The consolidation pattern is looking none too good so far today. At some point this could play into our overall Macrocosmic plan as the Microcosm Expands incrementally. Of course those running the machines in the fantasy factory may start to concoct a ‘Fed’s not gonna hike!’ bull story at any point. But right now, this thing is going bearish.
Hello, I am the S&P 500 and I am here to annoy the hell out you whether you are a bull or a bear.
Just look at how perfectly this robot stopped at the SMA 200 on this morning’s little jittery squiggle.
Call it a Triangle (continuation, implication upward but nearly as often it seems, they go the other way) or a Diamond (often seen as a reversal pattern, but nearly as often seems to continue a trend).
What it actually is is a consolidation in preparation for something… which should arrive shortly.
 I have been short SPY straight out with no leverage for a few months now. So that is a hint about the direction I think it’s going and also about the limited conviction behind it until the consolidation breaks.
As I have mentioned, I have been hard at work on my book and am approaching completion of the raw manuscript. The title of the book is What’s Wrong with Money?: The Biggest Bubble of All – and How to Invest with it in Mind, and if you would like to be on the notification list to receive an email when the book is published, simply send an email to [email protected]. Even better, you can pre-order it already, even though it’s not due out until later this year or early next year.
Yesterday, I finished up the draft of the second section, which is the “where are we now” section (there are three sections in total, and I am part-way through the “investing” section). I really enjoyed writing the following section and I think the charts are fun. So I thought I would include a snippet of Chapter 9 here for you:
If a length of steel is flexed, it is impossible to know exactly when it will fail. We can, however, figure out when that critical point is approaching, and estimate the probabilities of structural failure for a given load. These are just probabilities, and of course such an estimate depends on our knowledge of the structural properties of the piece of steel.
Last Friday it was Hammer Time, Part 1 as the indexes Hammered to close the day, setting up Monday’s bounce. Then came the jawbone, the pump, the failure and now… (would-be) Hammer Time, Part 2. Isn’t this market fun?
However, NFTRH.com posted a chart this morning, while the market was near its lows, of a support level that is really key. The market was going to bounce at this level. It always does at points where you, I and the chart jockey down the street all see the same thing. So too do the algos, black boxes, casino gamblers, substance abusers and day traders.
Adding to the ‘had to bounce’ scenario is MarketWatch dutifully playing the role I had assigned to them last week and had a laugh about this morning.
Yes, everyone seems to be playing their proper roles and nothing is resolved.
 This is an opportune time to mention again that markets do not go down because China is in the news… or Greece was in the news… or Apple is in the news. Markets go down because they go down and they go up because they go up. News flashpoints (and Fed Jawbones) only serve to roil things for short periods. The market is on its own plan and will either break down for real or up for real soon enough.
See: 2007, when everyone was convinced of ‘Peak Oil’ and there were websites named ‘Peak Oil’, ‘Oil Drum’, etc. constantly reinforcing the mania.
I remember being away on business one day in 2007, with nothing better to do in my hotel room than watch the congressional debates about ‘peak oil’ and what to do about the evil speculators that were driving prices up. I enjoy watching a good mania as much as the next guy. I realized that what we were seeing was ‘Peak Hysteria’ with respect to this phenomenon. I thought, ‘Yup, Prechter’s right’.
See: This hilarious video someone made about those who promoted the pitch to the public. Some of these people have re-tooled their scripts for a deflationary world today and others keep fighting the good fight I guess, or are living in a hole somewhere. Joe Kernan actually did a great job with the mania’s star promoter. “I’m the expert you guys, not you…”–T Boone Pickens (ha ha ha).
Moving on, what do the charts below say about the stock market? The oil mania was a manifestation of inflation. Inflation is willfully deployed against what is a structural global deflation that is always in play and trying to exert pressure. The charts below show where the inflation went on this cycle.
