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Five Things You Need to Know: The Debt Crisis Is Not a Final Destination


The debt crisis is not an end in and of itself, but rather is something to pass through. And no one knows what will emerge from the other side.

1. Are You Married to Your View?

One of the macro guys I really pay attention to is Edward Harrison of the site Credit Writedowns (Toddo, Peter Atwater, Professor Pinch, James Kostohryz, all Minyanville contributors being a few of the others I pay attention to). But Harrison is one of the few people who writes valuable macroeconomics content without being overly emotional or dogmatic. He isn't married to his view. And if the macro fundamentals shift in unexpected ways, as is often the case, he isn't afraid to update his outlook accordingly, something that is far more difficult than it may sound. (Here is Harrison outlining what is at stake in the latest Greek bailout.)

As human beings with egos we often attach too much significance to our opinions, sometimes forcing our analysis to try to make it correct when it is not. It's really hard to change a secular view once you've made it. To see this in action, just look at your Twitter stream and check out the Twitter handles people use. If your handle is @econoswindle, @FedFail, @ZeroCouponBust or @FiatFraud, it's likely you are married to your macro outlook. Those are each available by the way!

The crossroads for me came in 2009 when I started to run out of new things to write about the market. Not only was I running out of new things to say, the feedback loop when I did write began to come in aggressively positive. At a point, I thought, "Uh oh, something is wrong here." Don't get me wrong. It's fun and encouraging to get positive feedback. But there was a long transition in the responses to what I was writing from 2005 to 2009. In 2005 the feedback was almost entirely negative. "You guys are too bearish." "No way housing goes down 20%." "Get a life and stop hating." Every once in a while, infrequently, someone would write a charitable note. I saved those. But again, cycles change.

The point I want to emphasize is that 2006 was the time to prepare for a collapse, not 2011. Make no mistake, the road is going to be choppy from here, but what we should be preparing for now is to invest during the liquidity crises we see going forward. Liquidity crises are temporary. Debt crises are long-term. Right now we remain in a debt crisis, still, but we have reached the point of recognition. This is it. Everyone is now aware of the crisis. Ask your cab driver about PIIGS, the Greek debt situation, quantitative easing and whether he likes gold. Liquidity scares will shake out many longs and attempted longs, but the successful investor going forward will be the one who is positioned long and optimistic, not the one who obsessively focuses on what the market has already recognized.

With the point of recognition here, the coming phase will ultimately be bullish. Remember, the debt crisis is not an end in and of itself. It is not the destination. It's something to pass through. No one knows what will emerge from the other side. If we did, we'd all be bullish right now instead of angry and pessimistic.

Bear markets discover and price in structural issues; bull markets are the manifestation of those issues reconciled. I did not say resolved, but reconciled. This is critical to understand: we will never solve our issues. We will never solve for energy, lack of food, excessive debt, [insert macroeconomic variable here], we will only reconcile them and move forward to a new phase in the process of crisis --> decline --> recognition --> reconciliation --> advance --> crisis.

I find it easier to grasp economic problems when considering them as part of this process. Too often we consider economic problems as destinations. I made this mistake early
on with how I viewed and wrote about deflation. It was hard to imagine what could emerge from the other side, and at the time I felt it was more important to inform people about what the process of asset deflation would look like and how to prepare for it. But even so, I found myself married to this view in mid-2009 and struggling to adapt. Understanding it as part of an ongoing process helped me re-formulate my market view.

2. Bulls Face Uphill Summer Battle

After making my long-term bullish view, here is a quick market comment on how the short-term technicals are shaping up. On the positive side, the action in the Russell 2000 (IWM) has shown a positive divergence. Despite closing below the key TDST (the DeMark key trend measuring level) Down level at 79.46 for nine consecutive sessions, buyers were able to reclaim that level last Tuesday and it was never qualified as a breakdown.

Of course, the primary technical issue facing markets on multiple time frame analysis is the MONTHLY sell setup with at least 13 more weeks of duration, and the WEEKLY at least three more weeks before a potential buy setup can record. One way to get a sense of the uphill battle ahead this summer for bulls is to look at the WEEKLY NYSE High-Low Index, below. We have seen successive lower highs for this since October 2009, a bearish divergence versus market prices. This index is negative, having reversed down earlier this month, and at an elevated risk level above 70%.

Finally, while the overall market index will struggle this summer, individual issues continue to show positive divergences from the market. Friday's weakness produced a handful of TD Sequential 13 buy signals of note, and no sell signals within the S&P 500 universe. Among TD Sequential 13 buy signals: Advanced Micro Devices (AMD), BB&T Corp (BBT) and Exxon Mobil (XOM).

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No positions in stocks mentioned.

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