I'm going to start off today and show you what Fed policy has given us over the last decade and a half. What the Fed has accomplished has been one bubble after another.
We are obviously in the final euphoric
parabolic phase of a third stock market bubble. When viewed with the
benefit of the 200 day moving average as a mean regression line, it's
glaringly obvious just how dangerous this market has become. As history
has shown, anytime the market stretches too far above the mean the
forces of gravity eventually collapse price back to and often
considerably below the mean.
Yet despite thousands of years of
evidence that parabolas are never sustainable, investors invariably get
suckered into buying into these moves and get caught when they
This I can say with 100% certainty,
this parabolic move in stocks is going to crash, just like every other
parabolic move in history.
The smart investor will wait patiently
on the sidelines and once the crash occurs the low risk trade will be
to go long as the Fed will attempt to reflate the market. This is a
virtually guaranteed strategy to make money, although very few people
will have the patience to wait for the trade to develop.
The vast majority of traders will
ignore the extremely risky environment, because his emotions make him
think that he is getting left behind. He will buy into the parabola
assuming that it will continue indefinitely (Does this sound familiar to
the tech bubble and real estate bubble?).
History however has shown that this is
never the case, and buying any asset this stretched above the 200 day
moving average always turns out to be a gamble as to whether or not you
can exit ahead of the crash. If you miss time the exit, and most people
do, you end up paying a heavy price for following the herd into a trade
that you logically know is too risky.
Once the stock market parabola
collapses then the Fed's endless money machine will generate another
bubble in another asset class.
I strongly believe the next bubble will be in the precious metals market.