Sea of red. What's next?

At point of writing, 20110616, Singapore time 0230 thereabouts, the US dollar index is at 75.64, a rise of 1.76%. The US major indices are down 1.54% – 1.7%. Hence oil is lower by 4% (demand concern). And unless there are any strings of ‘good’ news, the markets will continue to fall.

With no news of QE3, and QE2 coming to an end, the markets had certainly showed no mercy. Since my article dated 11 May 2011, Without new on QE2.5…unwinding of carry trades I had tried to explain what unwinding of carry trades mean? In layman terms, investments in high yield assets like stocks, commodities will move to safe haven assets like the Treasuries, JPY, CHF or the USD, etc.

To what degree the high yield assets will fall, I began by relating the beginning of the Global Financial Crisis…. What’s next? Part 1  Since QE1 and QE2 were launched, high yield assets had mostly been the primary beneficiaries. Should QE3 surface, the market would go further north. But will there be QE3? is there a need for QE3?

I believe this would not happen as discussed in QE3 – it depends. (Three days later, Roubini’s interview with CNBC highlights a QE3 probability by year end. I still can’t confirm this. When I know if QE3 is coming he would also know!) While speculators have ‘more’ hope and expectation, the ‘more’ cruel the market reacts (when the hope and expectation does not realize).

The few ‘daily’ occasions when the market rose were opportunities for you to cut loss and not buy or average your longs. This was discussed in Sell I May and go away.

If you had been following my blog closely on market trends, I hope you had moved to low yield assets. I also hope you did not try to average your buys as I mentioned my generals are sidelined!

What would happen next?

While most people may not believe in BB that the second half of 2011 would be better but I agree with him. The US economy will be better. But it would not be better for certain economies or countries that had been raising interest rates (several times) to curb inflation.

With inflation popping around like bunnies in emerging markets and in Asia, (Asian) Central Banks had been raising interest rates. Particularly in Brazil, India and China, there will come a time when the yield curves are either flat or inverted. (Recessions are preceded by inverted Yield curves. Inflation is NOT present in the US yet. This was discussed in Global Financial Crisis…Part 2).

Fundamentals, Technical (support levels), Earning ratios are important tools, but the sum of all coupled with investors mindset is equally important. As I mentioned in my earlier blogs, the GFC spared NO support levels, earning ratios, etc. Herd’s mentality or mindset can be cruel as well as prosperous! My basis of speculating market trends is the speculators mindset, knowing and understanding what makes the market go up or down, vice versa. For Insights to Financial Markets, read S&P downgrade Greece and my latest weekly summariy. For investing principles, read Sun Tzu's Art of War.

I enjoy writing blogs and I hope you find it useful. I think I had speculated well on how financial markets behaved. I hope to see you more often in my blog. If you find my articles helpful, I sincerely hope you could twitter or share this on your facebook, etc. This chain reaction will help an even larger audience! Please feel free to share any ideas you might have. Have a great time investing!