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1929, 1987, and 2013: Three of a Kind?

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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.

And as I sat there brooding on the old, unknown world, I thought of Gatsby’s wonder when he first picked out the green light at the end of Daisy’s dock. He had come a long way to this blue lawn, and his dream must have seemed so close that he could hardly fail to grasp it. He did not know that it was already behind him, somewhere back in that vast obscurity beyond the city, where the dark fields of the republic rolled on under the night.

Gatsby believed in the green light, the orgastic future that year by year recedes before us. It eluded us then, but that’s no matter---tomorrow we will run faster, stretch out our arms farther…And one fine morning -- So we beat on, boats against the current, borne back ceaselessly into the past."

-F. Scott Fitzgerald, The Great Gatsby

When coming events cast their shadows before, those shadows fall on the New York Stock Exchange.
-William Hamilton

Coming events usually, but not always, cast their shadow, as Mr. Hamilton says.

There are times where things can occur outside the understanding of the markets. But usually, the market reads the tea leaves of the Great  Spiritus Mondi and is more prescient than any one man or any group.

Therein lies the attraction of those who have sought to outwit and beat the market. It’s the grandest chess game of them all -- a 3-dimensional chess game, if you will.

Mr. Market has the best antennae, the best radar of any one person or any one group in sensing what is ahead of it.

While the best study of the markets is a study of the markets themselves, the markets are not foolproof predictors of coming events in the markets and in the economy. Not since 1913 anyway, when the free market system met The Cooler.

The market crash in 1929 may not have caused the Great Depression, but it predicted it.

Bernanke, the great student of the Great Depression, came on the job just before the crisis hit in 2007, almost as if the powers that be ‘knew’ what the agenda was and brought on the Great Mathemagician to “make sure the Fed would not make the same mistakes it made in the 1930’s”, as Bernanke himself put it years before the crisis.

Yep, this was our boy.

In 1987, following another boom and crash, there were more than a few folks around who noticed the similarities in the market to the pattern from 1929 -- some before the fact, some after -- who thought it might lead to another great economic contraction.

Enter the Maestro.

Then in 2008, we got a slow-motion train wreck. Enter the Bearded One. While the Fed clearly thought the issues that led to and exacerbated the crisis were contained as it was in front of their face, Bernanke wasn’t about to make the same mistakes as the Fed in 1929, right?

No, if the Fed was going to make mistakes this time, it was going to be a whole new deal.

So while the market  itself may be the best predictor of coming events, since 1987 and the big Greenspan Put and especially since 2009 and the really big Bernanke Put, what does the market know and when did it know it? Can we trust price?

Today, it seems that big money is investing virtually entirely on the premise and assumption that the Bernanke Put and the Fed will save the day as long as everybody plays along and stays in line. Don’t fight the Fed isn’t just a saying now; it’s become a neon maxim lighting up the sky as if in some psychedelic world of investing where Timothy Leary is Chairman of the Fed.

What is similar about 1929 and 2013 is that both periods saw some of the best and the brightest economists and investors embracing the Fed’s ability to manage the economy.

Is the strength in the market due to the economy actually improving or is it a result of ‘The Hand’, where those inside the loop have figured out how to game the system and arbitrage the market place, driving it higher and higher in a marathon of basket programs and futures laced with algorithms and HFTs to the point where no one can really figure out what the market is or what it is really seeing.

All you have to do is look at 2008 to see that derivatives and their assumptions can explode in unexpected ways.

All you have to do is look at the perfect relationships every day between heavyweight index names like Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) to see the manipulation. AAPL goes down, GOOG must go up to compensate, and vice versa. Throw a little IBM (NYSE:IBM) in for good measure in case a real buyer or seller comes to market.

The current ‘permanent plateau’ of frenzy is similar to the 1987 portfolio insurance insanity where the idea of risk was dwarfed against a belief in derivatives. 

But sometimes risk is just risk and cannot be hedged away.

Going into 1929, the belief in the Fed roared its golden roar in the market.

Ditto 1987, when Greenspan rode in on a white stallion when portfolio insurance blew up after the belief that risk could irrevocably be hedged peaked.

It’s almost as if that period in the Roaring ‘90s yearned to reenact the Roaring ‘20s with the belief that the omniscient, omnipotent Fed was managing the market and steering the economy to permanent prosperity.

It’s almost like 2013 is trying to repeat the past and roar again like it did in 1929 and 1987 and 1999: the current record stretch in the Dow Jones Industrial Average (INDEXDJX:.DJI) of no more than 3 days against the trend hasn’t been seen at least since 1900. Mr. Market is gripping the handle bars tighter than anyone around has been trading the market.

Strategy. In the real world, any reasonable hedge fund manager would trim their portfolio and raise some cash after a day like yesterday and take a stab at the downside.

However, despite Boo's protests, the futures are up Friday morning before the open.

A 30-minute SPY (NYSEARCA:SPY) chart shows a little double top with a close on short term support which ties to the 165 SPY strike for options expiration today.

Perhaps the rally in the futes is someone trying to protect the 165 strike.

If 165 breaks with authority today, it will trigger a little Rule of 4 sell signal.

With reversal signal bars in the likes of leaders like GOOG, Netflix (NASDAQ:NFLX) and the Biotech Index (NYSEARCA:IBB) (see charts after this passage), the bulls may be scared away short-term and the ETFs will have to do some selling or risk losing profits on any downside follow-through. There are lots of signs and sell signals all around. That said, the SPY has not broken the low of lateral support to confirm any change in the short-term trend. Short-term lateral support also ties to the 165 strike. An hourly SPY for the last 7 days shows a measured move to 163.50 on a break of 165 with key low lateral support at around 162.50. Remember our note about the significance of 1620 (162 SPY) in both TIME and price from yesterday’s report.

Today is options expiration and we may just go flat, but it could set up a big hangover for Monday.


Yesterday morning, we sent a Square of 9 showing the setup in GOOG:

Click to enlarge

In my experience, when a stock or index reacts immediately and solidly to a perfected square-out, it is talking.

The tape indicates yesterday’s late selling was a short stock basket where the player goes long the futes as a hedge. This is because the futes rallied up towards the high while most stocks remained heavy.

This way a hedgie can sell his portfolio and go short stocks, and when the market starts down, he can slam his futures hedge, causing further selling and marking up his short portfolio.

Conclusion. Big-picture cycles were due to exert their downside influence by the end of the first quarter of 2013. The S&P (INDEXSP:.INX) went flat most of March, broke out in early April and triggered a Boomerang sell signal when it knifed back down through the breakout line with authority. Failed signals/patterns lead to fast moves. That’s what happened when the 4/11 peak of 1597 S&P was offset on 5/3. The market went into a vertical, runaway phase.

The current runaway phase over 1600 has been 64 points (8 squared points) in 9 days, testing potentially key exhaustion levels between 1656 (straight down and opposite the old prior top of 1576 from 2007) and 1666 straight down and opposite the 666 low from March 2009.

If yesterday’s stock basket seller was a small player or walks away today, they could still rally for the important Friday weekly close, but  there are several sell signals in key names from vertical moves and a break below 1650 should see some acceleration.

Editor's Note: This report 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.
POSITION:  No positions in stocks mentioned.