Pickles, And How Risk-On Might End

[Note: Hi everyone, Papa_Boule here. AlbertaRocks has graciously extended an invitation to me to post articles here occasionally. I take that as a great compliment, so thanks AR, from the bottom of my heart. AR even suggested that I simply repost my comment from a couple of days ago as my first article -- with a few edits for clarity of course. So here it is:]

AlbertaRocks and GregInBaltimore posed a couple of questions in comments a few days ago. AlbertaRocks mused:

"What a pickle. I wonder if it's realistic to consider that the Fed [in its ongoing easing operations] is actually, and fatally, trapped?"

It is a great question. There can't be a resolution to the current economic problems without reform, and there's no political will to reform. And the Fed can't continue what it is doing without consequences, and can't stop without consequences. "Pickle" is right.

And GregInBaltimore's question that started the little discussion was great too: "How will risk-on end?"

The conventional way bull markets end is on the highest of high notes. That's why no amount of technical analysis or Elliott Wave theory can pick a top. Bears give up, even shut down their blogs, everyone's bullish. The benchmarks point to more up side, and a lot of it. There's often a blow-off move and the news and outlooks are great. Exuberance abounds. And every major top over the last few years has come with an "unfinished" Elliott Wave count -- an expected next move up that never comes.

But this isn't a conventional bull market. I often wonder where the markets would be without intervention. This is what blows holes in the theory that the market is an accurate reflection of social mood. The reason they are intervening in the first place is to prevent the markets from organically moving downward with social mood, and to levitate them upward in opposition to it. Because of the incomprehensible amount of money they were loaned (interest free) to play with, they have succeeded. The investing going on isn't "organic." And retail investing -- where you would think most of the actual social mood is -- is still largely on the sidelines.

Algos bid the market up on every bit of good news (or bad news spun positively) in the expectation or hope that retail will respond to the news (and the upward ticker move itself) and come back into the market. But retail stays on the sidelines, and most all the action is just algos bidding the market up against each other using the free money.

It's an unsustainable game for several reasons. One of which is the one-sided inflation it causes: prices of goods/commodities rise while wages do not, so the cost of living goes up, and the standard of living and percent of disposable income for the middle and lower classes go down. Less spending means even more negative pressure on the economy.

Another reason it is unsustainable is: What is the second part of the plan once retail re-enters the market -- if it ever does? What then? Do all the big boys sell to retail and get out? That's not good, because that just means crash. Or do they then magically find the will to reverse NAFTA and restore Glass-Steagall and start real reform and break up TBTF banks? Is there an actual plan to end outsourcing and bring jobs and manufacturing back? Is wealth going to be "un-concentrated" now that it has been concentrated? Is there any will to do any of this?

Of course none of this is going to happen, not the way things are. And a lot of people sense there's no sunshiny outcome at the end of this.

So this one could end on some sort of "bad" news -- something forced by the consequences of intervention, perhaps -- that pops the illusion or shakes the confidence and brings more reality into awareness.

So, what exactly? My gut says some new scandal or financial crisis in some sector becomes the Black Swan event. But it may be more mundane. As GregInBaltimore suggests in his comment, maybe just rising interest rates will trigger it. He may be onto something there. 

Looking at the last two major peaks (the dot com and housing bubbles) as analogs may be really appropriate since this is the third of what looks like a triple top. So it may be a fractal in several different ways.

The dot com bubble ended fairly quietly without a discrete event, but with several interest rate hikes and with a court case finding that Microsoft was a monopoly.

The housing bubble was more of a case of playing itself out, prices overextending and collapsing, foreclosures increasing, culminating with the mortgage/financial crisis.

Here's an interesting possibility: It may be that these three bubbles are more than just a fractal. They may be directly related. The housing bubble may have been a lagging offshoot of the dot com bubble (when exuberance from the first led to an exuberant housing market). The housing bubble is credited with avoiding a full blown recession after the dot com bubble. Then the current QE bubble is a direct offshoot of those -- an aggressive intervention peak, to avoid a full blown recession after the housing bubble. So three peaks makes sense -- one led to the other and to the other.

And since the QE peak is not "natural," but an intervention peak, it makes sense that there won't be a fourth peak, but instead a big overdue correction. One that could start on a tiny little event, like an interest rate increase, as GregInBaltimore suggests.

