Markets can stay more illogical than you can stay solvent

(Posted Tuesday, 115am)

The above is one of my favorite phrases. It is also a reminder to me when markets are trending illogically. But what seems illogical to me may seem logical to others!

Take for e.g. global equities fell during the third quarter.  Hindsight: The reasons were with weak manufacturing data, inflation, global growth concerns, rising interest rates, unemployment, Europe debt crisis, etc.

As you probably know, US economic data for the past month or two had been encouraging (the latest existing home sales data rose 1.4%, better than expectation). Inflation fears had fallen with respective CPI in US and China, falling to comfortable levels with lower inflation expectations.

Manufacturing data in US and China has been encouraging. Employment is steady. Global growth is less of a worry with the exception for Europe. Interest rates had fallen in Brazil, Indonesia and Australia with most on hold. In other words, the fundamentals are better and the stock markets rallied.

Here is the first illogical scenario. Instead of focusing on favorable fundamentals, global investors’ mindset is focused on the Europe sovereign debt crisis, PIGS, then Greece, Italy, Spain and France. This week, the baton is passed to the US, with US markets falling due to unfavorable deficit reduction pact by the ‘supercommittee’.

Hence, global investors flee equities and high yield assets to safe havens. Here is the second illogical scenario. The safe haven beneficiary turns out to be no other than the US dollar and government bonds. The current/latest worry is on US deficit, yet investors flee to US dollar and US bonds. Is this a rational behavior? Yes and NO depend on who you are!

Gold is deemed to be a safe haven asset. We saw Gold rise when there were problems in MENA and when equities and currencies were plummeting in Q3, Europe debt crisis, etc. The third illogical scenario is Gold (instead of rising, Gold) fell last week and extended losses today! Coupled with the extension of the European debt crisis and Egyptian violence between protestors and security forces, Gold had plummeted more than US$ 100 since testing the US$ 1,800 resistance. Is Gold a safe haven asset? The safe haven investors are saying yes but the markets are saying NO.

What may seem to be a logical trade may be confused by the illogical market. But again, what is illogical to you is definitely logically proven right by the market. Hence, markets can be illogical, stay illogical than you can stay solvent.

Are you confused? Please allow me to explain. There are two herds of investors with different psychological mindset. The majority wins the tug of war.

Whichever, the fundamental and/or technical trading strategy that you are using, remember to bring your umbrella with you? The weather can change anytime, from anywhere.

How far can the market fall? I think the support level on October 4^th should hold. Otherwise, by that time, either Europe and/or the US would have been in very deep waters. If that happens, I would think the helicopter will make its appearance! Don’t forget QE3 is dying to be launched.

Are you keeping in touch with developments from the ECB and the IMF on how the Europe debt crisis can be resolved? Stay tuned!


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