Weekend August 4 2012
The politically salient jobless rate ticked up to 8.3% from 8.2%
Markets welcomed the news sending the DJIA to its third largest percentage gain of the year.
Investors on Friday bought Spanish and Italian bonds, which they had sold heavily on Thursday amid renewed fears about Europe. They sold German government bonds and US Treasury bonds, considered safe havens, to which they had fled on Thursday. (emphasis added)
Front Page WSJ Weekend Edition
The media is forever trying to link the news with public sentiment, the news did this, the public did that. But they might, the above quote really makes not fundamental sense, there is no logical linkage. Did the situation in Europe improve overnight? No. But this is precisely what we have been saying was about to happen. We have noted
-the change in sentiment Wednesday July 25, 2012.
-after the SPX bounced off support four times since the June 1 low the chance for a break out to the upside were better and better, and so
it happened Friday.
what happened - a literal overnight change in social mood. As the WSJ noted those same investors did the opposite on Friday of what they had done Thursday. As we say, social mood is created endogenously rather than originating from outside forces. Here is the perfect example.
We made an analogy to an hourglass. We noted that the sand had completely run to Treasury Bonds as TLT hit 132, completing a five wave pattern. The reversal wa swift and sudden when it arrived.
And to the markets turn on mood rather than news. If they turned on news, we would all have awoken to this sort of story Friday. This is my own hypothetical creation, it has not happened, yet.
The latest brokerage firm meltdown was simply too much for investors to endure. The announcement of a computer glitch causing a $500+ M loss at Knight Capital Group KCG coming on the heels of MF Global and Peregrine failures simply stampeded the herd. rumors of another Bear Stearns, Lehman, Merrill meltdown as in 2008 made the rounds for numerous market makers.
The inability of Europe to find its financial footing, the threat of an Israel attack on Iran, the continued decline of the Shanghai Index, and the fiscal cliff that Congress cannot seem ot face all created a perfect storm of panicked selling.
An imbalance of orders delayed the opening for many stocks by fifteen minutes Friday Morning. When the markets were finally able to open the Dow dropped 300 points in the first hour of trading Investors were running for the lifeboats of cash fearful of yet another brokerage burnout which would mean the inability to access their funds. Facebook FB which had already lost half its value since its touted IPO dropped another 25% to 14.37 on its opening. By the day's end.....
But that was not the story, though all those elements were present, and have been Indeed, has anything changed in Europe? No but as we said the Euro finished five waves down and the bonds and Dollar five waves up and so it was time for a mood change. And so for now the markets ignore the obvious that the regulators are not doing their job, speaking as a college accounting professor, brokerage firms clearly do not have adequate internal controls in place,etc. Expect that once the markets top out and the decline gets underway, we will likely see a news story much like my hypothetical above.
Bullish Percentage 150 MA
A couple of years back I took a class at the Southwest School of Art. It was titled something like Seeing Design. The instructor would exhibit a painting or photograph and ask, What do you See? Tell me what you see in the above chart. Can you reach a conclusion about its cycles or periodicity. I think I can. Once the indicator reaches and extreme high or low it always re traces to the opposite extreme. This is emblematic of a period of economic uncertainty.
My point is that since the highest probability is that the pattern will continue, we should expect a return to the previous high with 90% of the SPX stocks rising above their 150 day MA. The indicator is only at 60 so there is potentially plenty of rally left.
This is an update of the same SPX hourly graph. Note that SPX did not come all the way down to the lower trendling etched out by the blue arrows. Ratehr it stopped half way in the channel and rebounded. That is social mood in action. Again we told you the liklihood was improving that would happen, and it did.
TLT A Prediction, Conservative Inestors Should Skip This Section Rather than E Mailing Me That Only A One Should Never buy an Option
Here is our predicted path for TLT. I have traced out a five wave pattern using alternation of Wave 2 and 4. I assumed Wave 3 would be 1.618 times Wave One and that Wave Five would equal Wave One. The movement of money out of bond funds like TLT will power the SPX and out of favor commodity shares to new highs. Remember that markets collapse seven times as fast as they advance.
More Irrational Ratios
Pan American Sivler versus SOX Semi-Conductor Index
I accidentally hit the O instead of the P and guess what, silver is even more out of favor than it was at the 2008 bottom versus the Semi Conductor SOX index. Here is a great example of the sand running out of the hourglass. Hard to see but the ratio ticked up 2.56% this week. Computer repair shops will sometimes decorate their walls with out of date motherboards which of course are festooned with semi-conductor chips. Yesterday's upgrade becomes today's art object. I have never seen a shop decorate with out of fashion silver bullion however. I used PAAS as a proxy for the silver market as silver funds have only recently been created again.
Meredith Whitney Redux - California is Greece
For new readers, Meredith Whitney predicted widespread defaults in municipal bonds. This caused a drop in the municipal market at the time and a chorus of, yes politicos, claiming she was wrong The municipal market recovered. My take was that Meredith should have broadened her definition to include defaults to employees, bond holders or citizens or some of all of them, as that will almost certainly happen. Take a gander at
Coming to a State Near You, the lead editorial on page A14 in the Weekend WSJ. They note the Ravitch Volcker report has not gotten the attention it deserves. To wit, state and local government now spend $32.5 trillion and it is rising. The usual suspects of CA, IL, NJ, and NY are selling projected tax revenues. As they conclude the fiscal mayhem has only begun. Again as we have noted, in 1976 it was just New York City, now entire states are at risk as well as their cities.
But as we say, social mood has put all these problems on hold, just as it has for failed brokerages.
New Civil War
This writer wonders if the Chik Fil A protests have gone to far. Actually it's just getting started. We have written extensively about the North South divide in the country. We have noted that the maps of the
Civil War North and South states
National Right to Work Laws
Red versus Blue States
all look the same. It was mayors in Chicago and Boston, as well as of course San Francisco that excoriated Chik Fil A. Please appreciate that Mike Huckabee's Wednesday Appreciation for Chik is happening while the social mood has turned positive. it will not likely be this calm at lower stock prices. Once again this demonstrates that there is a huge difference in viewpoints of the Union Shop States and the Right to Work states, the latter getting the new manufacturing plants in America.
Letters to the Editor of the WSJ
A week ago in this space I commented that Peggy Noonan had the causality backwards regarding the popularity of The Dark Knight. My letter to that effect was printed in the Weekend WSJ on page A 14 this weekend.
We expect money to flow out of Safe Harbor investments of bond funds and into stocks, gold, and oil. There is still considerable doubt in the investment community that this will happen. But the charts above make it clear this move is underway. The markets can only really decline after the public is back in the market just as in the Fall of 2007 or the early Summer of 2011. We expect this rally to extend past Labor Day. August is seasonally up and this should be a spectacular August.
Thanks for reading The Market Perspective
The Market Perspective bases its information on techniques and sources that have been found to be reliable in the past, and The Market Perspective tries to base opinions on sound judgment and research, however, we do not guarantee that future results will match past performance ands no guarantee can be made that advice will be profitable. The Market Perspective accepts no money for stock recommendations and is purely motivated by its own research in recommending any stocks. Put another way, the responsibility for decisions made from information contained in this letter lies solely with the individuals making those decisions. The editor and persons affiliated with The Market Perspective may at times have positions in securities mentioned. Nothing contained herein represents an offer to buy or sell securities. The Market Perspective encourages investors to be diversified, and to maintain sell stops and risk control over their valuable investment capital. No guarantee can be made to the accuracy of text or charts.