Complacency giving way to fear? Caveat Emptor

The recent Presidential election proved to me that without a shadow of a doubt the world is changing and not for the better. Although we talk about the Markets in this blog we cannot help but be aware of the geopolitical issues and their profound effects on where the indexes go in the future. The current assault on freedom in the Middle East and the expanding European financial collapse all point to economic and social issues of a global magnitude.

Most people will say or argue that you can't predict the future, things just happen. Well, this excerpt from Strauss and Howe's book called the "Fourth Turning" which they published in 1997, begs to differ with that view. Read the comments and then get a copy of the book from your local library. You will understand what is happening and about to happen to our World in much greater detail.

“The next Fourth Turning is due to begin shortly after the new millennium, midway through the Oh-Oh decade. Around the year 2005, a sudden spark will catalyze a Crisis mood. Remnants of the old social order will disintegrate. Political and economic trust will implode. Real hardship will beset the land, with severe distress that could involve questions of class, race, nation and empire. The very survival of the nation will feel at stake. Sometime before the year 2025, America will pass through a great gate in history, commensurate with the American Revolution, Civil War, and twin emergencies of the Great Depression and World War II.”

 – Strauss & Howe – The Fourth Turning

Here is a link to another article by Joseph Russo who takes to task all the hub-bub about the fiscal cliff rhetoric coming out of Washington and the financial press. Well worth the read.

http://www.safehaven.com/author/246/joseph-russo

Then as we move from the global geopolitical ills, we need to find a way to invest in a broken market here at home. We are unlikely to be successful in our investing endeavors until we get rid of the outside influences (think the Fed) that destroy the normal rhythms (fear and greed)  the market exhibits when left to its own methods of balancing.

The following two paragraphs suggest a few interesting answers to the market problems and why you should tread very carefully in these markets.

Quotes from Zerohedge.com article:

The stock market is demonstrably an "attractive nuisance" and should be closed immediately. It should never be reopened unless these conditions can be met: 1) All shares must be owned for at least four hours 2) All trading must be executed by humans on a transparent exchange where all trading activity (and open orders) is visible to all participants 3) Intervention in the market by the Federal Reserve or any Central State agency or agents is against the law.

If you insist on putting money at risk in the stock market, be aware that you are playing a rigged roulette wheel and thus you are the mark. You might win, or the entire game might collapse in a rotten heap of lies and corruption. Just remember that the market is ruled by parasites who need to keep their hosts (investors) alive so they can continue to feed off them (i.e. biotrophic parasites). If the hosts all leave the market, the parasites will have only themselves to feed on, and they will quickly expire. 

Enough about broken markets and geopolitical problems. Whatever the peccadilloes of the market, it is what it is and we just need to find a way to deal with it.

As we began October the indexes were in the throws of their first major set back in some time.  November arrived and the weakest player is the Nasdaq Composite (Apple in particular) which has triggered a intermediate term sell signal by moving down through its 50 and 200 day moving average and the lower trend channel in blue. Friday's close touched blue wave 3 down and we should get a small rally into wave 4 early next week. (Click on chart to get larger image)

The markets are finally beginning to lose some of the "Hopium" that Ben's QE interventions seemed to instill in them. Now everyone knows its an endless printing press that Ben has unleashed and they are beginning to see the folly (read hyperinflation) that could be its result. So far the market has not been spooked enough to move the VIX (Volatility index) above the 20 level - so complacency remains in place. However, with no net under  the market, it could turn ugly very fast if the correction gathers any sort of momentum. By the time you see the Tsunami coming it will be too late.

Chart from Zerohedge.com

Here's what happened after each injection of QE. Now that Ben is through making announcements, you can expect a major move lower.

Chart from Zerohedge.com

Note green arrows on the chart to the left. They   cover the number of points for each rally since the 2000 top.  The interesting thing is that each rally covered 808 points and then topped. Hmm mm.

www.thelongviewtoinvesting.blogspot.com

Very Important .........................
What's next? If we follow suit you can expect the S&P 500 to head for the 565 area as shown on our long term chart at left. Both in time and price the last three tops form a close symmetry.

