July 29, 2014

Sue Berge issued correction call

We are five years from the Great Recession, and aggressive easing by central bankers around the world is still needed to sustain economic growth. Confidence and faith in the ability of the Fed to exit neatly remains one of the biggest bubbles extant.

Corporations' and individuals' dependency on low interest rates is not likely fully appreciated by market participants. (Just look at the U.S. housing market.) Buying all (even shallow) dips and dismissing short-selling as a mug's game have become entrenched strategies -- signals that, contrarily, risks are rising.

Thirty-five months without a meaningful correction is an excess itself.

It has become downright embarrassing for the cautious among us. Toward that end, a longtime and well-respected bear, technical analyst Sue Berge, gave up the 10% correction call this week.

Seasonality might also be a concern, as historically, markets often run into trouble in the July-to-October period. July and/or August highs are commonplace in the modern investment period. Some of the more serious examples developed in overbought markets in periods such as 1929, 1937, 1946, 1957, 1987, 1990 and 2007. Between now and November, investors and traders face atypically large uncertainties, including:

    -again, rising geopolitical issues
    -a Fed that is ending its bond purchases and is considering an interest rate rise
    -a potentially divisive midterm election that will set the stage for legislation in the years ahead.


To summarize, segments of the market are beginning to wear out, and certain conditions that have led to low volatility and an unrelenting bull market are looking like a rag doll.

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