The FED Throws a $40 B Party, Every Month

Weekend Sept 15 2012

 Oil prices climbed toa four month high and topped  $100 a barrel in the wake of the FED plan...

the FED announced it would keep buying mortgages until the job market improves. The measure was seen as an unusually strong commitment by the central bank whose previous bond buying initiatives came with a specific end date. 

The market is wickedly strong and a lot of that has to do with events going on overseas said Tony Rosado, broker at Dorado Energy Services in New York. 

Crude Oil climbs to a 4 Month High, page B4 Weekend WSJ

Does anyone have a clue as to why employers would want to hire people just because the FED is literally printing (if you and I did this it is called counterfeiting) money to buy bonds flooding the markets with cheap easy to borrow money.?  The answer is no, it is the classic government knee jerk response, 

we have to do something. 

This picture says it all, The Guru of Good Times 

Just for perspective, $40 Billion is about the Gross

Domestic Product for the entire country of

Paraguay.  Who's the real Party Animal Guru of Good Times here?  See Heard on the Street, page B 16. 

 

 

 

 

Overview

Today we review the risk stock market versus the  risk off bond and dollar markets. A lot of progress towards   has been made since Sept 1 in getting to our expected high for stocks, oil, gold. Bonds have begun the same waterfall decline seen in the last two QE moves. As noted above, this QE III  however has no end date. All of this is laying the groundwork for what will eventually be a return to 1970s type inflation but that will have to wait until the deflation in speculative markets, like Chinese real estate, is exhausted. 

We are long commodity plays listed previously and short TLT via put options. 

 To kick off the weekend, we  chart how stocks have come a long way in a short time. We then examine internal indicators which surprised us in just how far and how fast they have approached prevsious highs. 

 

SPX

SPX has rallied about 180 points off its June 1 low. And it is quite ahead of all four MAs. Notice the red bars during most of Friday's trading as the market sold off a bit. Note this is a two hour chart.  In the lower panel MACD is toppy, again.  All of which is to say the market is probably a bit ahead of itself here. Mondays have been the weakest day of the week for stock trading. After the long awaited announcement Thursday stocks look ready to fall back a bit. 

SPX Bollinger Bands

An alert reader pointed out that the market had not exceeded its Bollinger Bands since 2010! One can readily see the market tested the mid point of the bands several times on the way up. Recall that Mondays have been the down day of the week. So it seems reasonable that stocks may well pull back in the early part of the week. Okay I said that twice, just didn't want you to miss that we said it....

 

TLT The Bond Market

As we have said, the money to  power stocks higher will come from the Bond Market. It too blew through its Bollinger Band but the other way, to the downside. Wave One was 11 points from 132 to 121. A reasonable expectation for Wave Three would be 1.618 x 11 = 18 points rounded. From 128 that spots 110 as a target. And one needs to keep  a target in mind when playing with uber volatile options as I am for the time being. Option expiration is next Friday so that might well be a good target date for our third wave down in TLT. Given the collapse in bond prices on the previous two QEs, there is reason to suspect further weakness here. Third waves are the most powerful. Funds will want to show stock positions by the quarter end which is this month, not losing bond positions. So yes this is overdone, nine days in a row down but the bond market has a habit of not looking back once it starts down. 

TLT Weekly - A Longer  Perspective

The weekly chart puts the Falling Knife nature of this collapse in perspective. We put the SPX stock in dex at top. TLT really had no business going to 132 as stocks were already rising, but that's irrational social mood for you! The 1.618 generated target of 110 has some basis here, note that was the last time TLT touched its 200 week MA. 114 might offer some support but best guess would be to simply target the 110-114 area. I will start taking profits I think in that zone for the put positions. This won't be over until TLT finishes five waves down. I am of the opinion that Elliott Waves really only work well when the mood is very strong, and with everyone and his brother in bonds, and now throwing sell stop orders at the market to get out, yes the mood is strong. 

But the financial sand has to run out of the hourglass. Money is running from bonds to stocks and TLT is just now breaking through its 200 day MA. 

The Dollar versus the Euro

The Euro is racing towards its previous 134 high in February.  The Euro is the solid line with its price on the left vertical axis.  The Dollar is falling to its March lows under 78.5. We are not there yet. This is yet another indicator chart that we will use to judge that odds no longer favor staying at this party. 

