Value of Perfect Information

Friday’s internals were weak, in spite of being a mixed market. The NASDAQ 100 had a huge price move up, but a significant chunk of the price gain came from one stock, Google. Google rose $60.52 per share, or 11.10 percent, in one day, Friday. Google is one of those stocks that a market manipulator can buy to move an index in the hopes it starts bandwagon buying. During the 2003 and 2006 rallies, we saw MMM move the Industrials with bizarre isolated rising price days. At the time, it appeared to us a market manipulator was moving the Industrials higher with 3M purchases. From time to time we see concerted efforts to push markets higher. Now is one of those times. But each time this happens, it causes the subsequent decline to be worse than would otherwise have been the case, like stretching a rubber band too far. The snapback is nasty. Deep pockets can only delay the inevitable. They cannot stop it. Quantitative Easing talk is raising expectations for liquidity infusions that people think will seep into stock markets. Hedge funds are buying stocks ahead of the actual Quantitative Easing from the Fed. QE2 is simply a fancy name for the Federal Reserve printing U.S. Dollars and buying fixed income securities from large Wall Street firms, buying junk bonds, corporate bonds, mortgage backed securities or Treasuries. It is essentially a fraud on U.S. Dollar holders, is a fraud on the taxpaying U.S. Consumer and Small Business, a fraud on the working person who has to get his money through hard labor. We will discuss this further later, and why this policy will destroy what is left of this fragile economy, and will eventually help drive stock market values down toward zero, and drive the U.S. Dollar down toward 40ish. QE2 is wonderful for large Wall Street firms’ short-term profits. They love it. Imagine having a business where the Federal Reserve is interested in helping you make as much money as possible at the expense of everyone else? That is QE2.

We learned Friday that the U.S. Federal Deficit for the Fiscal Year Ending September 30th, 2010, was $1.3 trillion. With a total Federal Budget of $3.5 trillion, this means that for every dollar spent by the Federal Government, they had to borrow 37 cents to cover that expense. Can you imagine running your household or small business like that? You would go bankrupt in short order.

Quantitative Easing will some day be looked back upon as we now look at healing the sick through bleeding back in the 1700s. It is terrible economic policy, in fact should be considered criminal activity. Criminal for many reasons, such as debasing the value of the Dollar, but more importantly because it will be the final nail that destroys our economy. Wall Street is the key beneficiary. Households (consumers) which account for 70 percent of GDP, and small businesses, which account for 70 percent of employment, will not benefit from this fraudulent activity by the Federal Reserve. Where on earth is it right for someone to print trillions of Dollars out of thin air and then buy legitimate legally binding debt instruments in exchange for this printed paper? Anyone else doing this would be arrested and thrown in jail, with the key tossed into the deep blue sea.

But forgetting that this is probably a criminal act, and assuming that it is legally acceptable because the Central Planners enact legislation to permit QE2, let’s explore why it is a fraud on pretty much everyone except the sellers of the fixed income securities the Fed will be buying, primarily mega Wall Street firms, surrogates for the president’s Working Group (the Plunge Protection Team).

Bernanke suggested in his speech in Boston Friday on the subject of QE2, that he is justified in doing this to raise the inflation rate, which he believes is too low, and to increase employment. His economics are dead wrong. He believes it is perfectly appropriate to print trillions of dollars of U.S. Federal Reserve notes (Dollars) out of thin air, and then send this money from the Fed’s print shop across the invisible wall that separates the real economy from the non-economy (the Fed) to the lucky recipients of this cash. Here is the problem: This transfer of printed cash for securities in the market are normally known as open market operations, and the point of this exercise is to lower interest rates in the market to spur lending and filter cash through Wall Street intermediaries to banks to borrowers which would stimulate the economy and multiply the money supply in the market. However, short-term interest rates are already zero, and long-term interest rates are at historic lows. So QE2 will not reduce interest rates. Therefore it will not increase borrowing. Therefore it will not multiply the money supply or spur spending, ergo it will not improve GDP, will not help households or small businesses. The cash will simply move from the Fed to Wall Street where the mega banks can then leverage their investing and trading activities which will improve their short-term profits. There will be no trickle down benefits to households or small businesses. Without benefits to households or small businesses, there will be no improvement in spending (GDP) or employment.

What will result from QE2 is the devaluation of the U.S. Dollar as there will be too many Dollars floating around, in relation to hard assets such as precious metals, and foreign currencies. This reduces the purchasing power of Dollars, and reduces the value of cash in bank accounts. In other words, the consumer gets hurt.

The only way QE2 makes any sense at all is if it is conducted in such a way that the cash being printed by the Fed finds its way directly into the hands of households and small businesses, instead of Wall Street. The only way for this to happen is if newly issued debt from the U.S. Treasury is sold to the Fed for newly printed Dollars, and then the trillions of QE2 Dollars sent to the Treasury from the Fed are sent directly to U.S. Households in the form of a massive income tax rebate, and tax cut, with a minimum amount of $50,000 rebated to every household, since many good folks did not have jobs over the past few years to receive rebated taxes. Then half the income tax rebates, which would be ideally two years worth, would be required to pay down debt, with the other half available to be used at households’ discretion. The result would be an immediate improvement in household and bank balance sheets, and an increase in consumer spending (GDP). This would increase small business revenue, which would increase hiring, which would result in an increase in demand for large firms’ products and services, which would mean more investment banking business for Wall Street. The economy would grow, increasing the overall pie for all to share and prosper, with a resultant corresponding desirable modest level of inflation. Local, State and Federal governments would benefit immensely as they get an increase in tax revenues from the trickle up economic growth, capturing taxes at every level of spending, which can be used to reduce government deficits and debt. Stock Markets would rise as corporate revenues and profits rise.

