"There must be some kind of way out of here"...
said the Fed Chairman to the Congress.
The eerie calm of central bankers is a masterful disguise. They read prepared remarks in front of television cameras broadcasting to millions who are hanging onto their every word, dampening any hint of treble. The appearance of total control masks the actions of desperate chaos… and the market rallies onward. And why should it not? We’re living on borrowed time anyway.
We pundits are keenly aware of just how close we came to the abyss in the fall of 2008. For most, the financial crisis is a distant memory, history sealed in the past. Anyone who follows the markets closely knows that the current rally has been doubted since it rose from a market bottom in 2009. Market commentators -- the bearish ones, anyway -- have fought this rally all the way. This bull run goes against every school of investment philosophy predating Dow and Graham. Pundits understand the grave possibility that 2008 was just a tremor.
The dominos are stacked for the destruction of nearly all asset classes, at least in the short term. The shakeout of bonds and precious metals seems to be just that; we all know these are fear’s marionettes. When fear arrives, bonds and gold will rally at about the same time just as the average investor opens his or her 401k statement to discover that their conservative fund allocations are anything but conservative. However, as has been noted often in recent days on Minyanville, where one stands is a function of where one sits.
The angel tasked with tending the long-term trend line is in danger of losing its wings. Facing negative real returns on bank deposits, CDs, and US Treasuries -- all considered “risk-free” vehicles --- savers shrug; they could care less about being hung upside down and shaken by their feet. They’re wise to this game; they’ve seen how it ends twice in the last 13 years. Not this time. “The house always wins,” the archangel reminds.
How can the house win even if one is not invested in the markets? How quickly we forget about Cypress. The average American believes that their banking accounts are protected. But what exactly is the policy for redemption of funds from the Federal Deposit Insurance Corporation (FDIC) and the Securities Investor Protection Corporation (SIPC) in the event of a "covered" loss? Additionally, as we’ve learned with Greek credit default swaps, it is not always clear what is considered a “qualifying default.” Even with the stinking suspicion that bureaucrats have played with the language to limit qualifying events, the programs are massively underfunded and, even worse, were never intended to be implemented in an environment where systemic risk is the most serious risk of all.
Is the FDIC going to pump billions and trillions into failed banks? Even if it were possible, I don’t know if they would. Even if they could, I don’t know when
they would. Can you eat today with money from tomorrow? Sure, for a little while. But then what?
In our systemic world, the failure of several large banks (not to mention a sovereign crisis) à la Lehman Brothers and Bear Stearns, circa 2008, doesn’t just mean a broken financial system. It could mean that in two weeks’ time, your electricity, cable, water, gas, and trash companies could all be out of business. By then, the grocery store would have been emptied. It almost happened last time.
Here’s a news flash for the average individual: Every publicly traded company in the United States is nothing more than a hedge fund. Apple, Inc.
(NASDAQ:AAPL)? Hedge fund. Exxon Mobil Corporation
(NYSE:XOM)? Hedge fund. Waste Management, Inc.
(NYSE:WM)? Hedge fund. Dominion Resources, Inc.
(NYSE:D), Comcast Corporation
(NASDAQ:CMCSA), and The Kroger Co.
(NYSE:KR)? Hedge funds.
Confused? Let me explain: Although positioned in the public’s mind as secretive investment pools for the super-privileged, a hedge fund is in actuality any business that trades for the purpose of creating or preserving wealth as its “business.” When a company like Apple has over $100 billion in liquid assets, cash is simply not a safe option. This money must be invested, and it is often at work in the Treasury markets --a market that has been clobbered in recent weeks. This earnings season, it will be interesting to learn of losses or successful hedges employed by the treasury departments of firms with large cash positions on their balance sheets. If their ability to hedge foreign exchange exposure is any clue, it’s not likely to be a pretty quarter.