I'm going to repost that simple, elegant, and eloquent chart by The Green Prince that AlbertaRocks posted, because it deserves a second look -- and even a third one. The S&P100 peaks and bottoms average about half the value levels of the S&P500. So, extending the channel to the right a bit, a slide to the bottom of the channel would take the S&P100 down to about 275. That would be under 600 for the S&P500, or even lower if the channel doesn't hold, which I think is a strong possibility -- even a likelihood, if the dominos start tumbling with this next burst bubble.

And remember, as Aunt_Pittypat says, if things get ugly, don't get ugly too. Make up your mind to stay pretty.

Click the chart for a nice full blown view

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"Aaand... it's gone"

Simple And Elegant

Here's a simple but elegant chart submitted to Springhill Jack's great blog by a participant named The Green Prince.  This monthly chart of the $OEX (S&P 100) struck me as being so clear, so definitive that I thought I'd present it here and use it as an excuse to put up another post.

Full credit and thanks to The Green Prince for submitting this chart (in the form of a link) to our good friend Springhill Jack.

For the best view click on the chart

Secrets Of $NYUD

There are often times when patterns on charts just get so confusing that even when we make a plea to the more common indicators for guidance, we find that they too offer little in the way of direction.  And then we have cute little incidents like the mini-flash crash in the ES futures that occurred on Thursday, Dec. 20th which took all of 2 seconds to cause the circuit breakers to trip and put a halt to trading due to a "limit down" event.  And of course all that excitement prompted Zero Hedge to quickly publish one of their patented bullhorn specials explaining How 10,000 Contracts Crashed The Market.  It didn't help much that at the time of this mini-crash event the clocks in Asia had already ticked over to the dreaded Mayan "time to pay the piper" date.  Surely the crooks who run the world were having the laugh of their lives at the sheer 'coincidence' of it all?

But then something funny happened on the way to the Forum.  Or should I say "didn't happen".  The markets opened on Friday morning with the majority of investors all around the globe expecting a minimum of 30 down points on the S&P 500 and the evaporation of 300 Dow points.  I even had visions of such a bloodbath myself.  Silly me.  Because what happened next was... well... nothin' basically.  Apparently somebody came to the rescue and all was well on Wall Street.  We survived the week and the world didn't end.

But let's take a closer look at what "really" happened all day long on Friday.  We begin by first taking a quick look at the mini-crash itself as seen on a 'still photograph' of the futures at the time of the crash as displayed at ForexPros.  [Helpful hint #224: click on any of the Indices you see in the Index column.  Once it opens, select the link to "interactive chart".  From there you can create the time frame of your choice on any of them.]

Ok, to begin our little investigation and analysis on just what exactly transpired during on Friday's apparently lackluster trading day, let's back up a bit and see what that mini-crash looked like:

Click on image for a larger version

Obviously as the clock ticked down toward the open of trading on Friday morning, it seemed apparent that all hell was about to break loose on Wall Street.  But surprise surprise, that's not what happened.  In order to provide a snapshot of the trading activity that occurred during Friday's session at the NYSE, and in order to relate it to the chart above, we take a look at a 5 minute chart of the S&P 500 in approximately the same time frame:

Click here for a larger version

As you can see, after the initial gigantic burst of volume during the first 60 seconds of trading things settled down very quickly.  Stick save in action.  Notice that volume dried up almost instantly as the market commenced to churn sideways for the remainder of the day.  Even the silly Russell 2 million put on a very brave burst in the closing minutes of trading... something I'm always more than ready to mistrust in light of the fact that the Russell is one of the favorite playthings of the venerable JPM theft machine.  In the chart below we see how the mighty Russell finished the day [please note that in order to provide you with intra-day volume data, in this case an extremely important metric, I have to use IWM as a proxy]:

[Please also note that on the charts below, clicking the charts themselves will enlarge them.  Clicking on the link below the charts will take you to real time data.  In a few days the following charts will be far enough into the past that they will basically no longer be useful.  But by clicking on the charts themselves, the image will be retained]

