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Will Investors Join the Forced March to Risk?


Answer is elusive but the question is not.

Editor's Note: This was originally posted in real-time on the Buzz & Banter. It's being presented here for the benefit of the Minyanville community.

Last week on the Buzz & Banter, I shared that I thought we might see some comments from the Fed which were supportive of the dollar ahead of the G-20 meeting in Pittsburgh. Needless to say, I wasn't entirely surprised by the Fed statement on Wednesday and Fed Governor Kevin Warsh's op-ed on Friday. Nor was I at all surprised by the market reaction, based on the current market view that what's good for the dollar is bad for stocks.

But what I find very interesting is the quickly developing view that whatever the current pullback -- 3, 5, 10, or even 20% -- it's merely the precursor to a final push to 1133-1150 on the S&P, to perfect a 50% retrace of the October 2007 to March 2009 market decline.

Don't get me wrong -- I understand the logic, especially underscored by the Federal Reserve's seemingly endless willingness to provide liquidity to the market at the expense of the dollar. Better to go along for the ride, thinking you can get off early than fight the tide.

Still, over the weekend I found myself staring at two charts -- one of the market from November/December 1929 and the other from September to December 2001.


Click to enlarge


Click to enlarge

While admittedly, the time frames are very different, both bear a striking similarity to our March to September 2009 run.

March 6 to present:

Click to enlarge

I have long felt that what was unfolding post-March this year was a liquidity assisted/induced survival bounce. We lived! And the fact that the bounce's S-shape is similar to the post '29 and post 9/11periods provides some comfort to me in this regard -- particularly the post 9/11 bounce, given the similar, albeit smaller amount, of government market intervention.

But what happened next -- after December 1929 and December 2001 -- was very different. In the former case, the market rose through March of 1930, completing a full 50% retrace, while in the latter case -- although it subsequently took three tries to prove it -- the market finally rolled over in March 2002.
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Position in SPY and JPM.
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