Oh, it’s Biiwii… he’s a perma bear! Well maybe, I sure do not think the stock market is sustainable and I sure do think it is getting the same treatment as Oil circa 2007, Uranium 2007, Copper 2010, Silver 2011, etc. But I am more than willing to call it ready to bounce or even not yet ready to end its bull market, if only an interim correction ends up being the most probable view. But tuning out all that casino patron stuff, what does this big picture monthly chart say to you?
What does this chart say to you?
I keep hammering this chart in particular not because the Fed should do something or should not do something with respect to ending ZIRP. I hammer it because whether it was the Fed’s intention or not, a large and conspicuous distortion has manifested. Period. Here is what NFTRH 355 had to say about it…
“Pardon me if I hit you over the head too often with the following chart. But we have just wrapped up a couple of weeks that saw the Fed receive congratulations again for doing nothing (FOMC) and speak out of both sides of its mouth (Lockhart and Powell). We also saw another okay Payrolls report come and go.
Of course, with commodities crashed and inflation expectations well contained, must the Fed actually do anything? One might imagine that they also look at some representation of this chart and think ‘golly, that’s one hell of a distortion built into this market’.
I can’t think of many other reasons why a rate hike would even be on the table. They’ve seemingly got it all; a booming stock market, no inflation and no need for stern monetary policy. I believe that the Fed is as aware as we are that there is an imbalance of epic proportion out there somewhere. Will they try to repair the imbalance now, after 6 years?
The chart is the chart and while I cannot speak in details (since I don’t know them), I can see what historical imbalance looks like. Either the market’s laws have been repealed or something is going to seek equilibrium one day. If the former, well, how does it feel operating in a remotely guided market? Risky, if you ask me. If the latter, the risk in finding equilibrium is almost unfathomable. This is not meant as hyperbole, it is a chart.”
Back to real time. We have noted (as the chart above shows) that in normal times the stock market goes up as the Fed Funds rate is increased, until one day it breaks and the Fed steps on the gas (drops the Funds rate) in response. The market could follow the rate up again on this cycle, but the distortion has severed ties with the historical comp of the last 2 cycles and that is the concern. Oh and the Fed has not even tapped the break yet. The stock market is in uncharted waters.
NFTRH has been noting fading market participation for many weeks now as Bullish % continues to drop behind elevated prices in key US indexes. We have also been noting an ongoing bearish divergence by the the Equity Put/Call ratio for months now. Along with this new trend in the CPCE, came a flattening out of the S&P 500 on its road to nowhere. *
In NFTRH and publicly, we have been tracking the fade out of leadership indexes and also noting the fade in speculative urges as represented by junk bonds and junk bond ratios to bonds of relative quality (Treasury & Investment Grade). Here is the still bearish view.
SOX-SPX is still down below the channel. While the book-to-bill data have been firm (through June), the Semi index is starting to act like it would like to be in line with 2013 bullish running mate PALL-Gold, which is now bearish.
As for former leader RUT, it is just too erratic now (vs. SPX) to do much good as a short-term indicator.
With reference to the first chart above, here’s it’s pal PALL-Gold on its ‘economic down’ signal. Again, we recall that it was quite some time before PALL-Gold seemed to mean anything to the majority of participants when it triggered up early in 2013. So what about the recent signal? Should we not have the same kind of patience, in reverse, as back then?
After all, mainstream financial professionals were cashed up and braced against the ‘Fiscal Cliff’ disaster in Q4 2012 and did not begin to recognize a new market phase until well into 2013. I know this for a fact, since I interacted with one who spoke for the ‘best and brightest’ fund managers back then. We also know our friends at the MSM were in full bear mode back then.
Maybe PALL-Gold means nothing this time and maybe the Semi divergence is going to repair itself. Then again, maybe not, which is why I think patience is kind of a big thing now.
Don’t look now but the Dow Transports are working on a short-term trend change to the upside with a ‘W’ bottom and a pop above the declining MA 50’s.
Will TRAN have ended up leading the way to the mildest of market sags before bullish reversal? Well, not until it gets through the red resistance line and then the MA 200. If it does those things, it is going to get bullish and if Dow Theory means much (I still have my doubts) it would eventually spread out to the broad markets. First things first…