Bears to Market: Pay Me Now or Pay Me Later!
The market is walking a tightrope into a very important time frame.
Everything is going in the wrong direction
The doctor wants to give me more injections
Giving me shots for a thousand rare infections
And I don’t know if he’ll let me go
-- "Connection" (The Rolling Stones)
Now that I am out of government, I can tell you what I really believe... Central banks are now so heavily influencing asset prices that investors are unable to ascertain market values... this influence is especially evident with the Fed’s purchase of government bonds, which has made it impossible for investors to use bond prices to learn anything about markets.
--Kevin Warsh, former member of the Board of Governors of the Federal Reserve who helped manage the Fed’s response to the financial crisis, and who served as Bernanke’s liaison to Wall Street
As a friend commented to me yesterday, “Somehow it is legitimate to manipulate anything you want if you are a central bank, but it’s a crime for the European banks to have manipulated Libor rates. We’re in trouble. We’re fully invested in Ben’s Hedge Fund. Does the Fed have any clue or even thinking about how they are going to unwind? What is the balance sheet going to look like after another QE?”
Remember this is the gang that never saw the crisis coming or did what we’ve come to expect from those in government -- lied about it. As Mr. Warsh said, “Now that I’m out of government, I can tell you what I really believe”
How are we supposed to know what the market is saying if it’s been hijacked? The market IS the Fed.
This is the conclusion one draws from this report from the Federal Reserve Bank of New York.
We’d better rely on the cycles for a sense of the market.
Interestingly enough, the cycles point to a possibly pernicious and precarious path. Are we on that right here, right now, or there is one more dance before the panic?
Yesterday’s late-day action was typical of the ‘usual’ rally into the runoff, forcing shorts to cover. With the VIX (^VIX) at 18, apparently nobody’s worried enough to buy insurance, because if bad news arrives, the Fed will be right here with more paddles to stimulate the heart of the problem with QE.
So we didn’t get back-to-back momentum liquidation days, and the S&P 500 (^GSPC) held its 50 dma.
But does it mean anything?
Does anything mean anything on a day-to-day basis in the markets any more?
Anymore than there is no longer information in the blind pools of bids and offers intraday that are pulled in milliseconds in a sick game of 'gotcha'?
Are the blind leading the blind down a path to perdition?
So we get the show of ‘support’ at the 50 day, and then the market breaks wide open on the futes this morning?
Who is the big dog, and what is the big tail anymore?
This morning stocks are down on global growth concerns.
That’s a revelation?
“The global economy is deteriorating faster than central banks can ease policy,” says Tomomi Yamashita, a fund manager in Tokyo.
There is no place to ease.
EASING is the same as printing at this point, with the same eventual result: inflation. The key word being eventual. Timing is everything. The idea that printing creates real growth is ludicrous. But then when policy has failed and money is free, the logical fallacy is to buy time.
Yesterday, I noted that from this point, the markets went off the cliff into July 24. If we are in a panic, we are getting a new breed of sawtooth/slow-motion train wreck as we’ve become accustomed to.
There is no more connection from one day to the next in price discovery any more than there is any connection intraday between ‘real’ bids and offers. Anymore than there was any connection between yesterday’s Mack the Knife S&P to the highs of the day. Pure fundamentals, right? Another manipulation with the shorts trading shorts with the shorts? So that that the machines can cover on the opening plunge? Will it be another whiplash day or a trend day?
Hey, we’ve got problems, but not panic, right, right? Rallies and declines don’t end with a whimper, they end with a bang, on whatever timeframe. The alternating striptease of a decline and a pause and a decline and a pause saw the S&P hold the almighty 50 dma Maginot Line in the sand on Wednesday, but this morning we get the breakaway gap coinciding with a violation of an hourly short-term rising trendline and lateral support.
Yesterday’s close suggested a rally attempt, but key support is being smashed this morning. A break below our secret cycle date of June 27 at 1320 underscores the idea of a failure.
I keep going back to the premise that given the cycles, if the rally off the June 27 pivot low was the real deal, that any ensuing pullback should have been shallow and short-lived. It has not been. They don’t back up the train to the station to pick up passengers if it’s really a train we want to be on.
It’s another crash tease with a cascade possible with the 50 day buckling, then the last pivot low at 1320 giving way, and then the 200 dma at the key 1292 level right below that.
Remember, 1292 was the important October pivot high. It was the initial low in May, followed by an undercut to test the 200 dma. When the S&P recaptured 1292 on June 6, the S&P entered a rally phase and ever since has carved out higher highs and higher lows on the dailies. So, the first break of a prior swing low at 1309-1320 is a problem -- especially given the big picture pattern and the idea of a bearish “third of a third leg down”. Below 1320 should lead to an immediate test of the 200 dma.
There is no room for another break of the 200 dma here. We’ve been there, done that. Below the 200 dma indicates a decline to 1200 and then 1158. As you know, the first mouse gets the squeeze, the second mouse gets the cheese. In this case, a second mouse could get the cheese for the bears. Note the action in IBM (IBM). It has already broken its 200 dma for the second time. Is IBM a black and blue omen for the trajectory of the S&P?
There have been a lot of rumors around about an attack on Iran and an “October surprise.” This rhymes with the 50 year (600 month) cycle and the Cuban Missile Crisis in October 1962. Since the beginning of the year, I have been using this as a road map, which was a factor in forecasting a high for the year in the spring.
Early August is the 360-month anniversary of the beginning of the Great Bull Market in 1982. This is a half harmonic of Gann’s Master 60-year cycle. There was a case for the market rallying up into late July/early August but that likelihood is failing with this morning’s action. Only back above 1344 does this scenario hold water.
What is interesting about the upcoming anniversary of the 1982 low is that it was the 50-year anniversary (plus or minus 1) of the big July low in 1932.
The S&P turned its Monthly Swing Chart up into our anticipated turning point the first week of July and the beginning of the new quarter, 90 degrees from the April high of the year. The subsequent behavior tells the tale and it has been bearish. This morning, the S&P is set to test the high of the low bar week, the week ending June 8.
A failure below that high of 1329 implies a failure with the 200 dma in the crosshairs. It may be that a ‘perceived’ successful test of the 200 plays out with all the king's men and all the king's horses protecting the baby with an ensuing rally into late July/early August, but connecting the dots, it looks like it’s a matter of pay me now or pay me later for the bears. It looks like a panic, sooner or later.
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