If the intent of QE2 fails to include the household, it should not be allowed to happen. Congress must put a stop to QE2 immediately, and require a full explanation of the intended program before Bernanke destroys our economy. There should be an open debate in Congress on the merits of QE2, with testimony from all interested parties, in front of television cameras, for the American public to study before QE2 is effectuated. This is not something the Fed should conduct in secret. This is new turf, new territory for the Fed, and warrants careful scrutiny. The Justice Department needs to study if in fact the Fed is legally empowered to conduct QE2. This is serious stuff, an intentional devaluation of the U.S. Dollar, and thus needs to be treated as such. Intelligent, thoughtful contemplation is essential in an open public forum. Households and small businesses need to be able to weigh in by calling their congressional representatives before QE2 happens. QE2 should require an act of Congress. The Fed should not be allowed to do this on their own.

Unfortunately, the language of the markets, price patterns and indicators, have been warning for months that the U.S. Dollar is headed to 40ish (it knew QE2 was coming), and is telling us the stock market will react very badly once QE2 starts.

It does not look like there is any stopping QE2. The Central Planners are convinced that the more they do, the more control they take, the more they couch their activities with terminology that makes it impossible for the average Joe and Mary to understand what they are doing, the more they involve mega Wall Street firms in their fixes, the better. It is becoming very difficult to know if the Central Planners are simply misguided in their policies, that their intentions are good, that they really care about households and small businesses and the economy, or is this all an intentional game to benefit only the few large and powerful Wall Street banks, to build an oligarchy of Centralized power by design. That is for those who can figure out the schemes to decide for themselves.

The market’s language, technical analysis, suggests that regardless of intention, mistakes will be conducted, and the worst will occur.

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“Jesus said to them, “I am the bread of life; he who comes to Me
shall not hunger, and he who believes in Me shall never thirst.
For I have come down from heaven,
For this is the will of My Father, that everyone who beholds
the Son and believes in Him, may have eternal life;
and I Myself will raise him up on the last day.”

John 6: 35, 38, 40

Another simple indicator I like to use is that when investors are still choosing to buy corporate debt over treasuries lends me to believe that investors still have faith in our economy, and as such, I see the continuation of the bull.

Interesting is that investors are still moving into corporate debt. The ratio of treasuries over corporate debt is still less than one and currently at .93; investors still have confidence purchasing corporate debt in that investors are still willing to put faith in our corporations. When the ratio is more than one, investors are flocking to the safety of treasuries and confidence in our corporations is waning, and likewise it would not be good for the economy and earnings.

Quadruple witching (expiration of stock index futures, stock index options, stock options, and single stock futures) occurred with relatively low volume and volatility…

Recommendation:
Take no action.

Daily Trend Indications:

- Positions indicated as Green are Long positions and those indicated as Red are short positions.
- The State of the Market is used to determine how you should trade. A trending market can ignore support and resistance levels and maintain its direction longer than most traders think it will.
- The BIAS is used to determine how aggressive or defensive you should be with a position. If the BIAS is Bullish but the market is in a Trading state, you might enter a short trade to take advantage of a reversal off of resistance. The BIAS tells you to exit that trade on “weaker” signals than you might otherwise trade on as the market is predisposed to move in the direction of BIAS.
- At Risk is generally neutral represented by “-“. When it is “Bullish” or “Bearish” it warns of a potential change in the BIAS.
- The Moving Averages are noted as they are important signposts used by the Chartists community in determining the relative health of the markets.

Current ETF positions are:
Long at DIA $102.80
Long QQQQ at $44.76
We are long Oct $106 DIA puts at $185 per contract ($1.85 per share) on Friday, Sept 17th. (current bid = $195)
We are long Oct $48 QQQQ puts at $94 per contract ($0.94 per share) on Friday, Sept 17th. (current bid = $104)
We are long Oct $113 SPY puts at $231 per contract ($2.31 per share) on Friday, Sept 17th. (current bid = $258)

Daily Trading Action
The major index ETFs opened higher and peaked within the first ten minutes before moving lower for about another half hour to reach their low of the day. The rest of the session was spent see-sawing higher which gave way to weakness in the final hour of trading. A surge with a half hour left to go again gave way to weakness in the final fifteen minutes which ended with the Dow and S&P-500 lower, but only after their index ETFs went ex-dividend. This left all the major index ETFs posting modest gains. The Russell-2000 (IWM 65.21 +0.27) gained ground like the NASDAQ-100 with the Semiconductor Index (SOX 334.35 +0.11) posted a minor gain. The Bank Index (KBE 23.23 -0.19) lost most of one percent and the Regional Bank Index (KRE 22.39 -0.04) lost a nominal amount. Both bank indexes remain in trading states with BEARISH BIAS. The 20+ Yr Bonds (TLT 101.67 _0.41) posted a minor gain on above average volume. NYSE volume was above average with 1.227B shares traded. NASDAQ volume was above average with 2.410B shares traded.

There were three economic reports of interest released:
• CPI (Aug) rose +0.3% versus an expected +0.2% rise
• Core CPI (Aug) was flat +0.0% versus an expected +0.1% rise
• University of Michigan Consumer Sentiment (Sep) came in at 66.6 versus an expected 70.0
The first two reports were released an hour before the open. The final report was released twenty-five minutes into the session.

Quadruple witching (expiration of stock index futures, stock index options, stock options, and single stock futures) occurred with relatively low volume and volatility. Quadruple witching occurs quarterly and generally sees significantly greater volume. Measured by the fifty-day moving averages, volume was above average on both the NASDAQ and the NYSE but overall volume didn’t spike as much as it often does with quadruple witching. Volume is just beginning to return and we expect it to build over the coming week.

Healthcare and Materials were unchanged. Four out of ten economic sectors in the S&P-500 moved higher: including Industrials (+0.9%), Telecom (+0.6%), Tech (+0.5%), and Consumer Discretionary (_0.3%). Energy (-0.5%), Financials (-0.5%), Consumer Staples (-0.1%), and Utilities (-0.1%) moved lower.

