Ad Hoc Commentary – the S&P500 sell-off should be short and sweet

“The ideal target would be a sell-off into Feb 7; and a rally thereafter.”

There is simply too much information and disinformation out there that it complicates the matter unnecessarily. In yours truly simple analysis, we were, are and will still remain in a sovereign debt crisis driven by politician’s promises to the baby boomers in return for support during elections. In a sovereign debt crisis, capital needs to flee from bonds into another asset class. In the absence of a big and liquid alternative, real money will have no choice but to buy equities. That is why yours truly believe we need a large (measured in USD trillions not USD billions) infrastructure asset-backed security. Unfortunately, the newest idea among economists, probably headed by Larry Summers, is to waddle into negative rates. Negative rates depend on money being electronic to avoid hoarding. If that happens, not only they ban hoarding, but privacy will probably fly out the window too.

In any case, the S&P500 selloff that is attributed to fear of growth is bound to be short and sweet. This is because the buying since gold peaked out in Sep 2011 had not been driven by growth. Instead S&P500 was making new highs since Sep 2011 on capital looking for a safe-haven. Yes, we were taught in school that equities are not safe haven, bonds are. But, let’s face it: in a sovereign debt crisis, sovereign bonds are not safe either. It’s time to crucify those old economic ideas, and develop new ones. That is why economists always have a job despite Mr Frey’s and Mr Osborne’s assertion (in their book The Future of Employment: How Susceptible are Jobs to Computerization) that there is a 43% chance that all economists will be made redundant by 2033:

Those who are selling equities on the fear of emerging market slowdown are selling for the wrong reasons. Any selloff based on wrong reasons will be taken advantage of by Mr Market. Thus, yours truly hold on to his believe that the S&P500 will likely be rallying back when China returns from the Chinese New Year holidays, i.e. the week of Feb 10.

How deep will the selloff be? When looking at technicals, it is best to look at the default settings on Bloomberg. That is because everyone is likely looking at the same data. Using the default simple moving averages, we broke through the 50 dma. The 100 dma lies at 1761, while the 200 dma at 1701. It is probable that we will break through the 100 dma, but 200 dma could be a good place to re-enter the market with a tight stop.

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Good luck in the markets.