NEWS / Foreign Exchange

Mergers, Acquisitions and Global Liquidity

By Gabe Velazquez

It seems that lately when I'm going through my early morning routine of browsing the financial news, invariably there are reports of companies merging or looking to acquire others. M&A activity has been rampant on Wall Street for some time now. This is a sign that Corporate America is finding value in: either partnering with other companies, or gobbling up smaller concerns that fit with their strategic planning.

The global economy is also hitting on all cylinders. Markets of major Asian, European and developing countries continue to post all-time highs, and are actually far outstripping the US markets in total return. This phenomenon is creating an awful lot of liquidity around the globe. The abundant capital that is sloshing around globally has to find a home. Generally, money goes where it is treated best.

The combination of all three of these factors is what has created the fuel that has propelled the current stock market rally, which seems to have no end in sight.

In a recent CNBC interview, I heard a so called pundit utter those infamous words, "This time it's different," and last week, the Wall Street Journal published an interview with an analyst that proclaimed that the current rally could last another ten years. Does this sound familiar? Let me refresh your memory. The last time we were exposed to this type of advice, it was the fall of 1999.

For a contrarian such as myself, this sort of discourse would normally set off alarm bells, along with the raising of the big red flag and whatever other warning clich?© you can conjure up, but just as was the case in the late nineties, the market can continue to go up for as long as the momentum will carry it. In my opinion, this precedent should be taken much more seriously by the long-term investor, rather than the short-term trader.

Since my last writing, the market (ER2 Russell 2000) looked as though it was going to break down, but just as it has for the last year, it held at the bottom of its trading range (810). I wrote about this critical support area in my previous article . In last week's shortened holiday trading, the ER2 managed to trade to a marginal new high, albeit for a very brief time. (See chart below) This lack of follow-through caused, what is technically termed a "reversal".

This reversal took the ER2 down 22 points from peak to trough. This is quite a move, being that it happened in just two trading days.

Reversals happen when the market trades through an intraday high or low (in this case a new all-time high) and can't muster enough new-market participants to continue the momentum. Imagine a car that runs out of gas just as it reaches the top of a steep incline. It has just enough inertia to get to the plateau, but then gravity takes hold and it begins to fall back. The descent is swift and violent. The pros love to sell these breaks because they provide a high probability trade, which also comes with a low risk high return profile.

We can observe in the hourly chart below, the velocity of this move.

In summary: This week brings with it, two important pieces of data. The first is the FOMC minutes. These are the transcripts taken at last month's meeting in which policy changes were discussed among the members. The markets will be looking for subtle nuances in language, always hoping that the Fed will ease monetary policy. The second, and probably the most important report this week, is the widely followed non-farm payroll report which is released Friday prior to the market opening. This report always sets the tone for the market for the following week. If the recent past is any indication, the market should react positively to this report. We'll have to wait until Friday to find out. The market seems to be in a consolidation phase and perhaps this report will get us out of it.

So until next time, I hope everyone has a profitable week.