Follow the Gold wedge lower to the trend channel. The indicators are rolling over and signalling a major move is more than possible.Use the chart to get prepared for the potential of a horrific move lower. You can hope it doesn't happen, but you should be prepared if it does.

Some additional thoughts to ponder. The moronic media keeps asking why we have such an anemic recovery. The follow charts can help explain why things are not improving. They are by no means the only items, just a few that make it hard to move forward unless they are corrected.

Here's reason number 1. The average household has seen its net worth destroyed over the last 6 years.

We keep expecting the markets to break out of this slump any time now but when you look deeper at the damage that's been done to the average American household you can see that things won't get better for some time to come. One of the items is Household Net Worth. The chart below from the Federal Reserve shows how much the average family has lost. Except for peaks for the Dot-com bubble of the nineties and the Housing bubble of the 2000's, the trend has been down since late seventies. 

Net worth also has a strong correlation to the Dow Jones Industrial average as can be seen on the chart to the left. Notice the rounded top (Blue line) rolling over and heading down.

The number 2 problem. The drop in manufacturing jobs which takes us back to the same levels we were at in 1945 and the take home pay and you can see that the average consumer is going to be retrenching for sometime to come.

And problem 3.  Salaries. Notice the long term trend in average hourly earnings. It's no wonder that the average consumer is going to be retrenching for sometime to come, years in fact.

Tops take time......................

While the market is trying to put in a top it might be well worth your effort to read the following article from Mark Grant. Left to its own means the market will correct like it always does. If the Fed pours more liquidity on the fire in the form of QE3 then we will get several more months of euphoria and push the correction out a little further. If reality sets in we are likely in for a solid  move lower. So continue to pay attention to the external inputs because the market internals are getting ugly.

Via Mark E. Grant, author of Out of the Box, as noted on ZeroHedge.com

Surveying the Landscape

 Look around. Take a good long and hard look because the data is becoming unsettling and it is pouring in from all over the world. In China, where a hard landing was thought to have been avoided; one moment please, not so fast. China’s industrial output is now the weakest since 2009 and the latest figures represent the seventh consecutive quarter of deceleration. Most troubling is that China’s sales to Europe declined -16.2% last month which is a huge drop off and shows clearly the recession that is taking place and worsening on the Continent. Estimates for Chinese third quarter growth are being reduced on an almost daily basis and loan demand has taken a drubbing. The world’s growth engine is sputtering and there will be consequences. In the other driver of Asian growth Japan is markedly weakening. GDP expanded at 2.3% in the last quarter which was down almost 50% from the first quarter of this year. A Bloomberg survey places growth at just 1.00% for this quarter and there may be a negative number by the fourth quarter.

In Europe the situation is dramatically worsening with virtually every country in a recession with the notable exception of Germany though I predict they will join the club by the fourth quarter of this year or by the first quarter of next year. Italy just reported out their GDP at -2.5% for the second quarter and their prospects are not good with the third quarter likely to be down more than three percent in my estimation. Borrowing costs are also beginning to weigh on Italy as they have a two trillion dollar sovereign debt where their ten year is +441 to Germany and not likely to get better anytime soon. Even if you are a believer in some new ECB/ESM scheme the German courts will not opine on the ESM until September 12 and then there are still a number of countries that have not approved the plan so that any actualization of some scheme is unlikely to come before late in the third quarter or in the fourth quarter. It is an interesting side note that when Monti took office that the Italian/German ten year spread was just +78 bps so I think it can be said with accuracy that his tenure, as demonstrated by the numbers and not the hyperbole, has not been the rose garden so often praised by Germany and France. In another interesting side note Goldman reported that it had cut its holding of Italian sovereign debt by 92% and if one considers their CDS exposure they have actually gone to a position of almost one billion negative from a plus $2.4 billion position in March.