Implied volatility for the S&P-500 (VIX 22.01 +0.29) rose a bit more than one percent and implied volatility for the NASDAQ-100 (VXN 22.26 +0.45) rose two percent.

The yield for the 10-year note fell one basis point to close at 2.75. The price of the near term futures contract for a barrel of crude oil fell ninety-one cents to close at $73.66.

Market internals were mixed with advancers leading decliners 3:2 on the NYSE and by 4:3 on the NASDAQ. Down volume led up volume nearly 5:4 on the NYSE while up volume led down volume 5:4 on the NASDAQ. The index put/call ratio rose 0.46 to close at 1.51. The equity put/call ratio was unchanged at 0.58.

Commentary:
Friday’s trading saw most of a stand-off between bulls and bears. The resistance levels we have been monitoring have been breached by the Dow and NASDAQ-100 but not yet by the S&P-500. The Dow also has overhead resistance at the 10,720 level from its August 9th high. The levels we are monitoring are:
Index Resistance Actual
Dow 10,590 10,607.85
NASDAQ-100 1,940 1955.83
S&P-500 1,130 1125.59

I will continue to monitor these levels and I am looking for topping action to occur shortly. The nature support is such that a shallow dip could be recovered from but a more drastic move lower could be profitable for short (or put) positions. The markets opened higher and we took the opportunity to buy put positions on the cheap as insurance for our long positions. With the major indexes in uptrend states with a BULLISH BIAS, probabilities favor a continued move higher. However, patterns are such that a sharp move lower is possible in the next couple of sessions and we would like to be protected from such a move. We will bide out time in our long positions fully protected by our puts for a couple of days.

I have to wonder, are we entering the ending phase of this cyclical bull?

For some time now I’ve noticed the similarities between the ’02-’07 cyclical bull and what we’ve experienced since March of last year. The one difference is that this time we’ve truncated the middle phase of the bull. I suspect that was a direct result of the massive liquidity Bernanke … and all central banks have pumped into the system.

Both bulls exhibited powerful moves out of the bottom followed by a 9% correction separating the second leg from the third. In the ’02 – ’07 bull we then entered a 2 year phase were the market ground higher. That phase is missing from the current bull.

What followed the ’06 correction was a powerful runaway move into the February ’07 top. That persistent rally skewed sentiment extremely bullish at the time. We saw the exact same thing develop as the market entered the runaway move out of the February 5th bottom. At its peak sentiment had reached bullish levels exceeding what we saw at the top of the last bull market in the fall of ’07.

In ’07 the runaway move led to investor complacency and severely depressed put buying. The same thing happened at the recent top in April. Investors became terribly complacent. Protective put purchase fell off the chart. The market had no safety net under it. In that condition it was at risk for a crash if investors all tried to head for the door at the same time. They did, and we suffered a mini-crash in the spring of ’07 and again in May.

In ’07 the initial crash low was tested and broken followed by a 2b reversal.

Recently the S&P also broke to lower lows and bottomed with a 2b reversal.

Both markets experienced volatile swings as the market put in the intermediate term bottom.

Both crashes quickly moved sentiment back to extreme levels of bearishness. In ’07 sentiment turned sourer than at any other time during that cyclical bull. At the recent bottom sentiment was blacker than at any time in the last 10 years as measured by a basket of intermediate term sentiment indicators.

These kind of extreme sentiment levels are the building blocks for powerful moves. In ’07 the extreme bearish sentiment drove the market into a final double top that capped the cyclical bull.

If sentiment levels are any indication we should now be set up for at least one more explosive move higher before the fundamentals final overcome this market and drag it back down into the next leg of the secular bear.

The similarities are piling up:

Initial runaway move drives sentiment to extreme bullish levels? Check!

Protective put buying dries up leaving the market with no safety net and vulnerable to crash conditions? Check!

Mini-crash? Check!

Test and 2b reversal of the initial crash low? Check!

Sentiment depressed to extreme levels of bearishness? Check!

Volatile swings back and forth during bottoming process? Check!

If history is any indication we should now be on the verge of one more explosive move higher before this cyclical bull expires and heads back down into the next leg of the secular bear.

It has been an interesting week in the market as stocks and commodities push to extreme support levels. Below I have posted some charts showing where the market is currently trading at and what I think is likely to unfold.

Gold Futures – 4 Hour Candle Stick Chart

The price of Gold is testing a key support level. I figure we will see gold try to stabilize over the next week or so as it digests the recent drop in value then start to head back up.

US Dollar Index – 60 Minute Candle Stick Chart

The US Dollar and gold have been moving together the past few weeks as more countries pop up on the radar for serious financial issues. This is helping to boost both the US Dollar and gold as investors around the world starting buying what seems to be safety. The dollar has had a sizable pullback and is now testing a key support level.

This could be the start of a possible Head & Shoulders pattern forming which means the dollar rally could be nearing maturity in the next couple weeks.

Crude Oil Futures – Daily Trading Chart

Oil has been under serious selling pressure because of the rising USD. It has now dropped to a key support level and is starting to look very interesting. If the US Dollar bounces in the next week or two it will keep downward pressure on oil. I think this bottom is going to be a process not a one day event.

SP500 – Daily Trading Chart

Stocks have been under dropping like flies the past few weeks and shorting the SP500 last week at 1170 has played out very nicely for members. The broad market is giving me mixed signals and when I am unsure of a trade I stand on the sidelines. It’s always better to sit in cash and watch things stabilize than it is to watch your hard earned money evaporate. We could see a wave of panic selling in the stock indexes testing the previous lows so be cautious.

Mid-Week Stock & Commodity Trading Report Conclusion:

In short, I feel gold and the dollar will bounce in the coming days from their support levels. This will keep pressure on oil & the SP500 holding them down near support. Once the US Dollar forms a possible right shoulder we will most likely see them pop and rally.

