December 9th, 2009 by AdvisorAnalyst

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The following is a guest contribution by Yves Lamoureux, Investment Advisor, Blackmont Capital

I don’t share the recent stock optimism as the tail is wagging the dog. The higher the stock index goes the greater the number of bulls and the greater the amount of decimated bears. Those burned bears will not be adding to the buy side at lower prices to cover shorts. See chart courtesy Market Harmonics). Good news about this will also turn out to be bad when the party is up.

The party by the way is almost up. The not-so-smart money of 2008 might be getting its mojo back. If the commercials are getting it right in the futures market then they might as well be calling the top of many markets.

One huge problem is that the bulk of the long side is now carried by speculators with cheap money. A simple rule of Wall Street where bulls die from their own weight may apply right here. Its all about mechanics rather than economics and becomes self-reinforcing. That’s been my point throughout 2007. Perhaps an early call but the right one nevertheless. We have come full circle once again. Leverage has been put back on as if nothing ever happened. I have underestimated the great desire of participants for suicidal tendencies. The cracks start to appear in select markets first. We have observed a number of those already. We did fire our first gold warning recently even though we have been long term bulls.

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The second warning concerns the Japanese currency. I show a timing model based on expansion/contraction of the Japanese monetary aggregates. The recent stimulus from Tokyo is too small to make a large contribution to things. However it is relevant to us because money is already expanding and just might act to depreciate the yen at a faster rate.

You can see here another version of the same timing model showing the recent bump up in monetary aggregates. I have been a very long-term bull on the yen. If relative money expands in Japan while American money contracts then you have us bullish on the USD to come.

I have studied the behavior of commercials in the futures market for a long time. They usually have a success rate of over 8/10. The year of 2008 was not so gracious to the not looking so smart anymore crowd. The commercials would appear to have gotten their mojo back. They are relatively short in big ways in too many markets. For that reason alone it bears watching as this is a significant development.

The carry trade as a barometer of things to come will show the unwind at the early stage. From my perspective it is here & now that the carry trade ends.

Yves Lamoureux, Investment Advisor, Blackmont Capital inc

The opinions contained in this report are those of the author and are not necessarily those of Blackmont Capital Inc.. Every effort has been made to ensure that the contents of this document have been compiled or derived from sources believed to be reliable and contains information and opinions which are accurate and complete. However, neither the author nor BCI makes any representation or warranty, expressed or implied, in respect thereof, or takes any responsibility for any errors or omissions which may be contained herein or accepts any liability whatsoever for any loss arising from any use of or reliance on this report or its contents. BCI is an independently owned subsidiary of CIFinancial. CI Financial is a Canadian owned diversified wealth management firm, publicly traded on the TSX under the symbol CIX. Blackmont Capital Inc. is a member of CIPF and IIROC.

Hat tip: ZeroHedge

Read more from the author/contributor here.

Tags: American Money, Blackmont Capital, Canada, Carry Trade, Cheap Money, Contraction, Futures Market, Gold, Great Desire, Investment Advisor, Japanese Currency, Lamoureux, Mojo, Monetary Aggregates, Money Contract, Optimism, Second Warning, Smart Money, Speculators, Stimulus, Stock Index, Suicidal Tendencies, Timing Model, Yen
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