The Spring of Our Uncertainty

04/25/2012 8:00 am EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

Many problems loom on the horizon for the stock market, says MoneyShow's Jim Jubak, and therefore the prospect for increased volatility may force investors to the sidelines.

This is the spring of our discontent. Well, maybe not discontent...but what we could really say about this spring is that it’s the spring of our uncertainty.

We really don’t know very much, we as investors. We’re looking at the US economy, and there are signs that the US economy is slowing at the same time as the IMF, International Monetary Fund, is saying growth is actually going to be above projections. We simply don’t know.

We look at the Chinese economy, and we’re getting signs that there’s something...not so much a hard landing, but maybe the bottom is going to be more like 7% growth than 8% growth. But there’s signs on both parts of this argument, and we really don’t know.

We don’t know what the slippage is in the economies of the Eurozone. We don’t know what bond rates are going to do. We don’t know where the policy of the European Central Bank and the Fed is on another round of stimulus. All these things are unknown.

Now, if you think this makes the market kind of crazy and volatile, you’re absolutely right. What you get is a market really ruled by short-term traders.

So, for example, we had a ton of bad news coming out about Spanish bond auctions in the week of April 16. The auctions went and the yields spiked up, but in the secondary market for the ten-year Spanish bond benchmark, yields actually went down. You sort of look at this and go well, gee, bad news, but bond yields are going down. That means bond prices are going up. This makes no sense.

Well, it makes sense if you realize the bond market in many of these areas, in many of the troubled Eurozone economies, are really ruled by traders right now. What you are seeing is that as the yields got to somewhere around 6.1%, 6.2% on the ten-year, they were deciding "Hey, risk-reward, we’re going to close our shorts and move onto something else. We’ve made as much profit as we can without taking any more loss."

So what you saw is a number of New York and European big investment banks saying things like hey, it’s time to reverse that short and go short something else. When you’re short, you have to cover the short, which means you have to go out and buy bonds. So strangely enough, because these shorts were deciding that they’ve made enough money, bond prices started to go up...even though the news continued to be bad.

This kind of volatility drives people nuts, because they can’t really figure out where the market is supposed to be going. Because it’s being driven by stuff that they don’t know about, they don’t follow, they don’t have access to. I mean I don’t know any big international bond traders that I can really talk to on an hourly basis. They’re too busy trading bonds.

So all this means is that the uncertainty translates into lots of lots of volatility, which means that at some point people just decide to sit on their hands. I think that’s what we’re looking at as we head into summer.

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