We are still 7 trading days away from a cycle low on the broad market making this scenario very likely to play out. At the moment I am getting a lot of mixed signals and during times like this I prefer to stay in cash because volatility will rise and it is easy to get shaken out of trades.

If you would like to get my Real-Time Trading Signals & Setups checkout my services at www.TheTechnicalTraders.com.

The massive 200-pip jump in EURCHF in less than 10 minutes (13:00-13:10 BST) is the work of no other than the Swiss National Bank intervening to sell its own currency. But the 80-90 pip jump in EURUSD must also be the work of European banks intervening on behalf of the ECB to boost the ailing euro. The events of the last 2 weeks imply that coordinated central bank intervention is possible. If it took 2 days for the ECB’s to make an about turn on bond-purchases and for Berlin to institute a ban on naked shorts, then the prospects for intervention are very plausible. If neither the IMF/EU/ECB plan nor the Berlin announcement succeeded in alleviating selling on the single currency, coordinated central bank intervention must be utilized to at least slowdown the pace of the decline. While this is unlikely to reverse the slide in the euro, it will help resurrect a 2-way market in the currency and slow down the damage.

Euro Longs to Remain Naked

Unless the German ban on naked CDS shorts is instituted on a European or global level, its effectiveness will come up short. Unlike equity markets, credit default swaps are traded privately, and not on exchanges. And the fact that the bulk of these markets are in NY, the German ban will do little to prevent shorts from trading outside German shores. Also, according to the Deposit Trust & Clearing Corp (CDS clearing agency), outstanding CDS on most Eurozone sovereign debt does makes up less than 10% of the entire CDS market, estimated at $11 trillion. Chancellor Merkel’s unilateral ban is an ad-hoc measure that partly aims at containing her declining popularity following her Party’s defeat at last week’s regional election. Unless similar measures are adopted by the France, UK and US, these will prove to be no more than desperate politicians waging a losing war against speculators.

High Yielder, Highest Loser Down Under

It is NOT the euro that is the biggest loser since Tuesday’s close, but the Aussie, followed by the Kiwi and the Swedish Krone. The Aussie falls victim to its own success of higher yields, which are especially under scrutiny after the RBA hinted at a pause in its tightening cycle two weeks ago. We warned in our May 11th piece “Endangered Aussie Carry” that the latest sell-off in global equities has begun to unwind one of the few remaining carry trades in the non-emerging market FX space; AUDUSD and AUDJPY drop 3.8% and 5.4% respectively.

The technical significance of last night’s break below 0.8580 implies further selling of another 5% from current levels. The 0.8580 low was held in Sep-Oct 2009 as well as in Feb 2010. Last night’s failure implies a decline to as low as 0.80 and 0.78, especially if no close above 0.86 is attained this week.

Gold vs. other Commodities

Gold is finally responding to a broad sell-off in commodities. This was not the case on May 6 when the 9% intraday plunge in equities saw gold shrug off selling in copper, crude and natgas. The latest 24-hours are seeing less resiliency in gold, as the risk of deteriorating equities could force some managers into selling their winners (accumulated gold gains) to meet their widening gains. If the aforementioned suspicions of coordinated euro buying by the central banks are confirmed, traders could begin unwinding of their GOLD/EUR shorts, thereby, exacerbating the recent selling in GOLD against other currencies. Gold drops 3% against EUR from its €1,010 record high. Further pullback towards €960s could call up $1,165-70, followed by $1,120.

Are the markets manipulated ? Are they ?

You have been repeatedly told by those that clearly don’t immerse themselves in trading on a regular basis that they are not manipulated instead the movements are a function of some ordered theory that implies certainty of outcome when all one can do in reality is to conclude towards a probability of outcome that are usually little better than 60/40, well on the 6th everyone got the answer that they should imprint into their memories that the markets REALLY ARE manipulated. If your going to learn one lesson from 2010 then let that be the lesson learned. Contemplate on it, let it sink in, let it skew how you interpret price action and maybe you too can join in on future market manipulations!

Stock market volatility soars, the Flash Bounce follows the Flash Crash, the manipulated markets are not giving investors and traders time to react as the dark pools of capital continue to rake in huge profits by circumventing official exchanges such as the NYSE which if my memory is correct ALREADY HAS CIRCUIT BREAKERS that should have STOPPED the CRASH in its track so why didn’t it ?

Obviously, because far more trading of shares and their derivatives is taking place between the Dark Pools of capital OFF of the exchanges, which is ideal for a manipulators paradise. It will be interesting to see how high this months Goldman Sachs profits will leap after the 1st quarter having generated $25 million of profit EVERY DAY!

So, yes the markets are manipulated, though that is nothing new as all human activity involves manipulation of our environment to one degree or another where any mechanisms put into place to limit human manipulation are soon circumvented, we are a species of manipulators, we live in highly manipulated cities that are completely distant from the environment of the natural world, so don’t waste time going look for reasons of why the flash crash happened or crying about it, instead look for the finger prints for future market manipulation’s that show their hand ONLY in the price charts! Not anywhere else! (more on the flash crash here – 09 May 2010 – Don’t Blink Or You Will Miss The Stock Market Crash!)

Therefore this third bi-monthly in-depth analysis of the stock market for 2010, posted on Sunday 16th May (ensure you are subscribed to my ALWAYS FREE newsletter to get these and my weekly updates in your email in box) will again attempt to do the near ‘impossible’ by concluding towards a forecast trend projection for the stock market for the next 2 months, a tough task when considering today’s volatile flash crashing market environment, where it has become even difficult to project what the market will do in the next hour let alone 2 months forward!

UK Election Politicking is Over

The electorate has had their vote and settled upon a ConDem coalition government that will probably go up in smoke within 12 months under the weight of public anger at the cuts and tax rises that are about to hit the populous (not forgetting soaring inflation!).

