Thursday, May 5, 2011

Market in Correction Mode

Investors Business Daily's Market Pulse has posted an amazing 11 changes in market condition so far this year. Market Pulse is now posting - Market in Correction.

Leading stocks once again pointed to a change in the market. Short-term performance of these top stocks seem to give us an early warning of a pending change in trend of the market in general.

The markets in general and the commodity sectors in particular are still keying off the US Dollar; dollar up - market and commodities down and visa versa. The US Dollar has been gaining in strength. This is good for bonds and bad for stocks and precious metals in particular.

As you may know, QE-2 is coming to an end on June 30th. This essentially curtails the extra liquidity that seems to have boosted the markets for some time now. The following chart shows the correlation between the market and Fed Balance Sheet expansions and contractions (quatitative easying expanded the Fed balance sheet).
(Click on chart for easier viewing)

I really don't know how much the end of QE2 will affect the markets, but given the fact that we are entering a seasonally week period in the market, a further reduction in exposure to market seems to be prudent at this time.

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