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Born to Run on the Banks?

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JEFF COOPER'S MARKET OUTLOOK
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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 nightly day and swing trading picks, click here.

The highway’s jammed with broken heroes on a last chance power drive
Everybody’s out on the run tonight but there’s no place left to hide

-Born To Run (Bruce Springsteen)

Let’s make the assumption that the current Great Disconnect between Main Street and Wall Street doesn’t exist.

And, let’s make the further assumption that this rally is right as rain, that the current bull run is not the only manipulated bull we’ve ever seen.

Let’s assume that the disparity between ever rising prices and puny volume is perfectly normal and that robots being the vast majority of daily volume is synchronous with the capital formation role of a free market.

I believe we are on the verge of finding out whether the primary trend of stocks and the economy can be manipulated.

“On the verge” may be as long as until the 4th quarter, just before Bernanke’s term ends, but I doubt it will take that long.

As you know, my cycle work has been pointing to a major high in the first quarter.

As noted last week, the big question seems to be, if I am correct about being on the verge of An 80-Year Market Cliff, whether the market falls right out of bed or has an initial break followed by a return rally test of the highs.

In 2007, following a sharp break from a July primary high, there was a return rally test in October with a nominal new high.

Last week, we asked whether this was 1987 all over again and whether the Principle of Alternation would play out with the market falling directly out of bed from a high here in 2013.

In other words, if the 25-year cycle (300 months) is due to exert its downside influence here, will the market waterfall directly off a high or will there be a more graceful exit?

On the ½ harmonic of the 25-year cycle from 1987, the market top in March 2000 saw a decline and a return rally months later into September 2000.

If the Principle of Alternation plays out on the 25-year cycle, it is possible that the market melts down without the benefit of a return rally.


Click to enlarge

One of the factors that led me to offer at the end of August 2000 that “I believe the most speculative area of the market, the Nasdaq (INDEXNASDAQ:.IXIC), is in as vulnerable position as the DJIA (INDEXDJX:.DJI) in early September 1929” was the pattern and the anniversary of the return rally in 2000 tied to the all-time high on September 3, 1929.

I realize that short shrift is given to the idea of anniversary dates as having any bearing on market direction, but it is interesting that March is 180 degrees opposite September and that March 12 was the major higher low in 2003 and that March 24 was the Bubble top in 2000 and that March 6-9 was the low in 2009. So in addition to the 25 year cycle, there are a composite of anniversaries which could exert their influence here.

In my experience, when a market runs strongly and persistently into a series of anniversary/cycle turning points, then usually it turns hard in the opposite direction. The anniversaries/cycles often magnetize the market inextricably into a date with destiny.

In addition to the March anniversaries noted above, another example of the synchronicity of these anniversary dates is the October 10 bear market low in 2002 and the October 10 all-time S&P (INDEXSP:.INX) high in 2007, also harmonic with the major market low in 1974.

Last week's peak around the 10th anniversary of the 2003 low and the 4th anniversary of the 2009 low may be a low-to-low-to-high cycle square-out. Why? From the 11/21/2008 low around the world to March 17 is 1577 calendar days. 1576.10 was the all time S&P high in 2007.

In other words, we are at the number of days from the crash low in 2008 that ties to the price of the pre-crash high.

The theory of time and price methodology (or square-outs) is that as time proceeds, it “carries with it” numbers.

The low on March 12, 2003 was 789 S&P. Two times that is 1578. Sunday is 1577 days from the November 21, 2008 crash low.

This typically means a major change in trend is about to occur. Again the question is, if so, whether a primary high will see a secondary high near similar levels.

The news breaks with the cycles. If this morning’s breakaway gap following a little Island Top on the SPY (NYSEARCA:SPY) Friday sees follow-through this week, will we get a 5% or so correction with the bulls buying in with both hands near 1500 S&P (150 SPY) or do we get a 30% selloff right off the high (rally attempts notwithstanding)?



Remember that the bulls are all in, huffing and puffing to keep the market going into quarter-end. This morning’s price action is a T-Rex in the markup ointment, a wolf at the window dressing house of cards. One day the Dow hits record after record in an historic streak, the next it’s what, a record plummet?

