.

Oh No, the party’s over?

If the easy money party is over, then it must be time to sell.

That’s what they say.  In reality, the perception is that the market is addicted to higher interest rates which would seem like a rational reason why we saw a bit of a reversal today.

But a closer look at the charts and common sense analysis, and you’ll find a market that is deteriorating internally, hitting against long term cycles that are topping out and all we’re seeing are fits and starts of a market destined to roll over.

It’s hard to kill a bull.

Enjoy today’s analysis

About the Author

Trading and investing in markets is second nature to some, but a mystery to others. The goal is to provide a forum where everyday people aspiring to be part time or full time traders will learn how view markets differently and profit beyond their wildest dreams.

David Frost