Why Bears Worry
The biggest myth about bears is that we enjoy wealth destruction and/or anarchy. Arguably, the bear is the most bullish proponent of capitalism. Bears are the most sensitive to fundamental dislocations in the markets. Bears tell the world when they need to clean up a mess. People want to call us “doom-gloomers” who get off on disaster. My opinion is that nothing could be further from the truth. I don’t know anyone who finds bear markets a pleasurable experience, even if they happen to profit from the decline. A trader’s job is to make a profit. A trader’s bias is an opinion on where we’re headed. A good trader must keep these two things separate and trade the tape they’re handed, or else.
Perhaps the reason why we bearish pundits fought the tape all the way up is because we believe the old maxim: The bigger they are, the harder they fall. Maybe our mind’s eye saw all along that we would stand a better chance of surviving this critical point in history if we could just grow, heal, and adapt as nature intended. Nothing about where we are today is natural. Surely we can’t go on wagging this dog forever. There’s a mess long in need of cleaning up, and the Fed has finally loosened the leash, allowing market players to exercise their First Amendment rights.
Narcissism is a funny thing. We live our lives attempting to control anything and everything availing itself to us. At a minimum, we attempt to control ourselves in the vision of whatever delusion we’re operating under (we’re all delusional). Everything in life, in this universe, is about cycles. It amazes me how many people prioritize watching nonsense on television when they've never sat on a beach and marveled at the stunning accuracy of the tide, controlled by our moon. The majority abhors the most amazing wonders and joys of life, pushing miracles to the wayside in favor of superficial instant gratification. The devolution of social mood has digressed to where, in our search for endless life, we are living our lives in a synthetic projection of life itself. It’s not hard to understand why our children are obsessed with zombies. Just look at their idols.
My opinion in regards to the current market cycle is that the high may be in, but the top is not. Those who’ve followed my technical analysis in Minyanville’s Buzz & Banter
may recall my Elliott Wave count on the monthly chart of the S&P 500
(INDEXSP:.INX). By my count, we’ve only just now put in eWave 3 of 5. Due to this completion, my analysis dictates another tag of the bottom trend line, which currently stands around 1350 SPX -- about a 20% decline from the recent high. If this trend line holds (and it should), we stand to experience a fast, furious eWave 5 rally. A measured move dictates a 600-point rally from the trend line tag over approximately a 12-month period. However, traditional secular market analysts will want to see a firm lift above 1733 with strong breadth. (1733 marks 10% above the 2007 high.) It’s this handle that, for many, defines where the 13-year secular bear market will give way to a new secular bull market. The measured move of a 600-point rally from 1350 takes us to 1950 on the S&P 500. Interestingly, a 61.8% measure of this hypothetical brings us to 1720. That's 13 points shy from the line in the sand.
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The S&P 500 is also in danger of a never-before-seen event: a 50-month moving average cross below the 200-month moving average, which is often referred to as the “Death Cross” on daily and weekly time frames. However, because this cross has never occurred on the monthly time frame, there’s no precedent about whether or not it matters. Additionally, the long-term trend line, dating back to before the Great Depression, supports the market right around the 850 handle on SPX. As the term “trend line” implies, this has also always held true dating back to the beginning of market indices. Should the market “give” below this level, the implication is that the United States (and the world, for that matter) is no longer in the secular bull market that dates to the beginning of modern civilization during the Industrial Revolution.
What will happen if these two catalysts are observed? Best case scenario is a quick consolidation and reclaiming of the longstanding trend. The worst case scenario turns us all into lawless cavemen and cavewomen in the blink of an eye.
It’s important to caution that none of these outcomes are forgone conclusions. Interestingly, what happens in our world over the next two years will determine the ultimate outcome of whether humankind will continue to enjoy prosperity. Ben Bernanke knows that the Federal Reserve cannot do all the lifting by itself to support an entire world guilty of poor fiscal restraint. Love him or hate him, he’s the one that bought the world four years to fix its problems. Four years politicians in the United States have wasted away, thus far.