Predicting Short-Term Stock Market Moves (NYSE:DIA),(NYSE:SPY),(NASDAQ:QQQQ)

While it is not exactly possible to predict the future path of the stock market, Cliff Wachtel does help identify some forces and events that can help anticipate some of the upcoming market action.  This could benefit investors in Diamonds Trust, Series 1 (ETF) (NYSE:DIA), SPDR S&P 500 (ETF) (NYSE:SPY) and PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQQ).

Wachtel indicates that focus in the right directions can help investors see what is coming before many other investors. He believes that is often good enough to make profitable trades and investments in the markets.

Reasons for the Market Rally to Continue:

Continued low interest rates. Even if much of the developed world sticks to mid 2010 as the deadline for beginning rate increases, these will likely be small and cautious moves unless growth in jobs and spending or inflation is really heating up, which few expect to happen. This helps demand for stocks as it supports earnings by keeping credit costs down, and also leaves yield-seeking capital few alternatives.

Moral Hazard Weakened: Risk taking investors can take a certain comfort in knowing that the global policy makers will not allow the financial system to collapse, at least if they can at all avoid it. So far, they’ve managed, regardless of the future bill to their taxpayers. Thus insolvent banks can indeed be seen as rational stock buys if they are too big to fail. Ditto overpriced stocks and the high yielding bonds of major EZ countries, at least for now.

Reasons for a Market Pullback

Massive and growing debt levels that may not be sustainable:
a) On every level, from international banks and central banks to individual homeowners. So far, accepted Keynesian theory as handed down by Bernanke and other central bank heads has been to print money, bail out any large lender, and keep the national and international financial system and real estate market on life support until it can sustain itself.

b) Fine if self-sustaining growth or at least stability in jobs, spending, and earnings occurs before governments don’t exhaust the supply of buyers for their debt, at least at affordable rates. If they do, then bond rates rise, mortgage rates rise, debt defaults rise, banks or the global credit system gets shakier. No one really seems clear on how long the game can go on, how many bullets governments have left, or how creative they can be in devising ways to keep things going until genuine recovery kicks in.

c) We know it’s like a game of dominos. The more debt per player, the higher stacked and less stable that domino becomes, and the more vulnerable it is to even minor tremors. The more players in debt or dependent on steady repayments from the others, the closer the dominos are packed, and thus more vulnerable they are to even a distant, single collapse that sets off a chain of falling institutions (and governments?) that rapidly spreads to all. Or at least to enough so that confidence in the credit system fails and causes a credit seizure, which is almost the same result.

Read the rest of Wachtel’s story here.