Now it is time for the markets to vote, and they have sent sterling and UK stocks sharply lower. Though this should work to the advantage of UK investors in the mega caps as a weak sterling means the UK’s big export based corporations should see their share prices outperform. The only question remains is to what extent will the ConDem government seek to bleed the corporate’s much as the Australian Government’s tax on resources is bleeding the mega miners.

British Pound Following the Euro Lower

Sterling at £/$1.45 remains firmly on track to achieve its forecast sub £/$1.40 low (26 Dec 2009 – British Pound GBP Forecast 2010 Targets Drop to Below £/$1.40) now probably within the next 2 weeks, the specific support target lies at £/$ 1.37. I will seek to update sterling and as part of my in-depth update for the U.S. Dollar bull market later this month.

1. That sterling is targeting immediate support at £/$1.57 which implies it may temporarily bounce from there back through £/$1.60 before the eventual break.

2. That a break below £/$1.57 would target a trend to below £/$1.40. On a longer term view, the chart is indicative of trading range between £/$1.57 and £/$1.37, on anticipation of the eventual break of £/$1.57. On average this implies a 10% sterling deprecation against the trend of the preceding 6 months or so.

German Euro Gravy Train is Over

Germany has benefited hugely at the expense of other Eurozone countries over the past decade as it’s highly competitive industry had a captured euro-zone market to export to that the other countries could not devalue against. German exports were further boosted by a weak euro that enabled global exports to be maintained, however all of these small eurozone countries are now risk imploding and are lining up for a German and French handouts, the only sustainable answer to which is for the Eurozone to split into two as I speculated upon early in the week – (11 May 2010 – E.U. $1 Trillion Bailout, Detonates Nuclear Option of Printing Money to Monetize PIGS Debt).

Financing albeit shrinking annual PIGS deficits over the next few years will still mean that ALL of these countries debt burdens will be HIGHER in 3 years time, i.e. Greece’s debt burden is expected to rise from 120% of GDP to as high as 150% of GDP. How is that a solution for the debt crisis? How will that prevent eventual debt default ? Answer – It won’t!

The ONLY solution is for the Eurozone economies to GET their economic houses in order which means cut the deficits and total debt as a % of GDP which can only be achieved through economic growth which means public sector spending cuts and reform of economies to generate economic growth that means LESS E.U. and national regulation as touched up on in the article Solving Britain’s Economic Crisis Through Micro Business Capital Investments and Credit (31st Mar 2010). However when a country has a debt burden of 120%+ of GDP at interest rates of 5% or higher the inevitable result is still debt default.

EURO II ?

This, first of a series of money printing debt monetization bailouts puts the Euro firmly on a trend towards high inflation as are all fiat currencies, i.e. the fundamentals of the Euro block composed of many small weak economies that cannot devalue internally against highly competitive strong economies will still remain. The only possible solution is for a Euro II, i.e. split the Euro into two currency blocks one for the weak that suffer higher inflation and interest rates and the more competitive countries as part of the Euro II block (could just be Germany on its own?) which would act as a safety valve in times of economic crisis that demands internal currency devaluations.

The Euro Bailout is to pile more debt on top of existing debt which amounts to just being temporary sticking plaster that will eventually give way to the inevitable. At the end of the day countries such as Greece, Portugal and Spain and maybe several others will default on their debts, they have no choice, NONE ! With debt at 150% of GDP the interest payments cannot be serviced even at artificially low interest rates of 4%-5% let alone any repayments entertained. which means the bailout is effectively dumping Greek and other PIGS debt onto German and French tax payers. The strategy appears to be for Germany and France to buy some time to erect a firewall between themselves, their banks and future euro-zone debt defaulters.

A big step in creating such a firewall would be for the Euro to split into two with Germany and France and maybe a few others in Euro II, which would allow all the other bankrupting euro-zone states to competitively devalue, print money and set more appropriate interest rates as they attempt to INFLATE their economies and off course default in a more orderly manner with less fallout to the core Eurozone members.

In the meantime Greeks continue to riot, perhaps given their long history and having given genesis to many of the academic institutions that are now trying to force their economic theory of what should be done, Greeks are fully aware that the likes of the IMF and E.U. are totally clueless when it comes to doing the right thing, which is evident in the fact that countries such as the United States, Germany, France and Britain have done the EXACT opposite to that which the IMF says they should have done!

Dangerous Democracy

Another factor that seems to have escaped the mainstream press is that hated governments with hated austerity policies tend to get thrown out of power and replaced with more financially inept governments that offer to take the pain away. Which suggests that if there isn’t a Euro II sooner rather than later then the Greeks and other PIGS may vote in governments that force the European Union’s hand by unilaterally exiting the Euro and defaulting on their debts as there exists a greater preference to swim in the warm inflationary waters of the Meditarian than freeze to death in an icy deflationary imploding economy as Germany requires them to do as a consequence of the Eurozone bailout.

The bottom line is that the ECB has chosen to sacrifice the Euro by joining the rest of the central bankers money printing club, the ultimate consequences of which is inflationary and not deflationary as illustrated by the 100 page Inflation Mega-Trend Ebook (FREE Download NOW)

Implications for Stock Markets – The markets have voted with a big thumbs down to the bailout which is evidenced by the Euro closing at just 123.30 instead of 130 where it had rallied to on the announcement, it clearly has a lot further lower to go. Bailouts sap life out of the private sector that are the engines for economic growth as the cost of the bailouts are dumped onto tax payers of the more competitive countries, this will undoubtedly eventually impact on the corporations of the eurozone which is discounted in the present, against this is balanced the depreciation in the euro therefore benefits those corporations that export to outside the euro-zone. A eurozone in slow motion collapse is not good for bullish stock market sentiment but there are stocks and sectors that will benefit from their dollar earnings boost.

