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The Market Hits a Point of Recognition


The realization that the trifecta of more spending, more taxes, and more debt won't lead to prosperity is approaching.


Editor's Note: The following is a free edition of Jeff Cooper's Daily Market Report. For a two-week FREE trial of his daily commentary and swing-trading picks, click here.

Yeah we all need someone we can bleed on...
-- "Let It Bleed" by The Rolling Stones

"You can avoid reality, but you cannot avoid the consequences of avoiding reality."
-- Ayn Rand

"I'm living so far beyond my income that we may almost be said to be living apart."
-- E.E. Cummings

The market is approaching a point of recognition. Psychologically, it's not reacting to the "better news" broadcast from the administration and it selling off on "better earnings." Technically, the DJIA/S&P are approaching a test of a convergence of their overhead 50- and 20-day moving averages. A big back-test is brewing. Will the DJIA/S&P stop shy of the test or Pinocchio above the moving averages? From a bearish perspective, I can't help but wonder that the market will roll over from a perfect kiss/back-test . But, you never know.

The market fell out of a month-long ascending wedge within days of a turn-up in the big Yearly Swing Chart (on trade over last year's highs). The DJIA/S&P left bearish outside down reversal months. Tuesday, the Weekly Swing Chart on the S&P turned up for the first time since the break. Is the decline after the yearly turn-up a bullish knee-jerk reaction in a continuing bull, or did the yearly turn-up define a high after a counter-trend rally in a secular bear market? The point of recognition is approaching.

Moreover, if the markets rollover after a hope-filled rally from March where the policy makers "did whatever it took," what will it take to stem the tide if it turns the other way? And, where does more "whatever it takes" come from? Will they lower rates into negative territory and pay us to borrow money?

Can the aftermath of the deluge be reconciled without another crisis? A point of recognition is approaching.

"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner, as the result of a voluntary abandonment of further credit expansion, or later, as a final and total catastrophe of the currency system."

--Ludwig Von Mises (originator of the Austrian school of economics).

"It is incumbent on every generation to pay its own debts as it goes. A principle which if acted on would save one-half the wars of the world."
Thomas Jefferson

But then bankers wouldn't prosper from financing wars, would they?

No one knows exactly what's in Pandora's Box of Debt. No one knows for sure whether the worst is over and we'll muddle through or whether we're just in the eye of the hurricane and heading into something that few in their wildest dreams are thinking about. But, a point of recognition is approaching. And, I believe that point on the horizon will arrive in 2010.

The point of recognition that the trifecta of more spending, more taxes, and more debt won't lead to prosperity is approaching. Is it possible that the point behind the horizon where stimulus fails to get a rise is fast approaching, and that the market in its intuitive intelligence knows it?

The market has a memory. The decline from October 2007 to the November 2008 crash low was 835 points. All over the world, many markets bottomed in November 2008. Many US stocks bottomed in November 2008. Approximately, 111 days later was the March low. 835 days from the October 10, 2007 top runs to January 19, 2010. One-half of 835 is 417 which is a fractal of the 741 S&P price low on 11/15 (November 15, 2008, at/near the anniversary of the crash low in 1929). So, November is a good point to measure from and 417 points added to 741 gives 1158, very close to this year's January high at 1150. The market recognized the math.

It's interesting that the market found a high approximately the same period (111 days) from the initial reversal from 1080 in September that it found low in March '09 following the November '08 low. In other words the period from the first low in November '08 to the March '09 low is essentially equal to the period from the 'orthodox high' in September 2008 until the January 2010 high. The notion of an important top or topping process having started in January 2010, I think, must be respected.

In addition, there's a price harmonic between the undercut of the November 2008 low and the January 2010 high. From 741 S&P (the November 2008 low) to 666 (the March 2009 low) is 75 S&P points; 75 points added to the September 2009 high of 1080 gives 1155, a near bull's-eye with our recent high of 1150.

Consequently, a point of recognition technically may be ahead if the markets roll over and break last Friday's low. The market may claw its way into the inflection point of its 50/20 dma (day moving averages); at the same time another inflection point comes into play. Monday is the anniversary of the rollover and panic following the spike high in January 1980. A point of recognition seems around the corner, whether or not it coincides with a catalyst from Greece and Club Med, China tapping the brakes, or Iran.

Although off its highs, gold is one asset class that weathered the financial crisis relatively well. Despite the recent strong rally in the dollar -- with which there is typically,of late, an inverse correlation -- gold is holding up relatively well with GLD holding above a test of its December low. Despite the threat of another round of deflation, a double dip, and sovereign debt crises that could serve to pressure bullion as some countries might be forced to liquidate some gold holdings, the yellow metal continues to shine. A further deflationary threat may backstop a dollar rally and at first glance undermine gold, but it's not just a debased dollar that's a factor in a continuing bull market in gold, but the debasement of nearly all fiat currencies. A point of recognition seems to be approaching.

The Western central banks supplied massive quantities of gold to the market for at least the past 15 years. Initially this facilitated excessive producer hedging. Then it helped to fund a huge carry trade that greatly enriched their bullion bank cronies. Now it occurs in large part to protect existing huge short positions held by those same banks.

You might be inclined to ask why the central banks would do such a thing. The official explanation for the transparent portion of their activities (ie, direct sales) was to diversify their reserves. Essentially, why hold gold when you can own an interest-bearing piece of paper in its stead?

But that explanation is purely fatuous and a total smoke screen. The whole process, with the clandestine leasing and swapping of huge quantities of gold, was orchestrated by the United States. It was designed to reduce critical scrutiny of the central banks' increasingly reckless monetary policy, to allow interest rates to remain at unrealistically low levels and to maintain the US dollar's supremacy. That this undertaking would inevitably spawn serial financial bubbles, the very same bubbles that brought the world financial system to its knees, was conveniently ignored.

This was all foreshadowed by some remarkable comments by then-Federal Reverse Chairman Alan Greenspan at a Federal Open Market Committee meeting in the early 1990's, remarks that came to light only recently when a transcript of that meeting was scrutinized. Greenspan referred to gold as a "thermometer" and speculated that if the Treasury Department sold a little gold in the market and the price broke as a result, not only would the thermometer no longer be a measuring tool but the lower gold price could affect underlying psychology. Greenspan was unfortunately right in his perverse judgment and shortly thereafter the systematic dumping of gold by the Western central banks moved into high gear.

It really makes you love free markets, doesn't it?

-- John Embry, January 18, 2010


1. Government is a last resort, not a first resort to foster risk-taking.

By undermining the dollar, American policy makers may be losing the leverage to take action around the world. That makes for more uncertain and therefore more dangerous financial markets.

3. Free markets depend upon how you define the meaning of the word "free."


As the 10-minute S&P chart from last night's report shows, there may be a further push to 1090 with an undercut to 1088 as reflected by an hourly chart of the S&P, prior to a possible further upside retracement.

Trading Lessons:

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No positions in stocks mentioned.

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