As we offered in this space last week, long in the tooth creeping rallies usually end by erasing the last week if not the last two weeks of the rally. And, this rally had many market participants loading the boat for continuation into Friday’s option expiration and March quarter-end. A break below a mid-channel around 153.25 which coincides with the 20 dma could lead to a rush for the exits with institutions breaking rank like they did when the S&P/Nasdaq topped AHEAD of quarter-end in 2000 on March 24.

In my view, there has been a paradigm shift over the last few years that has taken the phase ‘price is the final arbiter’ to the next level. It seems that price has become not just the final arbiter, but judge, jury and hangman -- offense and defense: both sides and all sides wrapped up into a nice little Free Lunch Box of momentum tied up with a ribbon of Bernanke Put.

When the vast majority of market participants swing from one limb, one ruling reason: “don’t fight the Fed”, that limb is likely to break not bend. When an advance is precipitated on a one legged stool, one principle, that of price and momentum alone, then a tumble shouldn’t be a surprise when everyone follows price out.

Price is the final arbiter, but time is more important than price. When time is up, trend turns.

When the litany of “the trend is your friend” trumps all other considerations on the Street, you can be certain, that with standing room only on the Trend Train, it’s not going to let everybody off with a graceful exit before the possibility of it careening off the tracks.

Last week, we offered: Human nature is a funny thing. Nature is nice enough to give us some hints and some early warnings, but at certain stages of the cycle, people just refuse to listen to history. Momentum for momentum’s sake is an undeniable strategy: the trend may be your best friend, but Mr. Trend has no best friend and will plunge the knife in you as soon as you turn your back on him in complacency.

Complacency has occupied a precarious perch for weeks by virtue of the comments I hear in the mainstream media of late. Sentiment has been more bullish than at the 2007 top.

It was just Friday that I heard one commentator remark, “the European Crisis has been contained.”

The rally into March 2000 was the Y2K Short Squeeze. The rally into October 2007 was the Crisis Is Contained Short Squeeze. So is what we just saw the Fiscal Cliff Short Squeeze?

I can’t help but think that when the market and economy are not allowed to go through their normal corrective process, the rubber band snaps back with a vengeance.

Is it possible that the selloff from the 2007 highs was an ‘A’ wave decline and that the last 4 years carved out a ‘B’ wave rally? If so, the presumption is that a ‘C’ wave decline will likely take the S&P below 666 in coming years.

Parabolic advances have a proclivity to retrace their entire move. The parabolic advance that began in early January 1995 (running into March 2000) started at around 490 S&P. Is it possible the index will revisit that level if a ‘C’ wave decline plays out?

Conclusion. The dueling banjos of option expiration and rebalancing held the market up into weekend as a possible Trap Door opens to start the new week. Will today be an option expiration hangover to remember?

We must be cautious on any sell-off as they may not come back with a possible quarter-end window undressing. Remember, theoretically, the government shuts down after March 21.

While a move to 1584 would have perfected an ideal move of 6 full revs of 360 degrees up off the 666 low, we are at massive resistance and we do have a square-out with the 1577 number of days from the 2008 crash low which aligns with the all-time high hitting over the weekend. Since Price = Time, any big time and price and time square-out like this may indicate a bear market.

Following a major square-out like this, we look for technical evidence that a genuine turn has been made.

The world will look to buy dips above 1500 S&P. Below that and especially below the September peak at 1460-1474, a multi-month panic or a multi-year bear market probably plays out.

Strategy. Tune out the bulls' spin on TV going into quarter end. They must be fully invested and have to be long going into quarter-end. They depend on the market holding up into quarter-end to get paid.

The market could sell off 5-10% anytime without a reason. Now they have a reason, an excuse.

Given that the majority of Cypriot bank deposits are from wealthy Russians, is this weekends “bailout tax” on Cypriot bank deposits a one-off where the EU powers that be are simply ogling the Oligarchs money?

Germany vs. Russia? Putin’s pals are not happy puppies today. Are there geopolitical ramifications?

Are there greater implications with the credibility of banks everywhere getting a jaundiced eye?

Tramp-like central banker fiat-powered rallies are born to run. Run until they drop.

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POSITION:  No positions in stocks mentioned.

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