Click here for a larger version

Here's where this particular little study, one using about as small and sharp a focus as I ever employ, gets very interesting.  Note that as was the case with the $SPX, there was of course a huge spike in trading volume in IWM at the opening bell.  And as was also the case in the S&P, after the initial opening shock, volume dried up as the session evolved into one of those typically aggravating days of sideways chop.  But  what we were actually witnessing (in my humble opinion) was one of the largest offloading sessions by the big banks that we've seen in many moons.  Call me skeptical, but in light of the information you're about to see in charts below, as it was happening in real time I was not the slightest bit impressed with the volume spike seen in the chart above for IWM.  It is afterall one of the tools that JPM does in fact use in their daily arsenal to create smoke screens.  In fact, barring some sort of super impressive explosion higher in today's session, the last one before Santa arrives to use your toilet without permission, I believe the data shown in the charts below is a precursor to more downside action.

For those not familiar with $NYUD, it is a method of keeping track of volume by subtracting down volume from up volume.  The net result is a print that is either above the zero line (more up volume than down volume) or below the zero line (more down volume than up volume).  I keep this chart open every minute of every trading day but only have to refer to it a half dozen times throughout the session.  The reason is this: $NYUD has a proven track record of being extremely honest.  In the first 60-90 minutes of the trading day, the vast majority of days it sets the tone for what volume is going to do for the remainder of the session.  Once $NYUD has established its general trend in the first hour or so, it is extremely reluctant to change course.   Secondly, once the path has been established for the day, almost without fail there will be a huge volume burst in the final few minutes of trading which 'finalizes' that trend for the day.  Thirdly, and most importantly, on the rare occasions when we see the price action close in the opposite direction as $NYUD suggests price 'should have gone', it is $NYUD that speaks the truth.  The following day price will be proven to have been the liar and the vast majority of the time price will pay dearly for its sins.  Of course no indicator and no analysis is foolproof, but I've seen enough evidence of these phenomena that I have little choice but to go with the odds... they suggest Friday's action was a well crafted smoke screen.

We begin by looking at a 'typical' picture of what $NYUD would normally look like.  In the chart below the white line represents the entire NYSE ($NYA):

Click here for a larger version

Ok, here's where we get to the nuts and bolts of this analysis that I felt compelled to share with you today.  In the chart below we note that on Friday past, we saw the largest divergence in a long, long time between $NYUD and the price action in the indices, particularly that pesky IWM.  I almost think that I don't even need to explain the chart below any further, except for one small detail... I forgot to draw a couple of lines highlighting the divergence I refer to.  Nonetheless, you can still see that amazing occurrence in the image below:

Click here for a larger version

And finally to put Friday's divergence event into proper perspective, we take a look at how huge the down volume actually was when compared to what has occurred in recent months.  It's quite clear that this was an event that was very rare indeed.  I've broadened the time frame to 3 months+ in order to provide a snapshot of exactly how enormous the disparity was between down volume and up volume, not to mention that all of it was in direct divergence with price action.  One of them was lying:

Click here for a larger version

One important aspect to note is that each bar in the chart above covers 2 hours.  There is no overlap in those last 4 candles which provides further hints suggesting that it was an 'impulsive' event of massive down volume.

And finally, although we have seen days in the past with much more down volume, it is very rare that the market can make its way through the day by heading higher as it did on Friday.  Here's a picture of Friday's action as seen in a daily chart covering a year and a half:

Click here for a larger version

In conclusion, let me be the first to admit that I'm the king of the crow-eaters.  My younger brother and I used to kibitz each other (God rest his soul) about which of the two of us was more likely to end up with egg on our face any time we made some sort of claim that seemed even the slightest bit outlandish.  But whether the market bursts higher today and tries to make a liar out of me or not... I'm sticking to my guns on this one.  It's entirely possible that with what will most likely be a very small volume day today, the market could indeed burst higher.  But if volume does indeed end up being minuscule, I'll discount it.

In any case, this particular analysis is very valuable most of the time... and is something so worthwhile knowing that I'm more than happy to share it with my readers and followers.  In other words, on this particular occasion I'm willing to take one for the team.

And this time I can say with confidence that this IS the last piece I'll publish before Santa gets here.  So on that note I'd like to wish each and every one of you a most wonderful and happy Christmas.

