Author Topic: Elvis is money talk from our friends at Beverly Highland Capital  (Read 1079 times)

Offline Reginald Hudlin

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Sunday 8/7/2011
Elvis is dead.

JFK was assassinated by Lee Harvey Oswald, not the KGB, the CIA, the Mafia, Castro, or LBJ.

I also believe that Martians do not regularly abduct folks from trailer parks who have accumulated more empty beer bottles than teeth.

While I dismiss conspiracy theories about Elvis, JFK and Martians, it does seem suspicious that the stock market was selling off last week, for four days, before Standard & Poors (S&P) announced that they were downgrading the debt rating of the United States.

Markets tend to move before news events. The marketís move last week, ahead of the S&P downgrade is just one of hundreds of examples of this phenomenon. It is not difficult to imagine that very large money managers, who (oddly enough) have longstanding relationships with the folks at Standard & Poors, and who were actively selling stocks ahead of the news last week, may have been doing so because they knew the downgrade was coming soon. Easier for me to believe than the whole crop circle thing. If this is the case, it is sleazy at a minimum but still wildly profitable.

With the news of the United Statesí debt downgrade dumped in the laps of retail investors, Friday afternoon, after the markets were closed, investors had no time to react but an entire weekend to build fear and prepare their plans for the stock marketsí open on Monday morning.

As we know, fear in the markets creates volatility as investors discard fundamentals in favor of psychologically driven decisions. Fear leads to disorderly market events, often in the form of unwarranted price drops.

Tomorrow morning, I would not be surprised to see the markets open significantly lower than where they closed on Friday. It would be understandable to see small investors panic and sell their stock shares for virtually any price they can get. It also seems entirely plausible that large money managers (the same guys who were selling last week) would be happy to help those small investors by taking their stock shares away from them at deeply discounted prices.

Putting numbers to it, the DOW Jones Industrial Average could open 200 points lower. Then after a couple bumps along the bottom to scare shares away from small investors, a rally could ensue that would cause the index to close higher by 300 points or more.

The S&P 500 could drop into the 1,170 range, have similar moves during the day, and close up 4% for the day. I am not saying this will happen, but I believe it is entirely within the realm of possibilities.

For a number of somewhat complex technical factors (that I wonít bore you with here), the markets have a high probability of a significant move higher over the very short term. If the S&P debt downgrade is already baked into the markets (as laid out above), there could be very little short term downward pressure on stock prices.

Longer term, we have numerous economic challenges that we can discuss at another time. But over the very near term, there are solid arguments to be made for expecting the markets to move higher.

However (and this is a BIG HOWEVER), if real panic sets in and the markets get disorderly, all bets are off. Disorderly market sell offs can feed on themselves and see prices cascade lower to ridiculous levels that defy logic. But even in cases of massive panic driven sell offs, opportunities are created for patient investors. In fact, the best opportunities in the markets are generally presented when investors panic and are willing to sell stocks for far less than they are really worth.

The markets are currently positioned at such an incredible inflection point against a backdrop of uncertain and shifting macro economic factors, that only one thing is for certain: large moves will happen. Those who do not panic should be rewarded.

How the markets trade over the next few days should be interesting and should tell us a great deal about the longer term direction.

Have a great evening.