New Year and Market Review

Happy New Year!

I hope you've all had a nice holiday.

2010 was a tricky year in the stock market, as most global stock markets were directionless or flat until September. There were a couple points in the year that appeared to be good entry points to go short, but a very strong rally since September has punished any bears.

My bull index shows the picture for 2010. There was significant weakness for many months, but ultimately the market resumed its strength and ended the year strong.

Commodities have been much stronger than stocks, with a persistent and unrelenting advance. The Continuous Commodity Index ($CCI) shows an undeniably bullish picture. In fact, the index has ended the year above its 2008 high. That's right, we have now exceeded the 2008 peak!

Gold exhibits the healthiest long term bull trend of all. This action in commodities and gold is a reflection of central bank activity. Obviously, central banks have intervened a lot since 2000 and even more since 2008.

Money is flowing into commodities and gold, both as speculation and wealth storage. Unfortunately, this doesn't solve unemployment or credit health.

Beware the Risks

Many of the disasters that started unfolding in 2007/2008 have not yet played out their natural course. For instance, crashing bonds and derivatives have been directly propped up by the government and Federal Reserve. This doesn't solve the problem of bad assets and leverage; it simply sweeps problems under the rug and postpones the consequences. In the mean time, banksters (collecting record bonuses) are encouraged to resume the same activities that lead to 2008. Nothing has changed!

Flash Crash in May was not a good sign

This was a really weird event. Ignoring what happened on May 6 would be a big mistake.

Early reports blamed a data error or computer glitch. It was neither, according to the SEC report dated September 30, 2010 which I studied in detail.

Instead, the significant drop in everything seems to have been driven by genuine selling. It started with a mutual fund who sold $4 billion in S&P 500 futures. This started driving down the S&P 500 index. Other computers (algorithmic traders, HFT, etc.) amplified the effect by adding selling pressure. A positive feedback loop resulted.

At one point, the S&P 500 was down 8%. Some major ETFs in the USA and Canada were down as much as 20%. And some liquid large cap stocks traded more than 60% below their previous prices (over 200,000 trades across more than 300 securities!). This wasn't thin trading. In several instances, liquid large caps traded at just pennies or a couple dollars. This was literally a “no bids” incident, where the highest bid on some stocks was only $0.01 or a little more. Market makers, who normally always buy, stepped away and said “no thanks”.

There has always been heavy selling from time to time in the US market. However, the US market never tanked before like this and never went to a true “no bids” situation in liquid large caps. This didn't happen during the 1987 crash, or the 2008 crash.

The big question is: why did this happen now in May 2010, then?

Some possible answers:

I think this kind of flash crash will happen again, and I don't want to be long when it does.

What has not blown up yet?

I'm not saying these are imminent blowups, but there are several ticking time bombs. I am expecting most of these to become big issues within the next 5 years, although the US Treasury default could be as much as 10 years out:

- Perpetual Bull,