Internal Indicators

How Overbought is It -Think  Ed McMahon to Johnny Carson - New Highs New Lows Weekly

I added the pink lines to show the parallel to what happened since last October to the rally off the March 9 2009 lows. This is the first time since then this indicator exceeded 3,000. I looked at all 30 some internal indicators I track and many are much further along since September 1. This is in keeping with the exit out of an extremely crowded trade in bonds  to a 'nobody wants to play empty field' in stocks, oil, gold. 

NYSE Advance Decline Volume

I was rather taken back by just how far various indicators have moved up!  Note this one topped out in a period of two weeks. 

Crude Oil Joins the Party

This weekly chart of oil prices clearly shows the pop up with the heightened tensions in the Mid East as our embassies are attacked and one Ambassador is killed. The last murder before this incident was our ambassador to Pakistan in 1979. And then the Iranians took the entire US Embassy hostage in Iran. We are about as far along in this 18 year period of stagnation as we were by 1979 in that one and the social mood parallel could not be closer.

Note the time line similarity. 

The last era of stagnation was 1966-1982/84. The hostage taking happened in 1978, 12 years after the market topped. Carter was elected in 1976. 

This era began in March 2000. We are 12 years into the period. Now the Embassy attacks are coming in right at 12 years from the start of the period. Barack Obama like Carter came to office eight years into the period. The playbook is right on schedule. As is the incredulous administration response, who would think they would attack the people that oberthrew their despotic leader (Carter took delight in over throwing the Shah as well). 

Consider the cluster of events in both eras

-High oil prices

-A Mid East  belief the US will not do anything in retaliation for violence against the Infidel USA

-High unemployment in the USA

-Deep political division as a result  in the US. We shall see if the election proves to be a replay of 1976 or 1980. 

At any rate, oil will likely top last among the various commodity plays. Note how much oil looks like the previous A/D Volume chart. Before we leave this topic of oil, let's take another look back at daily prices in 2008. 

Crude Oil  2008

This is not a prediction that we are going to $140 oil again, but ..

Note the 40% move in just three months after April  2008.  With the FED sloshing money around with no end point, keep your mind open to just about any possibility, add in the front page headlines of Anti US Mobs on Rampage, the chance Israel might attack Iran, the refusal to complete the Keystone Pipeline here, well just about anything could happen. And oil was the last market to top in 2008. 

The Road Ahead

A reader asks if I still expect a sell off after a stock market top. Let me be sure to make my expectations clear here. 

The market is coming into a top worthy of comparison with March 2000 and the Fall of 2007. Market final bottoms such as 1932 or 1974  usually require a dividend yield of 6 % on major stock indexes. That equates to about Dow 5,000 or SPX 600. 

SPX Monthly since 2000

At far right the 50 month MA is still five points higher than the 200 MA. But frankly I don't think predicting another massive retreat is an extreme position. Any prediction other than that would be extreme, extremely naive that is.  Note the red green lines on the RSI at bottom. RSI has not achieved the over done levels of 1998 or 2007 but it is on its way. This monthly chart of course lags too far to be used as an early warning indicator. I also suspect that we will finally get a crossover of the  50 to the downside of the 200, and that will be significant. 

This weblog is named The Market Perspective for Good Reason. If SPX 600 sounds far out, this is only because every one has become accustomed to the New Normal since 1996. Because it was not until 1996that the SPX rose over 600!  

Monthly SPX

A tenet of Socionomics is that extreme mood occurs at the end of a move. INdeed in the last four years 1996-2000 the SPX tacked on another 900 points more than doubling the index. Consider that people have lived here in the USA   since the early 1600s. It took 400 years to get to SPX 600 and then just four more (1 % of the entire time to move 150% in price) to more than  double it, geez!

Readers, please stop whatever you are absent-mindedly doing and re read the last sentence. Recall that the purpose of a bear market is to clear out the excess speculation and dead wood from the past bull market era. Facebook is a great example, betting the farm on a national on line photo scrapbook. Its 50% collapse in a matter of weeks is the warning of much more to come in terms of curbing speculative excess. 

 The convergence of the MAs is signalling a massive turn ahead in the markets. With US Govt Revenue at 15% of GDP and Expenditures at 23% of GDP, there is no way this will be avoided. And we will be going into the downturn with 47 Million already on Food Stamps.

