Tuesday, April 10, 2012

Nice drop, but still unclear how real it is

That was a healthy drop we saw on the stock market today, but even combined with other recent weakness it still presents a rather weak case for concluding that we are entering a bear market or a recession is coming or even a healthy correction (5% to 10% drop.) It still looks a lot more like traders and short-term speculators at hedge funds and prop trading desks at banks trying to manipulate the market artificially, or to put it more charitably, trying to front-run where they think the market is or should be headed. It is also very possible that we are seeing some sympathy for a little premature "Sell in May and go away" selling, which is typical at this time of year, again some "hot money" trying to "front-run" where they think the market is going.
 
Yesterday it was the "Jobs" report. Today it is "Europe." So typical. Every day traders and short-term speculators fabricate yet another excuse for their manipulative trading practices.
 
In any case, I still want to see what kind of follow-through we have. Engineering a one or two day or even a week-long drop is a no-brainer for Wall Street traders to artificially contrive these days.
 
The decline may continue for a couple more days, but it is just as likely that we will see a healthy "dead-cat bounce" soon enough ("Even a dead cat can bounce.") Be wary of any such bounce. The real test of any bounce is whether the market bounces high enough to set a new high greater than recent market highs, say to 13,300 for the Dow. If we don't set such a new high within another week or two, that would be a bad sign.
 
I am no fan of the so-called "Buffett Rule" being proposed by the White House, but I absolutely am in favor of a steep hike in taxation of short-term trading and speculation gains. Lets keep a 15% (or at least under 25%) rate for long-term gains – any asset held for a least two years (or one year, at least), but slap a 35% tax on short-term gains – any asset held for less than two years. Lets get our investment goals and incentives right from a taxation perspective. That will go a long way in correcting a lot of the misbehavior on Wall Street.

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