 While the Prime Minister of Spain dances around and shouts at Don Quixote’s windmills I think that it is quite likely now that Spain will be forced to officially ask for aid and that it will be soon. Then I think that Italy will follow suit which will rest the funding squarely on the shoulders of Germany and France and with economies totaling just $6.33 trillion or 56% of the United States, there will be real consequences and real pain as the allocations grow for these two countries and as Greece and Portugal line up again at the till. Short term solutions and liquidity do not overcome the fundamentals in the end and paying off debt with an ever increasing mountain of more debt is a concept that historically has often proved to be a failure. I fear that Germany and France face more downgrades and the reality of Germany’s 160% debt to GDP ratio, my calculation, will begin to drive capital out of Germany as the actual numbers are appreciated and considered. 

 Sometime in October, if not sooner, rhetoric is going to be put aside and either another $50 billion is going to be handed to Greece or the charade will stop. The country cannot pay their debts under any scenario imagined and it is just a question if the game will go on a bit longer or not. Of one thing I am sure; it cannot go on indefinitely and when it finally does stop it will not be the “manageable” event that some European politicians contend. It is going to be one sloppy mess that will affect the ECB which will require re-capitalization, it will hit many banks in Germany and France and losses will have to be taken by the EU’s Stabilization funds if not the IMF. Everyone is campaigning for everyone else to take the losses of course and eventually someone will take them and the debts have been allowed to grow big enough so that the hits will not be insignificant. The tension is increasing in both Greece and Europe and the accusations have not been pretty and will get worse so that I think some tipping point will be found before year end. There is now too much strain for the great “Muddle” to continue much longer and as the economy in Greece continues its free-fall and as the unemployment numbers spike into the Uganda latitudes; something is bound to crack. Remember that everything is fine up until the day it is not and then it is really, really un-fine! 

For those that think that the Fed will save the day, if not the planet, I suggest to you that you may be in for an unpleasant surprise. There is only so much they can do now and each Fed action is being met by a less and less reaction in the markets and of a shorter duration. The proposed ECB/ESM scheme will also not be that panacea thought by many in my opinion regardless of the hype broadcast out of Europe. The nations that need funding are clearly squared up with the nations that could fund and I remind each of you that those with the gold make the rules. Beggars may shout and scream and appeal to whomever and whatever might get them the money but it is not their decision to make in the end. For those that think America lives in some kind of off-the-world existence and will not be affected by all of this then I invite you back to the planet Earth. With equity volumes declining to five year lows and a range that is bound more by hopes and prayers than actual considerations of earnings or of our GDP I find it highly probable that we will break to the downside while Treasuries continue their march higher in price again as the fiscal dangers become more pronounced and appreciated.

Some visual reflections on the economy ...........

If the economy was really starting to make its move higher, we would assume the Transportation Index would be leading or at least in sync with the rest of the market. Looking at the chart to the right will tell you at a glance something is very wrong with this rally. We are moving higher based only on the expectation that the Fed can save us.

Here's another simple but effective indicator. If industry and the economy was ramping up we would start to see more waste/scrap as an off shoot of the increased production rates. You again can see little evidence we are on the verge of a move higher, instead we look like a recession is much more likely. Note also how the GDP follows the Waste index rather closely. Expectations for the 4th quarter GDP are now for a negative number to be posted.

With Europe close to implosion and the engine of the World trade, China, is posting very soft economic numbers leading one to believe they are not going to be able to keep the US economy afloat via our exports. The chart at the right gives you a graphic view of where the New Orders and Exports are headed. Not something that suggests this rally is for real.

Chart from Zerohedge.com

Here's another sign that the next move by the Fed may not have the lasting effects the first and second infusions of liquidity had. The short interest ratio tends to tell you if there is enough fuel in the tank to move the markets significantly higher once the trigger event is evident to the market. The people who are short the market have sold shares of a stock (betting prices will go lower) and if the market starts to rally they normally have to buy shares to offset their positions thus creating additional fuel for the rally. Currently few shares are short as everyone is in a state of "hopium" induced euphoria.

Here are a couple of informative viewings that help explain where the markets are. The first is from Business Insider. com and its a video that explains High Frequency Trading and its effects on the trading.

http://www.youtube.com/watch?v=2o9AU8MAoq4&feature=player_embedded

The second is a chart of world problems ranked by urgency in the need to fix.

Fitch Global Risks - 2nd Qtr.

Remain Vigilant ...............

The Momo's are at it again............................

