Thursday, February 25, 2010

Is the Market Entering a BIG Trading Range?

The current action in the market elicited some superb thoughts from Bill Fleckenstein, of Fleckenstein Capital. which we enclose in the highlighted box below. As we at The Firecracker Report have pointed out earlier, while the upside catalysts to push the market higher have dissipated, the downside is also protected by:
1. The Fed's printing press
2. Endless supply of liquidity (banks are sitting on $1 trillion of reserves and no place to deploy)
3. Fed's Plunge Protection Team.
4. On top of all this the SEC today announced new rules on short selling. Expect more follow-up action on this front. Another repeat of 2H 2008 will not be allowed easily now.
Thus we believe the government will try its level best to prop up the stock market (as long as possible), to keep the facade of economic stability & recovery going. They know that any crack in this facade will likely take down the whole ship as can be seen with the sovereign crisis in Iceland, Greece and Dubai. We probably won't see a big collapse at least till 2H 2010 the catalyst for which would be an attack on Iran. If the war draws in a response from China or Russia the situation could deteriorate rapidly.
Enclosed below is the commentary from Bill:
Bill has a paid annual subscription which we highly recommend. (Please note we do not receive any compensation from Bill for this).
Supposedly, everyone was on hold [yesterday] in front of Bernanke's testimony. As my good friend Fred Hickey noted, it's so absurd that the whole world would be waiting for a man with nothing to say.
Which is pretty much the situation with Bernanke. He can do all the tough talking he wants. But he's not going to take very much action to reduce liquidity, given the fact that the economy does not appear to be in a self-sustaining mode and the recent data has been on the soggy side.
Yesterday a reader asked if I thought that we're now experiencing the failing rally which I've talked about in the past. I have to say that we could be, but I'm not necessarily sure what it means. In the past, when I thought that the equity or housing bubble was in the process of peaking, I was always looking for a failing rally, thinking that what came next might be a collapse. Eventually, that's what happened.
However, if we have a failing rally invthe current environment, I'm not as sure that it will lead to a collapse in the stock market (as long as the Fed has credibility and/or a printing press) -- because almost certainly, stock weakness combined with economic weakness would move the Fed and in all likelihood the other central banks to provide additional easy money.
So, while I could easily believe the highs have been seen and that we will lapse into a trading range (which has been my thought for many months now, as I've noted), I'm not sure that simply because the market can't go up it will get smashed right now.
I think for sure that the easy money in the stock market (caused by easy money from the Fed) has been made. But I just don't have a good feel for the downside at this moment in time, knowing what the Fed's response to weakness might be. Thus, I feel that both the long and short side are somewhat uninvestable, with some exceptions.
In my opinion, we could see a very big trading range with 1150 on the topside and 850/900 on the downside. I just don't know, but I do think that folks need to be very careful with their picks prospectively.

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