Excellent question from a subscriber:
I just finished reading your long term outlook on stocks and it appears very bullish. How does that gel with what you said previously that a collapsing housing market will likely suck liquidity out of the stock market and end its bull run. Seems to be a contradiction here.
There is a clear contradiction between my oft stated belief that the housing market collapse would cause the liquidity engine to run in reverse, and the currently bullish long term structures in the TA as I read it. That is, it’s a contradiction if the housing collapse begins to hit full stride now. If that’s the case, I think the TA will soon begin to reflect the cracks in the foundation.
There’s also the chance that it’s simply a matter of time, that my belief that a housing crash will pull everything down is correct but just very early. Wouldn’t be the first time.
My belief about the housing crash, and what its impact will be, is a forecast based on a set of assumptions that I hold, as well as observations of past and present trends. There’s not a lot of empirical data from the past, however. National housing crashes are truly rare events. There’s just not much to go on. Quite simply, I may or may not be right about it. I think that my view is well founded, but then there are the Fed and foreign central banks. If they decide to go the Weimar route, God only knows what will happen.
When it comes to the TA structures however, I’m just a reporter. The structures are what they are. They are neither right, nor wrong. Certain structures hold certain implications. We have lots of history on this. We know that if A and B happen, then the market is probably going to reach C. We’ve seen it happen time and time again.
When I report on the TA I am reporting the observations and what the theory says about them, within the framework of cyclical analysis. I also give time frames, although they are somewhat more variable than price projections. I am communicating to the best of my ability what the charts say about where we are in terms of the status of cycles and trends, and what the theory says should happen in light of that.
So maybe there is a contradiction, and maybe there isn’t. I sure don’t know. But as a trader, the ONLY thing that matters is what the charts and the TA say about where we are, and from that, where we are probably going within the relevant time window. The fact that I believe that something bad is going to happen at some point in the not too distant future, no matter how good the reasoning behind that may be, does not, and should not ever supersede the TA. It is what it is. We have to respect it.
I may be a bear at heart. I may think that the financial system is going to implode. But that simply doesn’t matter. The Fed and the FCBs are much bigger and more powerful than I am, and while prone to historic blunders from time to time, they are not entirely stupid or entirely evil. Most of the time they know enough about what to do to keep things humming along. We may think its wrong, but so far, there’s been no global calamity. So what I think about the likely impact of a possible housing crash doesn’t matter in terms of practical application in the here and now. What I report in terms of the technical analysis–or whatever you use in your technical analysis–that’s what we have to trade on.
The charts rule. The charts always rule. Decide what your time horizon is. Tune your chart periods and indicators to those time frames, respect the trend, and follow the indicators as best as you can. That means that you may have to hold your nose a lot of the time. But hey, it is what it is. We can believe with good reason that it will all end badly. We can be critical of the system and still try to make (or take) money from it. To do that, we have to be one with the charts.
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