It's getting to be rather ridiculous when the broken market can be juiced like it was with Friday's poor jobs number. The numbers are complete fabrications when you get into the details but don't let that hold you back from jumping in with both feet. We all know its the Wall Street guys trying to bump their month end balance sheets while the retail investors (most of us) sit there blocked out of the move since it essentially is complete by the time the market opens.

The High Frequency Traders or Bots win another one.

This market is moving on every feel good comment generated by anybody in Europe or CNBC. Rumors run rampant and moves can turn on a dime and destroy your positions in a heart beat. In the meantime, logic says that the rally will end with a sudden burst of reality. The charts are telling us that we are running out of time and need to be very careful going forward.

Here are three charts to try and make the point. The first is the Dow daily that shows you that while price is rising the OBV indicator is now lagging behind. This indicator was designed around the belief that price follows volume. Note the upper blue trend line on price is pointing higher, while the one on the OBV is pointing lower.

The second chart is that of the Vanguard Total World ETF. The most important thing to take away from this chart is the fact that it peaked in 2011 and is making lower highs, at least so far. The lower window on the chart contains the SP500 index which may have peaked earlier this year. Momentum indicators suggest we are weakening and the world markets may have the just called the next move lower.

 The final chart is the VIX (volatility index) that shows you we are at an extreme level of complacency and markets normally jolt you back to reality by correcting. The red indicator in the lower window of the chart is a leading indicator and it is moving lower. Something to keep an eye on.

Just be careful.

No confirmation ................ yet!

Man-oh-man, just a little BS and the markets ramp up like the European crisis was fixed, the US debt bubble is no longer and all the Bankers on Wall Street are finally serving time in jail. The key to last week is that the markets were looking for anything to move higher. The news is dismal and getting worse but we need a little levity to get people feeling better before the bottom falls out. The charts below from the chartist friend from Pittsburgh's site does a great job of showing you the lack of confirmation for the breakout on the Dow Jones Industrials. So what's next. Well it looks like everyone will move sideways into Bernanke's comments mid week. After that we should see if the market is drinking the cool-aid or moving swiftly to the sidelines.

Here's my chart (SPX) for identifying turning points. We are now approaching a turn window (red box). Can't tell if we are going much lower or this is just a small correction before the move to infinity. It pays to be careful here but the crooks who run the world banks may be able to push this wreck higher before the crash begins.

Market rises on possible new batch of crack (QE3)

Damn, right on time. As soon as the markets tried to swoon, the Fed policy leakers start sending little love messages to the market that all is well and the Father Bernanke won't let anything bad happen. Note comments sent out at 3:55 pm on Tuesday just in time to allow the market a melt up to close the day.

"The WSJ's John Hilsenrath leaketh the good stuff (QE3 hints) that the world's been waiting for right at the close -- coincidentally just as several important support lines and moving averages were beginning to be violated like James Holmes in a Colorado prison...
Federal Reserve officials, impatient with the economy's sluggish growth and high unemployment, are moving closer to taking new steps to spur activity and hiring."

Apple missed its numbers big time and the news on he economic front is dismal at best. Here's an interesting ending paragraph to the Hoisington Quarterly report that speaks volumes as to what they see going forward in this broken market:

"Based upon the historical record of effects of excessive and low quality indebtedness, along with the academic research, the 30-year Treasury bond, with a recent yield of less than 3%, still holds value for patient long-term investors. Even when this bond drops to a 2% yield, it may still have value in relation to other assets. If high indebtedness is indeed the main determinant of future economic growth and further government “stimulus” is counterproductive, then a prolonged state of debt induced coma may so limit returns on other riskier assets that a 30-year Treasury bond with a 2% yield would be a highly desirable asset to hold."

Van R. Hoisington
Lacy H. Hunt, Ph.D.

Certainly not an endorsement of the Equity markets going forward. The next bit of advice is characteristic of what I have been preaching in this blog since the start ......... things are really, really rotten around the globe and the guys running the Governments  haven't a clue on how to fix our problems. Their only hope was to avoid being in office when the dam broke ........ too late for that.

