Stock Market Crash: Surprised?
The stock market has crashed. How else would you describe the events of the past week? Were you distracted by the debt ceiling "debate"?
Better questions: Did the S&P downgrade cause you to lose your focus over the weekend so that you thought the drop on Monday was a reaction to S&P's action? If so, you may want to re-read what I posted on Monday. The S&P downgrade didn't cause the crash.
The crash was the result of the end of QE2. When the Fed withdrew its recent stimulus (QE2), it opened the door for deflation. A stock market crash is one of the possible symptoms of deflation. And that's what just happened.
What's coming next? Here are two suggestions.
First, QE3 will arrive shortly. The Fed won't tolerate deflation, as you probably know. But they felt they had to stop their stimulus for a bit, and so they did. Why did they stop their "QE" stimulus? Maybe they thought they were in danger of causing higher inflation quicker than they preferred. Maybe they thought that the dollar would drop more - more quickly than they wanted. I don't know for sure. The point is, they did stop - for now.
But with this crash, they may just speed up their next stimulus - QE3. Then again, maybe they'll call it something else besides the next "QE" to sort of disguise what they're doing. I don't know. But whatever they call it, it's coming. And if once I thought they'd wait a while from when they paused in June - like 6-9 months - I'm now wondering if they might panic and start stimulating sooner. Maybe they'll start in the next 3-6 months. In any case, it won't be much more than 9 months, because we'll be entering an election year and they always stimulate during a presidential election year to goose the economy. Fed chairmen always like to stay on the good side of the government. It's ultimately the hand that feeds them, especially the president. That's who nominates Fed chairmen.
Second, we'll soon be coming to a time when it may be safe to invest again - just not right away. Chances are - if history is our guide - we'll get a good bounce in the coming weeks. Not straight up, mind you, but a healthy bounce nonetheless. So why not invest right now? Because after that bounce, we'll then test the lows. And we may even hit a lower low.
So now we wait for that test of the lows. When we get there, it probably will make sense to take action on the ideas we've had waiting in the wings. It will be time to execute some trades. Until then, patience remains the virtue it has always been.
Better questions: Did the S&P downgrade cause you to lose your focus over the weekend so that you thought the drop on Monday was a reaction to S&P's action? If so, you may want to re-read what I posted on Monday. The S&P downgrade didn't cause the crash.
The crash was the result of the end of QE2. When the Fed withdrew its recent stimulus (QE2), it opened the door for deflation. A stock market crash is one of the possible symptoms of deflation. And that's what just happened.
What's coming next? Here are two suggestions.
First, QE3 will arrive shortly. The Fed won't tolerate deflation, as you probably know. But they felt they had to stop their stimulus for a bit, and so they did. Why did they stop their "QE" stimulus? Maybe they thought they were in danger of causing higher inflation quicker than they preferred. Maybe they thought that the dollar would drop more - more quickly than they wanted. I don't know for sure. The point is, they did stop - for now.
But with this crash, they may just speed up their next stimulus - QE3. Then again, maybe they'll call it something else besides the next "QE" to sort of disguise what they're doing. I don't know. But whatever they call it, it's coming. And if once I thought they'd wait a while from when they paused in June - like 6-9 months - I'm now wondering if they might panic and start stimulating sooner. Maybe they'll start in the next 3-6 months. In any case, it won't be much more than 9 months, because we'll be entering an election year and they always stimulate during a presidential election year to goose the economy. Fed chairmen always like to stay on the good side of the government. It's ultimately the hand that feeds them, especially the president. That's who nominates Fed chairmen.
Second, we'll soon be coming to a time when it may be safe to invest again - just not right away. Chances are - if history is our guide - we'll get a good bounce in the coming weeks. Not straight up, mind you, but a healthy bounce nonetheless. So why not invest right now? Because after that bounce, we'll then test the lows. And we may even hit a lower low.
So now we wait for that test of the lows. When we get there, it probably will make sense to take action on the ideas we've had waiting in the wings. It will be time to execute some trades. Until then, patience remains the virtue it has always been.
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