We are entering the phase of a Market – Blow Off Top. This is extremely profitable and scary condition when liquidity starts to chase liquidity with very little economic sense. The last Blow Off Top of epic proportion was in the NASDAQ with the famous Tech Bubble. This condition can last a few month (as the Nasdaq case it lasted from November to March) and always ends in pain and tears.
This blow off top is feared by the US FED. Maybe they will do something during this week meeting – but they are between a rock (Blow Off) and a hard place (Congress stalemate).
Now we could see what for the Elliott theorist (complicated wave theory) a 5th leg rally extension. It could be sparked by the “normal” Republican defeating the “tea party” Republican or by a liberalization of the Chinese financial system during the 18th November meeting (there are indication that Chinese will be allowed to invest overseas).
But all indicators signal that this rally is not economic data driven, but by liquidity…money chasing money.
When and what will end it. Statistical data shows that this condition can technically last till April 2014 (I would think a bit earlier).
The termination of this rally can be spurred by an issue on the US Treasury Bonds (specially 10 and 30 years) as, since September 13, the Fed is looking more struggling in keeping the yields low. For now it is successful, but there are signs on increasing stress.
Or, naturally, a political shock. Now the main issues have faded, but three main potentials are still there:
_ The Tea Party wins against the normal Republican
_A revolution in one of the Southern Europe countries (EG the military take over Greece)
_ A unilateral pre emptive strike of Israel against Iranian nuclear facilities.
_Saudi Arabia is really upset against the US for their behavior against Syria/Iran (no war) and could pull their equivalent of “nuclear option” which is end the petrodollar oil transaction (the use of US Dollar as currency for oil transaction is one of the main real reason why the US Dollar is the world reserve currency. This also explain why the US has always so keen to keep the Saudis happy (remember President Bush Sr and Jr). A well media planned and abrupt change in this policy could provoke a major shock.
All this events (apart the last one) are pretty far ahead in the future.
Enjoy this rally, but consider it a wave. Soon or later will hit the rocky shores.
investorpolitico 