"To top it all off (and trust that I could keep listing things but you get the point by now) yesterday we received an infamous confirmed “Hindenburg Omen”. So what does it all mean and what will happen next?

If we think back to the “Flash Crash” of May 2010 and the early August plunge of 2011 there were a few things in common with both events:

Market participants were generally positioned fairly bullish with a general sense of complacency – the $VIX was relatively muted and rose rapidly as panic set in
Both corrections occurred rapidly amid a “buy the dip” mentality which dealt out a great deal of punishment to the vast majority of market participants
There were powerful catalysts which emerged suddenly and took the market by surprise (Greece in 2010, Italy yields skyrocketing, emerging US recession fears, and US downgrade in 2011)"

 Comments by Robert Sinn at the Stock Sage and posted at the The Daily Crux


We are getting really close to a major top here and the move lower could be very swift. The one indicator we need to watch closely is the VIX index (Volatility). So far it has not shown the fear necessary to move the markets lower in a significant way. The chart below shows a 6 period moving average of the index and it moved up smartly yesterday above the 20 threshold but fell back once the QE3 rumor was circulated. Once we see a move above 20 and the market holds that level into the close it will be time to get very conservative with your investments. (Remember the VIX moves in the opposite direction of the market price)

JP Morgan loses $5.8B and the Market loves it...

You don't have to be a conspiracy theorist to invest in this market but it sure would  help. Let's list some of the recent market events that have been reported :

• News from China confirms a major slowdown and possible hard landing.
• Brazil is running into the same headwinds as the rest of the world.
• The problems in Europe continue and there is no answer in sight.
• The Central Bankers of  the world have been fixing the Libor rates for years and everyone knew but the small investors.
• JP Morgan lies about everything and the markets think its a good thing.
• Brokerages (PFG-MF Global) steal your money to bankroll their riskiest deals and no one goes to jail. This is a much bigger issue than the markets reaction to it. (see www.PeterLBrandt.com)
• The economic numbers in the U.S. keep coming up red as we edge closer to a "fiscal cliff" 
• California has 3 cities that declared bankruptcy...likely only the tip of the iceberg.
• Bernanke admits he is out of bullets and wants Congress to start doing their job. God help us.
• The US is on the edge of the cliff with 4 major problems that need to be resolved, end of Bush tax cuts, automatic Pentagon budget cuts, Obamacare and social program revisions. Good luck Chuck.

And the good economic news from last week:

• Jobless claims surge...
• Foreclosure crisis hits older blacks, Hispanics hardest...
• Factory activity contracts...
• Home sales drop 5.4%, fewest since October...
• Grocery bills on rise as corn prices near record highs...

What's the reaction from the market...... ambivalence or maybe just pure ignorance. Given how the market reacts to stress, as we have seen for the last few years, you have to come to the conclusion that this market is broken. The funny thing is that the small (retail) investors have figured this out and the big boys are just trying anyway they can to make money off of it before it all comes crashing down.

What needs to change to bring back confidence in the markets. The market action on any day is a reflection (or it should be) of fear and greed. A free market allows for the buying and selling of issues without interference from political influences.  The VIX index reflects this ratio and tells us how the market is reacting to the news (internal and exogenous) of  the day. As soon as the market begins to falter out comes the "Greenspan/Bernanke Put" comments or the QE3 whispers and the market miraculously corrects and streaks higher for no good reason. (Witness Friday the 13th)


A few fixes to start the process of cleaning house:

1. In the future let's stop the Fed from interfering with the market in terms of flooding it with liquidity every time there is a hiccup. We're too late for this time so we'll have to suffer the consequences.
2. Start reporting actual economic data rather than politically polished BS. It's impossible to make good decisions based on bad data.
3. Get rid of the algorithm's (bots) that are running the trading currently. Even when the markets are heading lower when they should you can see the computers go off as soon as a mythical resistance level is hit and no amount of logic can explain it other than the computers thought that was a good idea. We are losing control people!
4. Start putting the Bankers, who abuse the system, in jail instead of allowing them to get away with murder. A few good hangings on Wall Street would also help set the right tone.
5. Put everyone who was on a Banking or Finance committee in Congress for the last 10 years in prison just for spite.