Stock Market Trend Against Forecast and Expectations

A quick recap of the two in depth analysis of the year to date and the most recent short-term update:

02 Feb 2010 – Stocks Stealth Bull Market Trend Forecast For 2010 - The Inflation Mega-Trend Ebook Page 82 (DIRECT Download)

Dow 10,067 – Stocks Multi-year Bull Market that bottomed in March 2009 will trend Sideways during first half of 2010 attempting to break higher. The second half will see a strong rally to above 12,000 targeting 12,500 during late 2010.

DOW Stock Market Forecast 2010

23 Mar 2010 – Stocks Stealth Bull Market Trend Forecast Into May 2010

Dow (DJIA) March to May Stock Market Trend Forecast Conclusion – Therefore my specific conclusion is for a continuation of the uptrend into early to mid May, achieving the 12,000 target during this time period, also allowing for a correction during April.

Weekly Newsletter Update – 02 May 2010 – Greece Debt Crisis Storm Cripples Stock Market Rally Resulting Stock Price Churn

The stock market ended the week weak at 11,008, barely clinging on to its uptrend as of February 2010. The SELL trigger is less than 40 points away at 10,970. The trend is choppy and volatile that looks likely to continue.

My trend expectations by the 23rd of March 2009 had converged towards a strong bull run into early to Mid May 2010 to target 12,000 before a significant correction took place i.e. an acceleration of the trend off of the early Feb low that had lifted the Dow to 10,830 after it cleared the 50% axis at 10,333. The trend continued to a high of 11,258 by early April before stalling.

The market was hit by a series of debt crisis shock waves out of Europe which had the effect of eroding the time left for the rally to be achieved all the way into early May 2009 when my quick update (02 May 2010 – Greece Debt Crisis Storm Cripples Stock Market Rally Resulting Stock Price Churn) concluded that the market had just about run out of time and was hanging on to the uptrend by its finger nails within a few points of the SELL TRIGGER at 10,970, the rally to that point had not triggered any of the sell triggers mentioned during the bull run from late February 2010 to the 2nd of May.

The sell signal was triggered on 4th May with the break below 10,970, followed by the Second Sell Trigger on the 5th of May on break below 10,830 which targeted 10,750 and then 10,550 and then along came Mr Flash Crash on Thursday the 6th which I covered in last weeks update (09 May 2010 – Don’t Blink Or You Will Miss The Stock Market Crash!), which placed the Dow in a trading range of 10,300 to 10,600 pending a short-term breakout, that resulted in a recovery high to 10,920, with last Fridays close leaving the Dow at 10,620.

The Dow is clearly showing relative weakness against trend expectations, which reinforces expectations of the Dow entering into a trading range rather then any serious attempt at breaking higher in the immediate future.

Market Psychology – The Flash Crash sent shockwave’s through the market that will last infinitely longer than its 30 minute duration. Clearly the bulls were shocked that the value of their portfolios can out of the blue go up in smoke within a matter of minutes. The bears who had been betting and losing against the stocks bull market as a consequence of their Bear market rally mantra who’s end was always imminent were nearly equally as shocked, in that after all the expectations and losses to date when the sell off actually materialised they weren’t given any time to act on it to monetize on the drop! as it came and went within a blink of an eye, which I have to say I find pretty amusing

As mentioned earlier, bullish sentiment is also further eroded as a consequence of the Eurozone panic where investors are now having to contemplate the unthinkable i.e. a break-up of the Euro, which whilst it may be good for the long-term, is not so good for stock trends for the balance of 2010.

As things stand, market sentiment wise the upper hand is clearly with the bears who despite being wary of being wrong on calling the end of the bull market or bear market rally again, will clearly grow louder in their assertion that yes this time it really is it especially as the Dow revisits the Flash Crash low area.

Implications for stock trend – It implies that the bulls are less eager to buy and the bears are more eager to short. Which does not support an imminent run to new stock market highs, rather an assault on recent flash crash low as being highly probable.

ELLIOTT WAVE THEORY – The EWT pattern has concluded towards a 5th wave peak by early to Mid May as illustrated by the March 23rd 2010 Chart above. Which concludes in an EWT pattern that will seek to correct the whole bull market trend off of the March 2009 low i.e. the most significant correction to date. The normal EWT expectation is for an ABC pattern for a lower C low. Which on face value suggests a break of the 9,870 Flash Crash low, to complete the ABC pattern in advance of the resumption of the bull market trend higher.

TIME ANALYSIS – The current correction will seek to correct the preceding 14 month bull market. Previous corrections within the bull market corrected the preceding trend by approx 1/3rd i.e. the Jan to Feb 2010 and June to July 2009 corrections. This therefore suggest that the current correction could last over 4 months, taking the trend into Late September / Early October, which implies a prolonged period of stock price weakness.

Bear Market and the 1930′s Stock Price Chart Pattern – Every correction brings out these 1930 charts, is it this time ? After all it was not in January 2010 nor October 2009 before then nor August 2009 before. As ever the starting and end points are always moved to fit the price action. At the end of the day fitting past price charts onto the present ONLY works in hindsight and are totally worthless when it comes actually trying to determine and monetize on trends so plays no part in this analysis.

TREND ANALYSIS – The Dow started running out of steam at 11,200 as it entered the correction time window. The trend following that peak has been violently to the downside. This has made the trend extremely volatile which implies that one should continue to expect very large swings from day to day, as the Dow attempts to put in a bottom which at this point implies at the crash low of 9,870. The trend higher to 10,920 whilst strong, only sets the market up for a series of retests of the low.

INTERMARKETS – Whilst the Dow has marched to new highs for the bull market, China’s stock market became stuck in August 2009 and has since moved in a large sideways trading range for the past year between 3,400 and 2,500. The last close at 2696 puts the market near the low which is a sign of relative weakness and does not bode well for other major stock markets to push to new highs whilst China remains weak with a lot of resistance to overcome. Furthermore a break below 2,500 would deteriorate the picture still further, similar weak patterns are exhibiting in other asian markets. This therefore implies a trading range expectation for the Dow for probably longer than the next 2 months.

