Ok, I’ve been trying to set up some positions and targeted for the right timing for the past 3 years or so, but with little avail. The main reason I haven’t able to take a position was because,
- I was only thinking of long equity positions (since the only investments I’ve made before was several handful of stocks I’ve researched), and I was waiting for a crash so that the governments can clear up the structural problems and uncertainties.
- I haven’t been informed of other instruments like bonds, commodities, options, etc.
- And finally, I didn’t know how to take short positions.
But guess what? The governments have not been cleaning things up, and rather shifting the private sector problem to the public sector. Although the financial system is not short of liquidity, uncertainty remains in banks’ asset quality, capital sufficiency, solvency, government debt, deficit, and growth.
My thinking goes that a liquidity problem, when not solved in a timely manner, can be very consequential. On the other hand, the problems described above are not something that can trigger an immediate collapse akin to Lehman-like crash. So basically, I believed that it would take some time for these to explode. And I waited for three years since. Yes, there were some rallies that I missed. But, by not trading, I was able to reserve my cash and had the option to buy things up when they get really cheap.
But one day, I suddenly lost patience. I thought, “if the market will eventually crash, why can’t I reap the downside as well?” So from that point, I tracked the bond market and the currency market, but among many data sources, I chiefly looked at the weak peripheries’ 10-year bond yield, and tried to look for inconsistencies. I was waiting for the main peripheries’ (Spain, Italy and potentially even France) yields to surge, and if the stock market stayed at the same level or even go up, I thought that point was the right timing to short the market.
Recently, Spain and Italy’s yields went up despite bailout announcements. That gave me an assurance that finally this muddling through and kicking the can down the road will not work anymore. And, right before the financial crisis that began in the U.S., the bond market and stock market exhibited a conundrum to market observers (bond market was pointing a recession, while the stock market was keep moving up). This time, the bond market is implying that the peripheries will lose its access to the market, and the stock market has to go down. But, thanks to the existence of Bernanke (to be fair, he hasn’t done anything YET), and now the concerted actions that will come along from the world central banks, the stock market has seen a slight rally this week, amid bad economic reports coming from everywhere (weak hiring, weak consumer sentiment, etc.); in effect, the bad the news is becoming good news in hope for a another dose from Ben.
Many heavy events are coming next week. EU leaders meet up, there is an FOMC, G-20 leaders gather in Mexico, etc.
Despite the reasons leading up to the meeting, most of the people will get a relief from the meetings’ outcome, and once again, the market is poised for a relief rally.
But I hope differently.
Although many people point out that the Greek election is already priced in, and the series of events coming up will provide a bullish sentiment, I want to view the Greek election as a catalyst for a big move. What do I mean by a “big move?”
Well, keen observers of the stock market will remember that right after the debt-ceiling issue was agreed upon on Sunday, the market plunged precipitously on Monday. From that point on, American policy makers thought seriously of how to put their house in order.
The same should happen next week, regardless of the election outcome. The market should be “ALLOWED” to crash, and Germany, Finland, and others should rethink their Euro membership.