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The Fed in Wonderland?


The Fed is trying to pull a financial rabbit out of a hat, but can more quick fixes be multiplied by more synthetic credit divided by leverage?


"When logic and proportion
Have fallen sloppy dead
And the White Knight is talking backwards
And the Red Queen's "off with her head!"
Remember what the dormouse said:
'Feed your head, feed your head'"
White Rabbit (Jefferson Airplane)

Maybe it's just me, but I don't recall Alan Greenspan or Paul Volcker giving testimony before Congress with the Secretary of the Treasury backstopping them.

Be that as it may, Congressman Ron Paul was on fire yesterday, telling it like it is to this new Martin and Lewis team, Bazooka Ben and Daddy Warbucks. The problem I have is, like Paul, telling which one is the straight man. The other problem is if it weren't so scripted and sad, they'd be funny.

Acting as the Fed did in front of expiration once again just as it did in August actually speaks to how impotent and toothless it must really feel in the long run: does the Fed feel it is necessary to manipulate the 'free' markets and beat the shorts over the head to do its bidding?

Will the effects of the Fed news wane after the excess of options expiration? Of course excess is a concept it has become all too entirely familiar with, in my humble opinion. The long bond market is already speaking: long rates are rising as the vigilantes mount up and circle the wagons of these Architects of Excess, these Emperors of Credit.

The question is can the Emperor afford his new clothes? What's under the kimono? What will an unwind of the Yen Carry look like in all its naked splendor? What will the world look like with OPEC pegging crude to the Euro? What will higher long-term rates do to resolve the real estate morass and the deluge of resets behind the horizon?

With the S&P testing the low bar of the signal day from July 20 sell signal (the low of that day was 1529), we will get to see if in fact this is a grand test of the highs. We will get to see after expiration if this is a bearish test of a test. pattern. In other words, the July peak tested the all time March 2000 high and this move may be a test of that test sixty days later. Recall that some months ago I offered up that one of the most important subsets of cycle theory and time is 60, as in 60 seconds, 60 minutes, 60 hours, 60 months etc.

Speaking of 60 months, it occurs to me that the S&P may be tracing out a mirror image foldback. In July 2002 the S&P waterfalled into a climatic low which was tested in early October of 2002. One again that low was tested in March of 2003 before the market began to trend in earnest.

So, is the July 2007 blowoff a mirror image of the capitulation in July 2002? Is the index testing its high right here, right now as it tested its low in October 2002?

A chart below shows a live angle from the March low cuts through the early August spike and Wednesdays high at coincidentally 1529, the level of the July 20 sell signal.

Click here to enlarge.

On Wednesday, the S&P tagged the June "Orthodox High" of 1540 (A). I say Orthodox High because the July high (B) was a false breakout. Note how a Live Angle from the March 14 low (C) through the August 8 high (D) also comes in at Wednesday's high.

On Wednesday the S&P closed at the 1529 level after testing 1540. 1540 was what I call the orthodox high which occurred on June 1. Why? Because the July high proved to be a false breakout. So Wednesday's move could certainly satisfy the idea of a graceful exit for Daddy Warbucks' cronies.

Interestingly, 360 degrees up from the 1371 print low in August is 1523. On Thursday, the index closed below 1523. With this morning's strength, it appears 1523 will once again be tested and it will be interesting to see if this level can be captured on a weekly closing basis today.

Either the market is tracing out a valid test of the high or brave new world of asset bubble blowing is upon us. I would try to be patient and see what happens with the first pullback on the dailies and the first turndown of the Weekly Swing Chart before reacting to the flickering red and green and becoming too scenario-ized.

As the charts below show the key level for a test when the sellers show up is the 1505 area where the Monthly Swing Chart turned up. 90 degrees down from 1540 is 1501 which coincides with this level. 90 degrees down from the aforementioned 1523 is 1485 which is the level of the June lows and the breakdown pivot for the summer swoon.

Click here to enlarge.

Click here to enlarge.

So, you can see how the geometry of the market maintains itself even in the midst of extreme volatility. The message of the Square of Nine chart then appears to be that any break of 1500 spells trouble which is confirmed by a break of 1485.

Bazooka Ben and Daddy Warbucks are trying to pull a financial rabbit out of a hat, but can more quick fixes be multiplied by more synthetic credit divided by leverage? One pill makes you larger, one pill makes you small. Go ask Goldilocks when she's ten feet tall.

Editor's Note: Want more of Jeff's insight and trading ideas delivered to your inbox daily? Minyanville is proud to announce that we have launched Jeff Cooper's Daily Market Report, complete with Jeff's day trading and swing trading setups. Email Josh Sander for more details and how to sign up.

No positions in stocks mentioned.

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