I want to speak a bit about the stretching that is taking place in the stock market. Today, I am not speaking about commodities per se, but markets in general and stocks. I touched on this briefly on the May 31 post about cycles. Lets apply this idea now to the stock market. The chart below shows that the stock market range as of late has been 410 points above the 200 week moving average.
We have been that stretched before....back in the late 90's. That market ran at a Ultimately, that did not end well.round 410 points for nearly two years. Ultimately, it did not end well.
Just like a rubber band, the more stretched the market gets, the stronger the reactionary move in the market. Following the massive sell of of the great recession, we have experienced the greatest cyclical bull market of all time!
I have mentioned numerous times that the bread and butter of professional traders is buying oversold assets and dumping overbought assets. This is called the "Regression To The Mean Rule". This is a principal among traders, that liquidity eventually finds its way into undervalued assets. Likewise, liquidity will eventually find its way out of overvalued assets. The pros have mastered the art of staying in these positions longer than any other person such as myself believes possible. It is agonizing for us who are on the sidelines of such trades to watch. At some point, we decide we need to participate, which is about the time the pro's decide to move on, leaving us dealing with large losses because we entered late.
Like I had mentioned earlier, this post has nothing to do with grains per se, but this is how the process works.
So, where will this liquidity go when the market turns south? Consider the chart below.
(You will need to zoom. If you cannot, try this link and scroll to the bottom.)