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Enter The Dragon


From hero to villain so quickly? From Prince Charming to Shrek so quickly? Hey, it's not easy being green.

Night rise like the evening prize
In a turnstile backwards we fly
Cold bones tied together by black ropes we pulled from the swing
Little one just a little way today all of the dreams are waking.

--Beck (Little One)

No. The title is not referring to China. Although, true enough – no one can quite make heads or tails of a communist regime with more U.S. dollars than any country on earth, a communist regime investing in the gold standard of private equity fund, Blackstone. No, no one can quite tell if it's a bird or lizard.

No, I'm referring to another dragon – a Green dragon who let out a blood curdling cry on Wednesday.

I'm referring of course to none other then the Maestro, Alan Greenspan, Mr. Exuberance, Uncle Al-lowance – allowance to all those who assume risk, the former Fed head.

For a former Fed head, he's making a lot of noise lately – certainly a lot more than Paul Volker, his predecessor, certainly not a man to be out done in stature. But then, it's not easy being green. Just ask Miss Piggy or as she's known in Washington, the Working Group.

The S&P was up over eight points and poised for a new record close on Wednesday when, enter the Green Dragon – Greenspan who, no longer bridled by his former office, sent out a roar from across the pond. He expressed concern that the China stock market could decline sharply. At some point. Gotta love those prognostications. He's learned well that if you are going to make a forecast give yourself a wide berth. I'd say "at some point" is as wide a berth as you can steer.

Has the FXI, the Chinese ETF, played out the Principle of Tests? The market usually (not always) gives a graceful exit – if you take it. Note how at the test (B) of the prior high – an Island Top (A) – the FXI has rallied back to kiss the underbelly of trendline (C). In other words heads-up if the FXI gaps down and stays down on Thursday. A move below 105 suggests a test of the March low.

Is this something akin to Steve Wynn sending a "cooler" to the crap table in Macau. So, who is Mr. Greenspan's Wynn? Is it Bill Gross of Pimco, the bond king who recently hired Mr. Greenspan? Just askin'.

Shanghai's benchmark index has been breathing fire, up nearly 54% since the beginning of this year on top of 130% surge in 2006. So, Mr. Greenspan's pronouncement that the Chinese market is "clearly unsustainable and a dramatic contraction is ahead" is not exactly the voice of a prude at an orgy. But his comment has been taken as a mirage of reason in a desert of speculative frenzy. Revenge of the hedgies. I can hear the media storm brewing already calling for Greenspan's scalp. The torches are being lit tonight in trading rooms and bull dens across the free and unfree capital markets: get the Green Monster, put a zipper on his lip. Dr. Frankenstein I presume? The criticism of the crowd as it squeals for Greenspan's lobotomy has started anew. Hoofy's cheerleaders are out in full force reminding us of Greenspan's irrational exuberance "speech" in 1996 at DJIA six thousand, some four years before the top occurred at over eleven thousand. Hey, no one's perfect, it ain't easy being green. Anyhoo, that's when he held a government job. The private sector pays better. Now he's incentivized. So we shall see how good his calls are.

A) In early January the S&P had a first trendline break from the July 2006 low.
B) The S&P recovered tracing out a 1-2-3 Swing-to-Test the underbelly of that same trendline.
C) When a short-term 3-point trendline broke the S&P crashed.
D) Now the S&P has rallied to the underbelly of trendline C at point (D).
E) If once again the index breaks a 3-point trendline it should decline sharply out of an Ascending Triangle.

From hero to villain so quickly? From Prince Charming to Shrek so quickly? Hey, it's not easy being green.

Is Mr. Greenspan's rightful place to be relegated to that of a cartoon character in Far Far Away Land? Does he have any credibility? Isn't this the same Greenspan who warned on February 26th that the American economy might slip into recession by year's end? At the time, the former chairman said "The U.S. economy has been expanding since 2001 and that there are signs that the current economic cycle is coming to an end." Hey, he's a cycle guy – he's a man after my own heart. Credibility? We all remember what happened the next day on February 27th – the most extreme sell day in the U.S. market in one hundred years. Does history repeat? Maybe that's what the pundits are afraid of.

In February, Greenspan said "When you get this far from a recession, invariably forces build up for the next recession." Hey the guy is simply talking about reversion to the mean. Ditto his comment about Chinese stocks which have exhibited repulsion to the mean for the last few years.

Be that as it may, on Wednesday the Green Dragon of Pimcoville took the wind out of Hoofie's sails. On Monday late selling in the S&P spoiled the promise of a record close. Ditto Tuesday. They say the third time is a charm and on Wednesday it certainly appeared the S&P was solidly on the way to the inevitable record close over its March 24th 2000 high when – enter Al.

The third time turned out to be a charm for Boo as the S&P carved out a Bearish Wide Range Outside Day Down from a seven year high. Although the S&P seemed destined for a new headline grabbing high going into the long weekend it is not surprising to see a decline in an index (or a stock) after it tags an historic high. Many times an index will fail on the first few attempts to best an old standing high. It will sell-off and return at some point typically to capture that old high. This is probably how the scenario will play out. But, the time/price square out shown earlier this week may be exerting its influence and there's no telling exactly how strong this influence may be until we see the behavior of the S&P after turning its Weekly Swing Chart down.

A Live Angle from the March 2003 low (A) drawn through the first correction (B) tags the current level of the S&P. The breakout above a Triple Top Trendline at (C) commenced a Parabolic Phase. The only true support is trendline (D) at approximately 1460.

It will be interesting to see what happens in China with night rise. Will Boo get the evening prize as the bulls in a turnstile backwards fly? If so it will be interesting to follow how the Alan the Bull Slayer saga plays out.

It is interesting that the financial markets used to applaud and admire Greenspan despite his 1996 call, despite complaining they couldn't always understand what he was saying. Now these same speculators claim he is just a little lamb crying wolf in former Fed clothing. Maybe they're just green with envy over his speaking fees.

We don't need Greenspan's prism to observe a country Shanghaied by a mania. However this event plays out; let's not confuse catalysts with causes. When you're flying headlong into the sun and someone says look down, you tend to get dizzy. Even Icarus learned about reversion to the mean, albeit the hard way.
No positions in stocks mentioned.

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