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The Living Stock Market: Behind Every Tick, a Personal Drama


It's easy to forget that the stock market lives and breathes.

This is a tough one to read currently, because the situation we have in today's market is somewhat unique, at least to our generation. We have a market which is being forcibly pushed higher by the Fed's expansion of money -- but meanwhile we have economic fundamentals which don't seem to support current valuations. Up to this point, this has generally led me to think cyclical bull instead of secular bull.

The late '90s, part of a secular bull, were markedly different: We had a Fed that made credit cheap and easy, and thus encouraged credit expansion -- but we also had willing economic participants feeding the sense that there was at least some form of genuine prosperity underway. As a result, today's market "feels" somewhat unnatural and forced, for lack of better descriptors.

While it may feel forced, it's not exactly a surprise we've gotten this far (the mid-1700s were my long-term target back in February). Consider the market as a giant liquidity machine, with assets being buoyant. When liquidity pours into the market, then assets float higher, like a tub full of rubber ducks. When it drains out, then they sink -- and some of them get sucked down the drain and into the sewer, never to be heard from again. (I'm not sure if rubber ducks do this, but the other material I thought of for the "float and sink" analogy isn't really suitable for a family-friendly publication.)

Anyway, the bottom line is this means that someway and somehow, it's going to require credit and money supply to start shrinking in order for this five-year bull market to end. Either the Fed will do it willingly, by tapering, or something will eventually cast asunder the best laid plans of mice and men. In other words, we can't simply assume complacently that as long as the Fed prints money, there will be no declines or bear markets. Liquidity crunches can and do happen while central banks are still creating money -- but they require "events" which drain liquidity faster than it's being created.

It's virtually a mathematical certainty that at some point the cycle will peak and begin to head the other way. The question is whether we're there yet.

Frankly, in my opinion, it's still too soon to say. I personally can't predict every move the market is going to make in advance, but I can usually identify the important pivot zones. Weeks ago, I began talking about the current price zone as a larger inflection point, and the market has borne that thesis out and remained stalled ever since. The victor has not emerged yet.

Just one chart today, because there is really very little to add to the past few weeks of updates. Near-term, I would expect another leg down. First targets and signals to watch are noted on the chart below.

Click to enlarge

In conclusion, near-term I expect a trip into the price targets noted above. Intermediate-term, our collective drama is still unfolding. Trade safe.

Follow me on Twitter while I try to figure out exactly how to make practical use of Twitter: @PretzelLogic.

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No positions in stocks mentioned.
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