HDGE - Another Inverse Indicator to SPX

HDGE is a fund that literally shorts individual stocks. This is in contrast to other funds that attempt to replicate a bear fund by shorting futures. Such funds have all sorts of potential problems when renewing positions at month's end. This is not the case for HDGE. HDGE is the solid red line in the main chart, the SPX is the red green bars. At bottom is a new indicator from Stock charts, the Vortex Indicator. It is a bit of several indicators but is a better way of showing what Welles Wilder was trying to do with Directional Movement. Succinctly, when the green line is up in the lower panel, SPX is up. When the red line is down HDGE is down, and vice versa. What we are monitoring is the disparity between the two. The last big disparity was in March, when both the price indexes and the Vortex reached a maximum extreme. We are headed there again, so this is  another indicator in our  arsenal of tools. 

Socionomics

Once again Peggy Noonan  gets the causality backwards in her column this weekend. She suggests that one guy with a video caused the problem just as one guy shooting an Archduke in Yugoslavia started WWI.'  In both cases simmering frustration over old regimes finally resulted in violent social mood-war. The shooting or the video were simply news events that inflamed already hgh tension. 

The op ed in Friday's WSJ by the former Pakistan Ambassador to the US had it right. Islamists are frustrated at their pathetic living conditions and output. They are 20% of the world producing 7% of the goods and services and most of that is simply oil. The You Tube video was just a ruse to get the poorly informed and unemployed whipped int a frenzy, think the French or Bolshevik or Iraq 1978. These revolutions all  featured a lot more violence than democratic nuance. As the Ambassador noted, our Secretary of State unwillingly played into their hands by distancing herself and our government from the video. Gee where was the outrage over  the video of the Daniel Pearl beheading!

We have written extensively about the coming negative mood in everything from geo politics to movies (Batman) to fashions. And each time we warned, we are simply preparing you for a  much more negative mood in the future. Well it is here, now. 

Anti US Mobs On Rampage screams the front page headline 

And in Chicago, one might say anti taxpayer teachers strike demanding wage increases that elude most Americans

Recall that Moody's and S & P had New York City rated Baa the day it defaulted in 1976, now Egan Jones lowers the US from AA to AA-.  The truthis that the US is nowhere near that but such are the ratings. 

The Exit From Dividend Paying Stocks Begins

Here is the mood shift on display. I warned one reader just this morning that the move out of dividend paying stocks had already begun. He seemed surprised so I am adding this chart for those of you still happily clinging to such stocks. The Utility Index has fallen below its weekly  uptrend and is now failing to break through to the upside, trust me, while the SPX and DOW Indus trials make new highs, the Utilities likely will not. It will shortly be joined by the REIT indexes. I still am seeing columns in the media on How to Play the Dividend Game Now!  The real answer is, don't. 

Deflation Hits Bentley GTC

Dan Neil reports that the Audi V 8 powered Bentley GTC is a $17,400 less than the previous twelve cylinder model, gracing the spec sheet at a thrifty $174,000. 

 

 

 

 

 

 

 

Well 2614 words, I do go on. We are approaching an important trend change and here at TMP we  do all we can to insure that our readers are well informed. We appreciate your constructive comments and attempt to respond to all e mails. Tell a friend about TMP, you might save their financial future. 

 

 

Thanks for reading The Market Perspective

Dennislelam@gmail.com

 

 

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.

 

Comments

[Wonderwood]

Another insightful analysis, thanks Dennis. The TLT short trade has been awesome and your recommendations have been paying off handsomely. I look forward to next week in the market and your next update. Thanks!

[zenizen]

Great call on TLT. Daily RSI is at 26... technically, it can go lower but looking at the past, there hasn't been much price erosion below 30 (then again, TLT has never fallen from these levels before). On the other hand, a .618 correction of the rise from 108.46 to 131.94 is 117.43, and the sequence looks like a 5-up, 3-down Elliott Wave. Just a thought that if equities were to fall from current levels, TLT could hypothetically resume higher.

[Dennis Elam]

Zenizen

We of course never know about Elliott until the whole thing is done but I suspect at noted above we are in five wave decline now, especially given the start of QE III. The Drop friday was so severe it should take a day or two to flatten out even if this is some sort of bottom but I am thinking lower prices for bonds. Falling completely out of the bollinger band width is quite a kick off or should I say, kick down for a new pattern.

Thanks for your post! Another reader likewise cautions about getting too optimistic about this trade.