I'm sure I am not the only one who has noticed, but the leaders in the S&P 500, the ones that have lead the index higher, are beginning to breakdown. I'm talking of course about oil and commodities. The sectors gaining strength are defensive areas like staples and utilities, and these are not the building blocks of a bull market.
Traditionally, a bull market is built on the backs of sectors like Financials and Semiconductors, but thus far, these sectors have fallen into a deep slumber.
I find it odd that the May highs marked the top of this years market run, and these highs came to a screeching halt after the Bank of Japan is co decided to end their zero interest rate policy. BOJ Governor Toshihiko Fukui said monetary decisions should be "made early" and "in small increments", and speculation has it that hedge funds and investment banks were borrowing money from the BOJ at zero interest, and using the money to buy futures contracts on oil and commodities.
Now that the zero interest rate policy in Japan is gone, rumor has it that speculators in oil and commodities futures are selling and running for cover.
All of these complicated and behind the curtain transactions are way beyond the comprehension of the average investor. How can these hedge funds and investment banks do this without us knowing about while it is happening? Why do we have to hear about these moves after the fact?
Here is another question that needs to be addressed. If the money borrowed by these hedge funds and investment banks were responsible for driving energy and commodity prices through the roof, why isn't our government investigating this robbery of the American people, and throwing these guys in jail?
Today's move out of Japan said that its central bank was leaving its benchmark unsecured overnight call rate at 0.25%. In July it raised rates for the first time in six years. The day before this decision, San Francisco Federal Reserve President Janet Yellen said the "central bank's bias should be toward further rate increases".
So, my guess is the BOJ took the heat off of Ben Bernanke for a month or two, but investors may learn the definition the word pause (a temporary stop or rest) sooner than anticipated.
The markets found some relief from Ms. Yellen's comments today after the President of the Cleveland Federal Reserve said the full effect of past rate increases has not been felt yet. This of course suggested that the Fed is in no hurry to raise rates again. We will see.
The cyclical stock rally looks to be almost over. It looks as if the S&P wants to peak its head above the 1300 level once more, and we will probably see this next week.
If the S&P climbs up around 1305, I plan to add to my market short positions using the three Ultra ProShares ETFs I mentioned on August 28th. They are;
Short QQQ ProShares-Inverse of the NASDAQ-100 Index (QID)
Short S&P500 ProShares Inverse of the S&P 500 Index (SDS)
Short Dow30 ProShares-Inverse of the Dow Jones Industrial Average (DXD)
The also seek to correspond to twice the inverse performance of their underlying indexes.
Have a great weekend!
