Forced Buying Puts Finishing Touches On Rally
The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Wednesday, August 5th, 2009.
Forced mutual, pension, and hedge fund related buying could push equity prices higher in coming days, however if our views on the dollar $ are correct, any such buying should be fleeting, possibly even ending today if overnight reversals in various key stock markets have any predictive value. Such a reversal scenario is quite common, with the various forms of funds forced to buy an overbought market due to monthly inflows set against stated objects laid out in prospectus. As prices move higher, and especially as they threaten to move past landmark resistance like the S&P 500 (SPX) at 1,000, or NASDAQ at 2000, fund managers are forced to participate whether the market is overbought or not. They cannot delay becoming involved in the market any further whether they believe in the rally or not, caught by momentum. This is a large part of the dynamic that builds bubbles in today's markets, and this is where we are right now, with a reversal imminent once all this unsustainable buying has dried up.
As you know however, if history is a good guide, any top here should only be of the interim variety, with a more profound high expected at Christmas, which would largely be the result of forced year-end buying. (i.e. as opposed to month-end [think hedge funds] and systematic buying [think mutual and pension funds] being witnessed at present.) Here, although fiscal year-ends for the various funds come in fall, as long as the money is coming in and forcing participation of reluctant managers at the wrong times, such a sequence would continue repeating, which would make the present liquidity related 'bailout bubble' even bigger. Of course the other part of this formula that is necessary is continued money printing. This should not be a problem with the economy remaining soft, along with Bernanke wishing to get reappointed as Fed Head. Both Congress and Ben are sprinkling helicopter money whenever possible these days, so the money printing should remain robust until the foreigners shut them down.
When will the foreigners shut them down? Answer: When their exports (foreigners) go down so much they no longer care about keeping the American consumer afloat buy keeping interest rats lower. (i.e. by purchasing US bonds.) This is of course already happening, with net foreign purchases of US bonds already in the tank. This too is a big part of the reason the $ cannot catch a bid. If the equity markets become unglued again however, the $ will catch a bid due to the synthetic squeeze associated with hegemony (debt) repayment, but we are not there yet, so don't expect to see such a development until next year if stocks rally until Christmas. How can we be sure this thinking is right, and not those calling for a lasting top right here? Answer: Because we have already had the big crash in US markets back in 2000 - 2003 when the NASDAQ crashed, which was comparable to the Dow of the 30's (the Dow was the high tech index back then), and now we are tracing out comparable post crash patterns here not only to the 30's, but more modern examples (think Nikki) of similar magnitude as well.
Anyway, and returning to the present, some precious metals investors are going to be quite surprised if another downturn comes so soon after last week's whipsaw, however in the initial stages of a $ rally, gold and silver will undoubtedly get smacked. Certainly the price managers will not miss an opportunity to keep prices under $1,000, so expect more volatility for a while yet. The initial stages of a downturn in equities should send silver reeling at first, however if upcoming weakness in stocks is to be minor, we would quickly see this in the Silver / Gold Ratio. It should main relatively buoyant despite the appearance of a head and shoulders pattern in the trade. So we will be watching this very carefully, along with all our other charts of course.
Along these lines, and in providing you with an appraisal of our review of the Chart Room over the weekend (in reviewing month ends), below you will find ten charts that require comment on in painting a 'big picture perspective' at present. As you will see below, the charts are telling us we are on the cusp of a return to growth in the system, which would be represented by prices pulling away from present levels post clear break outs. As alluded to above, and consistent with our discussions on comparable historical perspectives within our ongoing work, one is reminded past pattern analog is suggestive we will see such break outs after consolidations in the near-term, but that true to mature fiat-currency based economies / markets, once all the speculators are drawn in, lasting failures will transpire. This will of course send prices down to test the March lows, which will likely get taken out unless US monetary authorities can engineer growth rates of broad money supply measures to match those presently being witnessed in China. You should know the world is riding on China's coattails in this regard right now.
If Frank Veneroso is right however, the Chinese miracle is an illusion, part of the speculation game perpetuated by cashed up Chinese businesses and crazed global hedge funds. Moreover, the Chinese real estate market is an accident that has already happened. And you know what happens to economies once the real estate market is bubblized (in this case oversupplied). The ability of central planners to expand the credit cycle is impaired on a long-term basis, often ushering in an economic depression as a result. So although prices could surge past the upper boundary of this range as Christmas approaches in matching historical precedent, largely, US stocks should be bounded on the upside by the 155-month exponential moving average (EMA), which is only some 100-points above yesterday's highs. (See Figure 1)
Declining volume rallies are never a good sign a far as longevity is concerned, which is exactly what we have as you can see above, however as long as too much currency is chasing too few goods, the excess money will continue to find its way into stocks with little else to buy in a generally contracting economy. Here, one should not be fooled by recent improvements in economic data because it will not last. Those who prefer not to view things through rose colored glasses know this of course, along with the real situation associated with our fiat currency based economy. So again, and like the SPX at 1000, while the NASDAQ might be able to break back above large round number resistance at 2000 temporarily, history suggests such a break out will not last. Moreover, and in focusing on the monthly plot below, it should be noted On-Balance-Volume (OBV) has already broken out of the indicated triangular structure, but that it's still lagging Accumulation / Distribution (A / D), along with the fact its never good when indicators break out prior to price. (i.e. both the 144 and 155 EMA's are too close to current levels to call lasting break outs yet.) (See Figure 2)
Further to this, and as mentioned above, it's important to understand that despite the fact US stocks are up some 50% from the March lows now (as measured by the SPX), that nothing significant has occurred just yet in terms signaling lasting growth has returned to the economy, which is evident in Figure 3. Here, one should notice that the 21-month EMA (swing line) of the SPX / VIX Ratio has not been exceeded yet; suggestive the move higher in stocks these past months is a corrective test. And again, if history is a good guide the 21-month EMA will be exceeded as Christmas approaches, only to fail in dramatic fashion afterwards when central planners pull the plug(s) on the printing press(s). (See Figure 3)
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