QE2 and Q2 Window Dressing are Now Over: Where Will Markets Head From Here?

An interesting discussion on valuations was given by Leon Cooperman on CNBC yesterday… Hard to argue with his logic, however, I also tend to agree with the bears here who say that this rally of 30% since the Jackson Hole Fed meeting has been driven primarily by QE2. So what does this mean for the rest of the year? The question is very relevant because we have rallied 4% in the past 4 days.

As a momentum/technical analyst I would have to be longer term bearish here for many reasons though in the short run we could trade higher because of the holiday and on the shorter term, we are now above all of the moving averages… Unless we gap below the 50 and 100 day in the next week or two this “signal” for systems traders means that they are getting long the market here, but I think these levels will fail very soon. The most important thing to focus on is that we have had serious window dressing and also that QE2 is over.

As I am invested in small businesses and not too involved in trading the market personally, I am agnostic to market direction. My investments tend to be recession resistant, but then again there is not telling what the future holds.

Relying on QE3 is quite risky, but I have to agree that the government prefers an inflation approach to a deleveraging approach.

The charts here are getting redundant — we all know that the S&P is above the 50 and 100 day MA which SHOULD be bullish but with no more QE2 I say “Caveat Emptor” — Money Managers are under pressure as many of the hedge funds are still below high water marks and have huge overhead. This is why I am more interested in taking a longer term private equity approach myself and managing my own and family assets with a longer term focus.

Looking forward, we can see that the government wants lower commodity prices and higher stock prices. I don’t think that it’s possible here because of the CAPE PE 10 and the Tobin’s Q are at nosebleed levels, but then again anything is possible because trailing earnings are very strong.

If I was fully invested long the market, I would consider shorting bonds here and buying IWM and QQQ put option spreads as a hedge. That means buying an October $85 IWM put and selling a July $81 put option for a hedged stance in equities. I would be trying to match my exposures here and would be very cautious, but that’s just my opinion and does not mean I am negative on the U.S. — I believe caution is the key to investment success after 85% rallies. I would also watch the 100 and 50 day moving averages and the 200 day MA with a view that QE2 is over and the overall momentum is likely not going to be to the upside without more intervention.

One thing is certain. the government loves intervention and it does work in the short run. One way to play this trend of money printing and interventionism is to own silver and gold, though the end of QE2 is also a risk for both of these metals and risk assets in general.

My feeling is that one should be hedged here depending on their portfolio’s discount or premium to intrinsic values.

I also feel that bond yields could rise. I am long some TBT here and I think we could move higher over the longer term in yields.

That’s my update for now.

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