Liquidity

The markets fell off the charts in May. Rather, they fell out of bed midmonth after the Federal Reserve indicated they were not yet done raising interest rates. This comes amidst evidence that the world wide spiggot of easy money is being shutdown via global rises in interest rates. Since higher rates translates to less market liquidity the choppy period we've been going through makes sense. I believe that since sometime last summer -as returns in general market indexes have stagnated -that speculators have taken much higher and inappropriate risks by buying an increasingly narrow body of asset classes and equity sectors. Namely everything related to commodities, energy and international have been golden. Everything else has been punk.

These areas have started to take on some of the same aspects as technology in late 1999 early 2000. That is in spite of high valuations you could find high level of investor complacency regarding the valuation of these securities. Until mid-May, euphoria ruled the roost in these sectors. CNBC talked of nothing else and the business press did nothing but tell us why "This time it is different" although it almost never is.

I hate the words "investment bubble" because it is used all the time to describe any parabolic move in an asset classes. The idea of a new era/paradigm is often re-introduced to investors to explain these types of moves. Unfortunately it seems to be an automatic about the human condition to always need to provide some rationale to in the end what amounts to little more than some type of momentum-based buying strategy. These rear-view statistics almost always include things like last quarter's corporate profit growth, prior month's retail sales activity, P/E ratios, large corporate cash hoards, subdued inflation and interest rates.

Now the "bubble" in these can't miss asset classes seems to have been at least for the time being deflated if not in some cases longer term popped. Now market participants seem repelled by the tandem effects of rising global interest rates and Fed Chairman Bernanke's hawkish yet convoluted musings on more interest rate increases. As such fear seems to have engulfed Wall Street. Fear is almost always translated to higher volatility which usually means lower stock prices.

The markets are reaching a point of soon being very over sold. I believe that there is at least 1 to maybe 2 more rate increases in store this year as the Fed worries about inflation and continues to look at the economic data to find evidence that it is contained. The market could be in for a few more rough weeks but should set itself up for a better buying opportunity later in the month.