SPYing on the Big Picture

By: David Gillie, ETF Digest

There are times when the best way to look at the market is from a distance.

Monthly charts filter out the noise and the day to day media hype. Be forewarned - it's not a pretty picture.

(click to expand image)

First off, let me make note that the indicators are changed on the monthly charts to reflect 12 month running averages. 
I'm taking this chart from 1996 when we launched into the new era of bubble markets. The dot com and Housing bubbles are just for illustration purposes. However, they have set some benchmarks. Most importantly, is the long term pivot at $120 (orange dashed line). We see that over time, this has been a major support/resistance on SPY. In 1998 and 2002, the market retreated from this level. In 2005, it stalled here. Failing this level in 2010 initiated QE II from the Fed. Failing in 2011 initiated "Operation Twist" from the Fed. Speculation on the Fed's action on next monthly close below $120 is pretty obvious. 
Let’s look at the Relative Strength Indicator - the exuberance during the buildup of the dot com bubble was extreme, keeping markets overbought for years (hey, we were new in bubble market strategies). After the big crash of 2001, investors looked at market with a little more jaundiced eye. It took the housing bubble to the very end to rebuild the overbought exuberance levels in 2007. And, of course, just when it was too good to be true, 2008 tore it all back down. This time off a double top AND achieving a lower low in 2009 - a very bearish pattern. 
Let examine these bubbles from a fundamental perspective. Although it popped, the dot com bubble was massively successful. Fortunes were made in Silicon Valley, the internet exploded, technology advanced in geometric steps, universities change curriculum to IT studies, computer hardware and cell phone manufacturers expanded enormously, and retail business has shifted to on-line sales. Even though it was a "bubble", its effect has been long-reaching and hugely successful. 
Now, let’s look at the housing bubble. Again, fortunes were made by builders and developers. Building material suppliers and all that went into interior outfitting and furnishing had explosive profits. Skilled and unskilled workers had no problem finding jobs in the construction industry. Even the "little guy" got a piece of the action as homeowners bought and sold homes with 100% profits routinely. With fortunes being made, luxury cars and SUVs were bought without concern for price. BUT, there is a BIG difference between the housing bubble and the dot com bubble.

Instead of long-lasting success, the housing bubble has given us a hangover of epic proportions. Foreclosures are historical. A glut of homes that nobody wants or can buy is littering the landscape. Work in the construction industry is just gone. The builders and developers have long ago declared bankruptcy and disappeared. Of course they're not buying new pickup trucks and nobody wants those gas-guzzling SUVs ("Cash for Clunkers" - Ha! a $50K "clunker"). 
And now to the worse bubble of all - the Fed bubble. No fortunes are made, no jobs are created, and no new industries are built and developed.

Nothing. Nada. Zilch.

Oh, but its effect will be the most long-lasting of all - massive, unpayable debt. Fraud and corruption are rampant in the U.S. like a third world banana republic. Furthermore, average investors have exited the market forever as manipulation has frustrated and disgusted them. But wait! It's get worse. With media cycles shortened to four hour cycles and algorithm high-frequency platforms, "risk on, risk off" trading is at a frenzied pace. Rumors and headlines are the new "fundamentals". 
So where do we go from here? That $120 pivot line is what the Fed is watching. A monthly or weekly close below that will be "The Fed MUST Act" signal. Nobody even cares anymore what the long term outcome will be - we just want to feel good (or get elected) NOW! As we see on the chart of the Fed bubble, the Fed has been reliable. The crash of 2008, the Fed wrote a check for a Trillion Dollars on a cocktail napkin on a Sunday night.

The market failed at the $120 resistance (pivot) and the Fed pumped 'er back up with another $600 Billion (QE II). The market tanked under $120 again, and the Fed stepped in with "Operation Twist". The Fed has no choice anymore - especially in an election year. Also, the Fed doesn't have the mutual fund investors to hold the market up - they're on their own. Maybe they can make chatter about the banks are no longer "too big to fail", but the stock market isn't.
Timing is everything. There isn't much purpose for Bernanke to fight the tide right now. He'll get the most bang for "his" buck in mid-June when fund managers want to pump the market to create 2nd quarter fees. They'll gleefully join in the circus and the media will be fully compliant playing, "Happy Days Are Here Again" to defraud investors. QE III is coming. 
Do I sound cynical? I am. When my father was teaching me about the stock market in the 1970's, it existed so the average guy could get a piece of the action in corporate profits. Buffet-style investing of examining the fundamentals of corporation was smart investing. Massive data, powerful computers and technical analysis became the way of the turn of the 21st century. Still reliable based on well-established pattern recognition and market cycles. Now, with massive government intervention, crooked bankers and the SEC asleep at the wheel, the best analysis is to "Think Like a Crook" (i.e., what's in the best interest of the politicians and market manipulators?). My father's market of wealth building for the average guy is gone forever. Now the market exists to destroy the wealth of the average guy and put it in the pocket of the banksters (Goldman-Sacks refers to their clients and investors as "Muppets").
Can you still make money in this market? Oh yes! You just have to "Think Like a Crook". My "criminal mind" tells me the Fed will pump up the market when they'll get the most bang - when hedge fund managers want to make their fees in the 2nd half of June. Profits will be taken after the first Monday in July when the monthly 401K money comes into the market - probably larger than usual because they couldn't invest it with due diligence as the market was sharply down in May and June.

From there, Bernanke will keep it afloat in the low volume of summer with little resistance (while the banksters are enjoying their profits in the Hamptons). After the election - who cares? Let it tank. 
Remember: Think like a crook - Invest like a criminal.