How to Kill a Zombie Rally

  • The last man standing 
  • An unhealthy rally
  • The higher we go the worse off we are

ALL BUT ONE - Each and every market, each and every asset class has responded in some way to the end of this monetary policy except for one. The coordinated response to the 2008 financial markets crisis has been supporting the global economy to this day, and yet, most markets have already taken as much advantage as possible and have since corrected from the limitations of those benefits. Some already started correcting years back and some only a couple of years back. But of all these markets, only one has yet to respond. 

NOT TEXTBOOK - The US equity market refuses to back down and the more it does so, the scarier it gets. The uptrend in this market is not the type of healthy, conventional uptrend you would see in a textbook. It is more of a zombie uptrend that continues to push higher without thought, seemingly on a blind momentum, and perhaps more appropriately, a blind faith that all will be well so long as US stocks keep pushing higher. It doesn't matter whether the fundamentals align with the valuations, all that matters is that if we keep on higher, we can continue to ignore the elephant in the room. 

THE ELEPHANT - And what is that elephant in the room? It's the fact that all of this is effectively a big sham. Simply put, we entered a major crisis in 2008 and the only way out was to conjure up a strategy that would maybe work for a while but would only end up fueling another major bubble. Back in 2008, central banks and governments realized that the only way out was to lower rates as much as possible while also adding fiscal measures that would incentivize spending and force investors into the only viable option of stocks. And with stocks at record highs, everything would seem great!

TWO BUBBLES - Well, the strategy has worked. Stocks are at record highs and we are all supposed to believe things are great and this confidence should be trickling right down into the real economy. And you know what? It isn't. Now I'm not saying there wasn't a whole lot of merit to lowering rates these past several years. But at the same time, there is a limit to all of this. Global growth has only been contracting since the crisis and we need to come up with a different strategy at this point. Now, not only do we have one bubble in the form of US equities, but we also have another in the bond market!

This US stock market rally is more of a zombie uptrend that continues to push higher without thought. Via @joelkruger

WISH LIST - So I sit back and talk about how bearish I am all the time. And I tell you I will only get increasingly bearish the higher we go. People will poke fun and say that I have been bearish forever. But that's ok. As per my update the other day, I have been bearish for a while and have picked my spots and made a lot of money in this bull market selling into rallies. I have no complaints. My only wish is that when we finally do see a healthy correction that sustains itself for more than a minute, that I am able to be holding a short position that I will also be able to hold onto for a good portion of the ride down. 

STRATEGY - As you all know, I am short the SPX500 now from 2154 and will sell some more if we see an extremely overbought intraday move. Until then, I will just sit back and wait. As far as other trades go, I am still long AUDNZD and holding and I like the idea of buying GOLD into this most recent dip. GOLD has pulled back quite a bit since topping out at 2016 highs earlier this month, but the pullback is corrective and with equities extended, monetary policy exhausted,and so much misplaced political risk out there, it would seem that buying the hard asset is the right move. Let's see.

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