This credit cycle bubble we have been riding is coming to a end and there is no way to avoid the destruction it will have on our economies. We can kick it down the road a little longer but its now months instead of years until the payment comes due. Here's a few well chosen comments

 Andrew Jackson: (Quotation)

“Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I intend to rout you out, and by the grace of the Eternal God, will rout you out.”

 Game Theory and Crowded Trades - Doug Noland - Safehaven.com

"But the downside of the Credit cycle radically alters rules of the game. Over time, reality sinks in that the previous prosperity was in fact an unsustainable boom-time phenomenon. The downside of the Credit cycle ensures faltering asset prices, deflating household net worth and financial sector deficiencies, along with the revelation of problematic economic imbalances and maladjustment. It's not long into the bust before many see themselves as losers - and to have lost unjustly at the hands of an unfair system. The growing ranks of losers become an increasingly powerful political force".

 James Howard Kunstler: It's Too Late for Solutions

"We are discovering more and more is that the world is comprehensively broke in every sphere, and in every dimension and in every way. The governments in every level are all broke, the households are going broke, the banks are insolvent, the money really is not there. And the pretense that the money is there has been kept going simply with accounting fraud. And accounting fraud really accounts for most of the so-called "innovation" that we chatter incessantly about – this is at the heart of (Jame's new book) Too Much Magic and the wishful thinking about technology. We are so intoxicated with this idea that we can create new and wonderful things. And we have absolutely no sense that the new and wonderful things that we created in the money system are destroying the money system".

Here's the updated monthly chart of the SP500 (SPX) and we are still trending - sideways to down. The markets are running out of momentum and will soon have to correct in a major way before a new bullish leg up can begin. We can still get a move higher for a few more weeks or as long as the markets remain oblivious to reality. Note: the leading indicator in red (first window below the price) has already flashed a sell signal. We still need confirmation from the other indicators. In the mean time stay safe 

Oops......I think it's starting to matter!

As I've alluded to in the past "Hope is not a strategy".  The market has been bobbing and weaving for months fueled purely on "Hopium". Last week the reality, of the economic malaise we are in, was brought home by the dismal employment situation which the BLS can no longer hide in make believe numbers. The Government has been putting lipstick on a "pig" and people are coming to the realization that they are being lied to.
Next week may see an early bounce due to the following:

• There is a full moon on Monday at 7:00 am and after which the markets tend to rise 70% of the time.
• China is hinting at adding liquidity to its markets.
• Japan may have already started the liquidity pumps flowing.
• The FED will be speaking all week long and there are plenty of opportunities to mention QE3 is coming.
• There are signs of an oversold condition which would require a bounce to alleviate.

Like any time frame in investing, the markets go up and down. Let's take a look at the longer term to try and anticipate where we are going.

Even though we had a miserable day on Friday, the VIX (lower window on the chart) really didn't jump as high as it would normally be expected to with such bad news. This likely means we might just see a bounce come Monday unless the news out of Europe is very bad. The VIX is above the 25 level but is far from the 40-70 level seen at past bottoms. So even if we get a bounce, the near term direction appears to be down.

Here's my previously presented 2012 forecast chart. All three (3) attempts to foresee the future of the markets have us moving towards a mid summer low of some sort. Right now we are looking at 1160-1150.

Updating the forecast through Friday the 1st, you can see that we are moving right along the plan and heading lower.

I've added the 1292 "line in the sand" for the SP500. Notice we broke through that level and it will now act as resistance going forward.

When this chart is posted most people want to pretend that the U.S. markets could never spend the next 10 years drifting lower like Japan. That is the true definition of "Hopium". Look at the past 10 and then the potential for the next 10. Scary!


You need to prepare yourself for the potential of this scenario coming to fruition.





The chart below should be familiar to you if you have spent any time at the site. It's the monthly SP500 and the green arrow on the chart tells you exactly where to expect the markets to make the next major bottom.
Sadly the number is near 600 on the SP and 5000 on the Dow Industrials. The indicators are just beginning to roll over so we lack final confirmation but I wouldn't wait until we get all the I's dotted and T's crossed before you safeguard your portfolio. CASH is good!