The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, January 26th, 2009.
Major stock market indices put in outside weekly reversals last week, which is a bearish technical indication the intermediate-term trend may have finally rejoined the primary forces that would see prices far lower were it not for official intervention. And although this intervention is now getting talked about in the press in a more intelligent fashion, even if only on a very limited basis, it should be understood most remain oblivious to what makes the stock market world go round. Of course while better than nothing in terms of enlightening the masses, at the same time it should also be understood that such accounts never present a comprehensive explanation of what causes prices to trend (meaning intelligent speculation is still possible), with the attached above yet another example of this, offering no discussion on investor sentiment, cycles, and so on. The aspiration Mr. Biderman ultimately comes to, that the low volume 'jam job' government price managers have engineered is likely a 'ticking time bomb', is correct; however such an account is still lacking, and far too late for those unfortunate and unaware speculators who have already been ravaged by such activities.
And it's likely fair to say it's also far too late for Obama to repair his image as well, and that of his administration, even if Geithner is replaced by Paul Volker for the State Of the Union Speech on Wednesday, which is the rumor. Obama, being a particularly self-centered political neophyte, will do anything to keep his approval ratings up, including attempting to steer negative public sentiment towards vulnerable key members of his administration apparently. While this may appease the mob temporarily, in the end, because he is essentially attempting to keep a spoiled child happy, which wouldn't work even if the economy were to recover (which it won't), such efforts will of course fail, like those taken to steer various markets (precious metals, stocks, etc.). Speaking of this, and the Fed's central role in official market rigging activities under the guise of being necessary in terms of Working Group activities, here, even if Bernanke gets reappointed this week it won't matter either, not in terms of the inflation / deflation debate. Stocks, in their lead role in keeping things 'glued together' will fall in spite of the Fed's best efforts no matter who is in charge when speculators change their betting habits, which we know from our work is now happening.
That's right, it's happening right now according to our sentiment studies, where update US Index open interest put / call ratio distributions are suggestive speculators are now buying the dip (weakness) once again, meaning the ratios should begin falling and remain low as prices continue to fall. This is exactly the same thing that happened at the top in 2000 as well when the mania finally burst, where the bears simply disappear due to both financial and psychological exhaustion, and the short squeeze in stocks comes to a crashing end. And the bulls, they are all ready for a rebound already, especially since stocks have now met correction targets consistent with previous turns during the squeeze since March of last year. So, although it's still possible the hedgers squeeze prices back up again with open interest put / call ratios in the SPX, SPY, and NDX still high, and VIX at the lows, it's important to realize that speculator psychology has turned, evidenced by plunging values in DIA, DJX, MNX, QQQQ, and RUT, which again, means support for prices has become precarious. The OEX has yet to break out of a triangular formation, which also leaves the door open to another squeeze if ratios remain elevated at expiry approaches.
It should be noted that February is a 5-week cycle however, meaning put / call ratios will have little influence on the trade this week, allowing for outside monthly reversals in the major stock market indices to go along with the weekly reversals mentioned above, which would complicate things for the bulls and price managers, especially if volumes continue to increase as selling progresses. What's more, if Obama actually replaces Geithner this week in an attempt to boost his image and the market falls, not only would this be damaging at face value, but more, it would send the message market participants are worried about Volcker being too aggressive in changing the status quo in reverting back to Glass Steagall Act like policy initiatives. The money center banks are essentially nothing more that mega-hedge fund conglomerates these days, so this type of thing would be viewed as a big negative by the smart money, putting yet another nail in the stock markets coffin to go along with increasing taxes, expanding market controls, and protectionism. And when you add in the changing sentiment picture discussed above, Obama might set the record for officially cooking his own goose this early in his first term with a stock market crash so severe people will still remember in 2012.
The last thing the stock market needs is a cooler (Volcker Rule) right now, where a befuddled and transparent President is seen to be schizophrenic, newly steered by such policy, essentially breaking ranks with the bankers. Such a development would truly be a negative for stocks, which unbeknownst to Mr. Volcker, hard medicine may not turn out the same way as his last exercise in cooling things down. That is to say given the vacuum under stocks, along with the hollowed out economy, that was not the case during his tenure as Fed head (not too mention demographics, stock market participation rates, etc.), like a heroin addict being kept alive on life support he is already dead, making revival later on impossible. You see even if increasing doses of the drug were administered it wouldn't matter, never mind pulling the plug on the life support machine. So, the turn lower corporate bonds last week, which was right on schedule by our accounts (see Figure 2), should be taken in the appropriate light, especially considering this bubble was the big carry trade for timid but still excessively greedy equity players off the 2009 March lows. All this would make an outside monthly close in stocks predictive in my opinion, not a contrarian play. (See Figure 1)
If this were the case, it would also bring the massive head and shoulders pattern in the Dow, as seen above, into play as well, where it should be noted options distributions offer no pricing support at this time. Apparently Robert Prechter was out last week drawing attention to the similarity between the Dow's bounce into 1930 and present circumstances, which are in fact almost identical on a percentage and structural basis. If this turned out to be an accurate observation, which might be the case with sentiment beginning to swing in a sympathetic direction to enable such an outcome, according to Pretcher, who is no dummy, the above crash target range would be conservative (his is sub-1,000 on the Dow), as a Grand Super-Cycle Degree event is about to unfold. Certainly macro-circumstances are aligned for such an outcome with demographics and the credit cycle rolling over at the highest level, one leading to the other. People don't borrow more as they age, but less along with generally developing realistic goals in preparation for retirement. So instead of increasing leveraged speculation they begin to save more, which is a trend the banks are endeavoring to make up for in terms of adding leverage to the system through hedge funds, along with goading the government into destroying its balance sheet as well. This is why just the perception of a Volcker Rule could be so hazardous combined with an untimely shift in sentiment. (See Figure 2)
And that's why you should take these risks seriously as well. Falling gold is telling you the risk of asset deflation is rising, and although nothing is written in stone as of yet, things could change quickly never the less, where one would do well to remember the last time market / sentiment conditions reflected present extremes, the CBOE Volatility Index (VIX) went to 150, back in 1987. Action causes reaction - where in this case the combined actions of a meddling bureaucracy and complicit mob could be enough to bring Rome to its knees once again, with the most successful modern day cooler in history guiding Presidential policy.
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Good investing all.