Click here for your Christmas gift courtesy of Albertarocks

The Fiscal Cliff - A Beautiful Thing

Earlier today on Pretzel Logic's great site, a commenter posted a couple of charts for silver.  They give the impression that silver probably wants to fall further.  And judging by the weekly chart for silver it becomes apparent that it has basically been range-bound for about 15 months now, fluctuating roughly between $26 and $36.  True, that's a big range... one that has even been tradeable for those who don't mind a sideways market where moving averages become problematic and momentum indicators take over as the keys to finding entry and exit points.  But the point I'm driving at is that it appears silver will most likely be heading lower over the next couple of months at least.  Same story with gold.  It's even difficult to know which of those two would decline the most in percentage terms because the gold:silver ratio itself is also headed more or less due east.  But a closer look gives the hint that for a short while at least it will most likely be gold that outperforms silver.  A few weeks down the road though their rolls could reverse.  However, while all this is happening I think both metals will be falling.  Silver continues to under-perform for another 2 weeks or so, then gold takes over and begins to fall harder than silver, catching up.  Even if these views don't pan out exactly right, there's a much more important theme that I'm heading towards here.  On a side note, if you'd like to see an example of how 'great' analysis of Elliott Wave Theory should be presented take a look at the most recent installment by Jason Haver at Pretzel Logic's.  Amazing work.

Weekly chart of the Gold:Silver ratio.  Click here for a larger live and updating version.

If that brief analysis is correct, it would imply that the dollar should start to climb.  What in heck could cause that to happen?  The fiscal cliff, that's what.  I think the crackheads in congress are going to allow the budget to go over the cliff but I highly doubt that is going to be nearly as bad a thing as everybody seems to fear.  When was the last time your household suffered as a result of you tightening your spending belt?  In the short term, yes it causes some discomfort and probably a few weeks without your $7 Starbucks coffee and your favorite expensive ice cream before bed every night.  You'll eat ice cubes instead and pretend they're ice cream.  And somehow you'll survive.  Six months later you find out that by golly you've got one of those nagging debts already paid off.  A great start.

I think that's what's in store for the USA... the budget goes over the cliff.  Equities get slammed and probably hard and fast.  The dollar soars due to increased confidence overseas that maybe there is some fiscal sanity left in the USA after all.  So even though the mighty Thorin Bernankenbeard is going to print trillions more dollars, he's going to need them in order to continue buying up bonds... bonds that are likely to become even more expensive thanks to the fact that the entire global population will have earned a new respect for bonds as a proxy for slightly more fiscally responsible dollars.  If we go over the cliff, the following trades could pay off handsomely; long TLT, short gold and silver, especially silver, long the dollar and short equities.

The alternative to going over the cliff

That scenario does not represent anything even remotely resembling the end of the world for the USA.  It will at first but that would be a misguided view.  In the long haul it would be magnificent if the stupid bastar bastages in congress pull off the surprise of the decade and just let 'er roll over into the abyss... just like the party-boy who fell out the bedroom window of his girlfriend's apartment on the 34th floor, screaming like a 6 year old girl all the way down... and survived.  He survived because he only fell 3 feet onto the nice balcony just below her window sill.  He stood up, realized that he was still alive and had an instantly renewed appreciation for the beautiful view of the great city sprawled before him.  Then he barfed over the balcony.  But that was only because the bugger was pissed to the eyeballs... a totally irrelevant factor.  Why else did you think party-boy fell out the window?  But that's all that would happen I think... America falls out the fiscal window and crashes 3 feet below on a nice lawn.  There's hope after all.  Equities would get slammed but the country wouldn't.  The economy certainly wouldn't start to improve immediately, but over the long haul without a doubt it would end up far better off as compared to what it will look like if nothing at all is done to curb the annual deficits and the overall debt.

To me the views expressed above make the most sense "as long as we go over the cliff", which is what I think is going to happen. If that's what happens, then this article by Bill Patalon, executive editor of Monday Morning would go a long way toward explaining 'why' I could be right about all this.  I admit that I couldn't possibly quote the actual numbers like Mr. Patalon did so I wouldn't have been able to explain in defined terms why I hold the views I do... only in general logical terms such as "it makes sense that your household debt will become more manageable if you stop spending like a drunken sailor".

