On July 14th, 2010 I wrote a “letter” to short sellers warning them to “be very, very careful here into year end” and that “we are set up for a big rally over the next 5 1/2 months.” I cited a calming down in European credit stress, a better than feared earnings season at the time, the Nov election possibilities, an underinvested buyside and lastly and the most important, a Fed that would remain extraordinarily easy. I thought though at the time that 2011 would bring new worries but QE2 gave the market fresh legs to where we stand today.
I am now putting out a warning to you, the long only, mostly long PM. The road is about to get rougher as QE2 is near its end at the same time US economic growth is moderating and central banks around the world continue to raise rates (the BoE is going to be forced to soon).
Also, Europe is reaching a tipping point now with Greece and investor sentiment remains very bullish or at least not bearish at all. Do you know anyone that is set up for a market drop? I don’t. The correction in commodities over the past week is the first shaking of the tree that should not be ignored and will be the precursor to a painful 10%+ correction in stocks over the next few months. Both rallied hand in hand since late August and thus won’t be separated in market action.