The Stock Market and Economy

Today the stock market took a dive, breaking key levels as you can see from Trader Mike’s excellent charts. I am all cash right now (and have been since mid-February) and so is Dick Cheney, apparently. He has bought inflation-protected bonds and is taking a cautious route in his portfolio.

I am suspecting that a bottom will be made in the next few days as the Naz retests its lows from a month ago. While the stocks I follow like Apple (AAPL) and Sandisk (SNDK) are diving right now with no bottom in sight, Google (GOOG) looks like it is a couple weeks away from breaking out to new highs.

From Trader Mike:

NASDAQ, 12 Jul 06

From my daytrading days, I learned about Japanese candlesticks, Fibonacci retracements, and Elliott wave theory. You can think about them in terms of simply representing energy and momentum.

Basically I adapted them into my own strategy to feel like surfing. You sit out in the water, waiting not just for any wave, but the right wave. That is, you should only trade when you see the perfect line coming. You shouldn’t trade just for the sake of trading. I lost a lot of money trading when I was bored, and not when things made sense to me. When I traded things that made sense to me, I made money very quickly. I bought AMD all the way up, and shorted stocks in waterfall patterns, covering those shorts once they’d reached Fibonacci levels. It was too easy.

So this is all why I invested heavily in Nintendo and not the market. Nintendo looks like the perfect wave.

But the Naz here…it bounced in June and made a higher low and higher high a couple weeks later. It tried to rally from there but failed. But it is like an ocean wave…all that downward momentum needed to be worked off and dissipated before a bottom could be set, before the tide could turn.

We will see if the market has managed to get rid of that downward momo. The market may not rally. But that’s why you wait to see the perfect line. If the market acts how you predict it should, then you go for it. If not, you keep waiting.

The stock market has been waiting for word from the Fed that it is done raising rates. But the Fed has so far not provided anything. The rest of the world’s banks are also raising rates. This makes the market the most uncertain — world politics require something really serious to change the overall tone. But the stock market will bottom before the Fed announces it’s done.

Confused yet? Sorry. =)

“That’s What Free Trade is! *exasperated Bush face and hand gestures”

George Bush made a big deal about the economy’s success under his leadership yesterday. I will yield to him by saying that the economy’s doing pretty well. It’s been doing well since the Great Depression ended. However, I am skeptical that mere tax cuts had that much of an effect. I think tax cuts vs. no tax cuts is a pretty silly argument as there is probably a more intelligent, fluid, and adaptive policy that would involve both to different organizations. Not to mention I believe in the FairTax which would rid us not only of stupid income-based taxes but also of the massive burden of accounting departments, tax filing periods, etc.

In the same way that it’s pretty ignorant to admit that 15-20 billion people on the planet, polluting the environment at exponentially increasing rates will not at least mildly affect global climate, it’s downright stupid to think that the American economy in the long-term can sustain the fiscally-draining global war on terror as well as weak budget-deficit management policy.

A lot of people talk about our imploding trade deficit. This I am not so sure about. For one I have written about how some people believe that measurement is inexact, not reflecting properly the accounting of manufacturing and sales in an international business. China hitting all-time trade surplus highs while we hit all-time lows would make sense. They need us to buy our shit and we need them to make it. The question is, are we getting hurt by buying so much from China? It forces us to innovate and advance in how we go about making money so that we’re not relying still on a low-grade manufacturing. We still make a lot of money selling advanced parts and machines to China so that they can drive down the price of things through cheap labor. It seems more of a symbiotic relationship and so therefore I think the argument is good that more study needs to be done into traditional trade-deficit statistics.

Now, remember how Bush bashed the economy when he was running for office in 2000? It was Clinton’s fault, of course. Despite the fact that Clinton enjoyed the dotcom bubble and the Dow bubble, cutting the trade deficit actively through Robert Rubin in order to make us more sustainable financially. Despite Clinton providing economic and diplomatic stability.

Once Bush took over, his word on the economy changed. Through massive spending programs, the advent of GWoT, and tax cuts, somehow the economy roared back to life. Never mind the fact that the economy had been doing splendidly during the 90’s, and was interrupted only by excess speculation and improper business ethics that led to the fallout of the bubbles bursting. It picked up where it left off only 3 years later.

Bush took the credit. Now he parades the news with wild abandon.

But come on. It makes no sense. You can’t spend all that money, printing more and more to provide liquidity, and not have it bite you in the ass later. It is a testament to the strength of the American economy that it has absorbed Bush’s free-wheel spending of the last 6 years or so. It has stood up to rising gas prices so far. It has stood up to inflation-fighting policy from the Fed.

I am wondering whether we will see all the slack being taken out of our economic engine soon though. Eventually it will be strained. Not today, not while Bush is in office. But it will happen eventually if we don’t do a 180. Isn’t that the government’s task? Not to tout short-term fluctuations but to put the country on course with a no-bullshit program that makes sense intuitively?