MARKET INTEREST RATES – The interbank LIBOR market is again showing signs of freezing up as investors dump Eurozone sovereign bonds for safer U.S. Bonds thus driving U.S. yields lower and currencies elsewhere lower. The banks are becoming wary of lending money to one another fearing the level of exposure amongst banks to the EURO!, this is just as occurred with subprime mortgage backed securities but on a much larger scale. This is the hidden story behind the Euro crisis as a Euro triggered interbank market freeze would be far worse than that which followed Lehman’s, which really could trigger a NEW BEAR MARKET. So it will be something that will eventually make it into the mainstream press if the interbank market does freeze again, its something no central bank including the U.S. Fed wants to happen.

This is going to directly feed into high stock market volatility that points to a trend towards the recent lows for stocks i.e. 9,870, probably sooner rather than later.

SUPPORT / RESISTANCE – Volatility has resulted in a wider range of support and resistance levels to keep focused on than has been the case for many months. Resistance lies at 10,920, 11,200 and then 11,260. Support is at 9800-9850. The wide range suggests that the Dow can be expected to continue to trade to both extremes of the immediate range of 10,920 and 9850 over the coming weeks. With the trend in the immediate future targeting the lower end of the range.

MOVING AVERAGES – The flash crash saw the Dow break the 200 day moving average, something that it has not done in nearly a year of the bull run. Furthermore the reactive bounce to 10,920 was more or less contained by the 50 day average. In the immediate future the 50 day acts as resistance and the 200 day acts as support. However I expect the 200 day to again easily give way and subsequently act as resistance which the Dow will need to overcome as it attempts to put in a bottom over the coming weeks.

PRICE TARGETS – Upside price targets resolve towards 11,260 and 11,900 to 12,000. Downside price targets resolve towards 9,800 to 9,850 and then 9,450.

MACD – The MACD is expected to hug the lower end of its range at -100 for the duration of the correction. Most recent activity suggests that Dow may be supported within the next few days for a weak trend higher over the coming weeks as MACD works out its oversold state in advance of another assault on the lows.

VOLATILITY – Market volatility as measured by the VIX spiked on Flash Crash day to 42. Current VIX at 31.24 remains elevated far beyond the sub 20 range of recent months, which is not supportive of an imminent stocks bull run. Usually a VIX of above 30 is supportive of downtrends, which implies immediate term stock market weakness, suggesting that the recent lows of 9872 / 10242 on the Dow are likely to be revisited. There’s also off course the risk of another 40+ volatility spike day so the key message is that of increased volatility following the steady bull run from the Feb lows into the late April peak.

VOLUME – Volume has remained WEAK throughout the rally, which has been one of the main reasons why so much commentary has been bearish during the past 12months. However it is perfectly inline with that of a stealth bull market and also implies that this rally has mostly not been bought into. Therefore I continue to expect heavier volume on the declines and lighter volume on the rallies.

SEASONAL TREND – Sell in May and Ago Away is here in force as elaborated in my March 23rd analysis. Weakness from a seasonal prospective could continue into September, with a possible low in early October followed by a sharp rally into December. Therefore the seasonal trend continues to match the actual chart trend. The Seasonal pattern is also virtually identical to Time Analysis.

PRESIDENT CYCLE YEAR 2- The impact of the 2nd year of the presidential cycle on the stock market is for a weak trend into September, and a rally in the fourth quarter into the end of the year for a small average gain for the year, which is starting to match the most probable outcome for the year.

Stock Market Conclusion

Despite the flash in the pan crash and prevailing Eurozone sovereign debt default gloom and doom, the bottom line is that this is still a stocks bull market with the Dow ONLY down less than 6% from its bull market peak. Therefore the sum of the above analysis concludes towards the stocks bull market under going its most significant and a highly volatile correction since its birth in March 2009 (15 Mar 2009 – Stealth Bull Market Follows Stocks Bear Market Bottom at Dow 6,470 ). This correction could last for several months and may extend all the way into early October, which suggests that the next 2 months are going to see an ABC correction to be followed by a sideways price action between the extremes of 10,900 to 9,800 and so despite continuing wild gyrations I would not be surprised if the Dow is little changed from its last closing price of 10,620 in 2 months time (16th July 2010). Expectations remain for the bull market to resume its trend towards a target of between 12k to 12.5k by late 2010 after the tumultuous trading period over the next few weeks. I have tried to illustrate a more precise Dow forecast projection in the below graph, reality will probably end up being far more volatile.

My next in-depth update will follow in about 2 months time with regular short weekly updates, so ensure your subscribed to my always free newsletter.

Risk to the Forecast – As indicated the support zone of 9,800 to 9850 should hold on repeated assaults, failure there would risk the Dow falling to just under 9,500 which would greatly weaken the scenario and prompt an in-depth update. The obvious trigger could be if European countries actually do start to default on their debts over the next 2 months which would result in a REAL stock market crash as we enter another Lehman’s style contagion event where governments are forced to bailout their respective banking sectors that can only result in an acceleration of the Inflation Mega-trend.

Gold and U.S. Dollar Inverse Trend Myth Busted

Do you hear the deafening silence amongst the U.S. Dollar doom merchants ? Remember when you were being repeatedly and relentlessly told that it was impossible for the U.S. Dollar and Gold to BOTH Rise together ?

It was either Gold will Soar, and the Dollar will Crash, or that the Dollar would rise and Gold would Crash, but never that Gold AND the Dollar would rise together.

Well that’s another market consensus myth well and truly busted, and there is little point now AFTER the fact, AFTER Gold and the Dollar have already risen to come to the realisation that okay Gold and the Dollar could rise together.