So don't fear the cliff my friends... embrace it.  Rejoice and short the hell out of equities for a while.   Not yet though, we have to wait until some time closer to the announcement that a deal has not been reached, that it's too late and that we're going over the cliff.  I'd fully expect equities to keep soaring almost until the last moment, based on hype, lies and spin stating that the likely outcome will be "Yay, we've all been saved!  Yay, we're not going over the cliff, we're going to go hopelessly further into debt.  Yay!  We're all saved!  Santa has arrived.  See, stocks are soaring.  Everything is great because we're stupid!  Yay!"  Horsepuckies... the cliff would be the best thing to happen to America in two decades.  But not for equities, at least not at first.

Merry Christmas from Alberta, Canada to friends of this blog from all over the world.

In case I don't publish anything else between now and Christmas, let me take this opportunity to wish each and every one of you the most beautiful Christmas you've ever experienced.

It's Official - Today's Fed Statement Signals " QE FOREVER"

Well the Fed did it again today... extended quantitative gorging-on-fiat indefinitely.  By adding a new component today to their strategy (a new justification) Bernanke, in the most conniving and sneaky fashion,  gave himself the green light to justify more debt monetization until hell freezes over.  Because that's how long it's going to take for the unemployment rate in the United States of America to drop below 6.5%.  

It's simply amazing to watch the charade continue that seems like it's right out of the Twilight Zone.  Prior to the addition of today's new qualifier, all the Fed had to do was to simply continue to lie about the rate of inflation in order to justify money printing on an ever-increasing scale.  But in light of the fact that to continue to hide the current horrid rate of inflation in the areas that hurt us the most (like soaring food prices) is becoming more and more difficult, nearly impossible, a new metric had to be introduced.  By making it official that future decisions by the board of governors will now be tied not only to the rate of inflation but to the rate of unemployment, a major step has been taken in which the Fed has paved the way for justification for future insanity on their part.  And of course in the insidious modus operandi typical of psychopaths who patiently work toward their goal of ruling the entire world, gradually over time the peg-to-inflation aspect will quietly drift off to the land of the forgotten.  In the months and years ahead the 'inflation' aspect will be spoken about less and less often and will instead be replaced with ever-increasing focus on the employment rate as being the key determinator.  In essence today's statement opens the door for the Fed to supply the drugs to a hopelessly addicted government for perhaps the next 20 years.  This is probably as good time as any to ask Chairman Bernanza exactly what it is that he's been smokin' because the country and the currency won't last another five years at this pace let alone twenty plus.  Surely Bernanke knows this?  Let me answer that question for you.  Yes, he does.

Today's Fed statement read, "In particular, the Committee decided to keep the target range for the federal funds rate at zero to one-quarter % and currently anticipated that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6 and a half percent, inflation between one and two years ahead is projected to be no more than a half percentage points above the Committee's 2% longer-run goal, and longer-term inflation expectations continue to be well anchored.  The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy."

Up until now the target date for the end of the policy of supplying more and more green powder for congress to blow up their noses was "sometime in 2015".  With today's statement the Fed has extended that date essentially to eternity because let's face it, as long as the once-monumental manufacturing sector of the formerly-great USA continues to leave America for foreign shores, the unemployment rate is never going to drop below 6.5%.  NEVER.  It's going to balloon to 20% and higher.  Eventually the rate of unemployment, which is already grossly under-reported, will also become nearly impossible to hide any further.  I expect that sometime after 2016, with bodies piling up in the streets, the ability to hide the rate of unemployment no longer be manageable and will have to be be replaced with a new and fresher "qualifier" that would justify even more QE.  I'm guessing it will be something along the lines of "once the economy has improved to the point where the annual suicide rate drops below 65 per thousand we would feel quite confident that we may be able to sell a few bonds back into the system".

We have to recognize the reality here friends.  The global central banking cartel are going to print forever.  Let there be absolutely no misunderstanding about that.  Because the only alternative is literally to allow the greatest bond market crash in human history to occur.  That would destroy not only the entire global economic network but the bankers themselves.  Which more or less makes their long term itinerary a crystal clear no-brainer, does it not?

Until next time...