There has been a lot of talk about the possibility of a market melt up where bears fully capitulate, new buyers come in, and it is just a buying frenzy. It is something I think is a very real scenario and I don’t discount it for a second. We live in historic times, there is no debate about that, no different with our markets. While looking at weekly and daily charts of the S&P and the Russell 2000, I noticed that our corrections have started to get smaller and smaller. That tells me that people are not willing to wait to get into this market because they ‘know’ that there isn’t going to be any kind of significant correction any time soon, or that they are trying to get in before something major happens. After noticing this, it was brought to my attention that someone else has written an article about this. The visuals on that page are extremely compelling when you think about the psychology behind this market and the amount of QE going into it.
![Capture_thumb[1]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi5CKDlByPeF89_NJECysCylUldAx58LJeaqeoqAITxKWH07u4n0AVAJx_DMf-T7hoKPk4UdEHlrB8-_pmHjGLpXxZS2HCz5k01PeaiOMvMPT66hm64MjQPD9LfcGIMccWDzEws4YsRdOhr/s1600-h/Capture_thumb%25255B1%25255D%25255B5%25255D.png "Capture_thumb[1]")
Source: Zero Hedge (http://www.zerohedge.com/news/2013-11-11/john-hussman-asks-what-different-time) Credit: John Hussman of Hussman Funds
I usually don’t write blog posts about things like this but I thought people really should see this. When I said our corrections are getting smaller, this is exactly what I pictured in my head. Good news? We are going to see some serious volatility if this happens both on the way up and on the way down. More good news? If this is going to happen it is going to start within the next few months, and people are going to make millions that know how to use this. Bad news? If this happens, we may have a massive crash and possibly cause another global crisis. Even worse news? We are maxed out on government spending, low interest rates, and QE. This means government can’t handle another crisis, this means they can’t come in with trillions of dollars to ‘stimulate’ the economy, & it is going to hurt bad. Good news on the bad news? We have a chance at free market capitalism, throwing out all the restricting government regulations and oversight on small businesses, get rid of all the government agencies that we can no longer afford, revert back to the economy that made us the world’s largest creditor and the most prosperous country in the world. Either way though, if this did come to fruition the VIX would rise and it would be a very refreshing change of pace from these slow, drugged up on QE market conditions.
Obviously this is just something to be aware of, don’t hold my feet to the fire if it doesn’t happen because I am not saying it is going to happen but only that it is a very real possibility given how people are psychologically set and infinite QE programs right now. I am just as negative as the next realist on our economy, but the economy and the stock market are two completely separated things. Every good trader knows this. So don’t think that we can’t head higher, and a lot higher because the trend in the graph above shows different. Price depicted this pattern so we have no choice but to observe it, take it for what it is, and not be shocked or stuck digging in our heels if it happens.
Trade well,
-Michael