Gold is on track to achieve its forecast target of at least $1,333 this year (sooner rather than later), whilst it has traded to a new all time high in dollars, that’s nothing compared to the levels seen Gold soar to when priced in sterling and euro’s. My in depth analysis (02 Nov 2009 – Stocks, Dollar and Gold Bull Markets Inter-market Analysis ) concluded in strong bullish trends for Stocks (9,712), Gold ($1046) AND the U.S. Dollar (76.36), which prompted many emails and comments that my analysis must be wrong as there existed a strong consensus view that Gold, Stocks and the Dollar CANNOT Possibly ALL move in the same direction. Well more than 6 months on, that is another market consensus myth well and truly busted, with many now concluding AFTER THE FACT that perhaps Gold and the Dollar COULD both rise together after all, since which both Gold and the Dollar have appreciated markedly.

The US Dollar bull market has already achieved its long standing target of USD 84, and is on route towards resistance at 89 which I am sure will puzzle many americans reading this as they full well know of the huge amounts of debt that the U.S. Government is busy issuing to finance its own budget deficit, this is the advantage of having the worlds reserve currency and as a consequence of Countries such as the UK and Eurozone adopting panic measures to INFLATE their economies and DEVALUE their DEBT through competitive currency devaluations (See Inflation Mega-trend Ebook – FREE DOWNLOAD ). It increasingly looks like the U.S. Dollar far from crashing as many have iterated during its stealthy rise, may in fact just be getting warmed up for what is to come as the Euro targets PARITY to the Dollar Yes that’s right PARITY ! I will seek to update the U.S. Dollar bull market trend to cover the next 6 months within a week or so.

Your existing outside of the box analyst looking to pick-up cheap long-term investments during market panics.

By Nadeem Walayat

http://www.marketoracle.co.uk

The UK election politicking is over, Britain has a new ConDem government led by David Cameron of the Liberal Democrats and Nick Clegg of the Conservatives, or is the other way around, hard to tell these days.

The coalition government parties have publically locked themselves into a 5 year death embrace. They had no choice, as their honey moon period will soon evaporate as the government has no choice but to implement swinging spending cuts and mega-tax rises such as VAT to 20% to fill the 25% black hole between what the government spends and what it earns in revenue which will soon ensure that the ConDem government is destined to become the most hated government of the past 50 years!

The ConDem strategy is clearly to survive the painful years of 2010-2012 and then engineer an election boom into 2015. If the coalition disintegrates during the pain years then that would likely result in a Labour landslide victory.

The pressure is now completely off of Labour who succeeded in killing two birds with one stone (12 May 2010 – Gordon Brown Mission Accomplished, Labour General Election Plan a Magnificent Success). Labour are now FREE to go on the offensive and play mischief as their strategy is clearly to systematically rip the coalition government apart that I would be surprised if it does not disintegrate within a year. It is just not manifestly workable for a partnership between left wing and a right wing parties to survive.

Stock Market – The stock markets are flipping from one day to another from flash crash to flash bounce back to flash crash, it’s difficult enough to know what’s going to happen tomorrow let alone further out, still my Sunday’s newsletter will attempt to conclude towards a stock market forecast trend for the next 2 months.

Gold / Dollar

Gold and the dollar continued their bullish dance as a consequence of TREND.

British Pound

Ended the week weak at £/$1.45, still targeting a sub £/$1.40 low.

Euro Blood Bath

The Euro continued its slide right into the end of the week closing at 1.2358, down 10% in less than a month. My early week analysis (11 May 2010 – E.U. $1 Trillion Bailout, Detonates Nuclear Option of Printing Money to Monetize PIGS Debt) speculated that the most probable outcome is for the Euro splitting into two which basically means Germany would stand on its own.

EURO II ?

This, first of a series of money printing debt monetization bailouts puts the Euro firmly on a trend towards high inflation as are all fiat currencies, i.e. the fundamentals of the Euro block composed of many small weak economies that cannot devalue internally against highly competitive strong economies will still remain. The only possible solution is for a Euro II, i.e. split the Euro into two currency blocks one for the weak that suffer higher inflation and interest rates and the more competitive countries as part of the Euro II block (could just be Germany on its own?) which would act as a safety valve in times of economic crisis that demands internal currency devaluations.

Everyone’s dumping the Euro and European stocks, time for selective accumulation into Germany? Remember, Panic and Crisis breed opportunity!

By Nadeem Walayat

Bears remember this please:

Two important metrics vis-a vis interbank lending and general credit conditions, while registering a slight bump in the past few weeks, currently are well within the normal zone.  However it is interesting to note that the last time the S&P 500 came crashing down towards 1100, those markets were in severe distress.

Bears remember this please:

Citigroup has studied 50 years of large one-day falls on the S&P 500. When markets have fallen 3 per cent or more on a given day, the average return over five, 20 and 60 days was 0.78, 0.21 and 2.56 per cent, respectively

Bears remember this please:

Analysts collectively are looking at 2011 earnings for S&P 500 companies above $95.  Applying a 16.37 or so multiple will get you very close to new market highs at around 1555 for the S&P 500.  Read here  to see how to apply the multiple!   Highest close was 1565 on October 9, 2007 and highest intraday level was 1576 on October 11, 2007.

err folks…. very simple rule here.. the Greek Crises will be resolved by June 11, 2010.. no ifs ands or butts about it.. no kinda sorta maybe but not really anything about it.. you all know why.. they will all have a giant pacifier that will have them all transfixed and glued to the tube! World Cup 2010 with Greece in it!!!!
You think they wanna be out throwing stones!!! Greece won Euro 04 and the country went ballistic with happiness for months.. encore and round two with the World Cup just weeks away.. win or lose it will unite the country in the global of global sports!!!!!

How the world markets looked on Friday

Baahhhhh… wonder what Lyin’ Larry has to say? I haven’t heard (or is it herd) too much from him lately. Here’s another example of a chart (originated a few weeks ago) that just may work out with a little patience.