Market Overview

Thinking with Waves - 9/6/2013



"The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little." - FDR, 1937 Second Inaugural Address

A short week that feels like a prelude to the end of the year, the markets are nervously moving higher with Syria and the Fed meeting looming in the near future. On Tuesday we showed our WaveBOOM members how they could have taken 75 points of potential profits in NASDAQ Futures. We began discussing a bit of our macro view of the market in general and the coming eventual decline. According to the latest data from the Investment Company Institute, U.S. equity mutual funds and exchange-traded funds took in $446 billion in assets in July, bringing the total to $8.2 trillion in stock "risk" assets. Assets in "safe" money market funds were basically flat month-over-month. This means that the amount of money invested in equities versus the safety of money markets rose again. There is now nearly 3.5 times more money in stocks than "cash." That's a new all-time record, going back nearly 30 years. The previous high was a ratio of 3.46 in April 2006, followed by 3.39 in May 2007. At th e peak in August 2000, the ratio was 3.09. The crowd, after 4 years of rising prices, is now at record levels in certainty that prices will continue rising.

If you're thinking, "But, don't things look great here in America, and isn't Europe all fixed now?" That depends on if you are a reader of fiction, or if you prefer the facts and their historical implications. As you know, I prefer the latter, so here we go. Since August '12, yields on the 10-year Treasury note have doubled (literally, from 1.39% to last week's 2.91% peak), despite the common belief that the Fed is holding rates lower. They are holding their rate lower, but that has no linkage to the "market", as the Fed is a 'follower' of the crowd sentiment, not the leader. As is about to be seen, after over a year of rising yields, the Fed is about to signal their adoption of the herd's behavior, and "taper" their manipulative stimulation of lowering interest rates, through buying Treasury bonds in the open market.

Economists and brokerage pundits are convinced that the economy has arrived at a win-win scenario that "is different this time" (long thought to be the four most dangerous words in investing). Headlines like "Keep Buying-You Can't Lose" and others support the race for the highest SPX 'tout' that is now being run on Wall Street. Goldman just raised their target to 1825, when too many other joined the 1700 Club.

Under the win-win, there are ONLY two outcomes available for stocks in the future: First, that a weak economy will cause the Fed to continue its monthly dose of QE, keeping stocks rising, or second, that a strong economy will produce strong earnings, which will keep stocks rising. The crowd is virtually oblivious to the potential for deflation and depression, and positioned for only the win-win.

Further, the herd is so bullish, it sued beloved Apple (NASDAQ: AAPL) for hording cash recently, when it found that the company was sitting on as much as $135 million in cash. This recklessness gets even more ebullient, as corporate raider Carl Icahn announced he owns 5% of Apple stock, immediately calling for the company to borrow money to buy back its own stock (despite Apple's already unveiled largest share repurchase program in history). This complacent behavior is historically ONLY seen at important stock peaks.

Tesla (NASDAQ: TSLA), the new Apple, has gone to parabolic, it now trades at 290 times its per share earnings (compared to 10 for Ford, and 1 for Toyota). Astoundingly, the latest run to new highs started after Tesla reported in early August that its earnings fell 58% last quarter. This enthusiasm for weak corporate fundamentals smacks of the pre '00 Internet craze, where the worst thing a company could do was report that it had turned the corner, and was not making money!

Finally, long time BOOM readers will recall that for the past four years, we've been predicting that by the time the final lows are seen in 2016 +/-1 year, CNBC would no longer be on the air. The latest Nielsen figures show that the financial news station ratings just plunged to the lowest level since Q2 '05. In the 25-54 age group, CNBC scored the second lowest viewership since '94. Odds now favor that Comcast, the parent company, will pull the network's plug well before the final lows are in place. Added to the facts that there are 30% more Americans on food stamps now that before the '07 peak, and that housing foreclosure are rising again, this time augmented by the already-bailed-out borrowers of the past few years, and we don't even need to get into the "real unemployment rate" debate.

We also discussed a few of the equities and futures we are following

  • After crude trickled to the lower end of our 118 +/-7 target zone last month, while testing 112, the past week witnessed a reversal from that test, and plunge to the recent 104 level. Next, a break of 103.50 should cement the highs for crude, and begin the movement toward 85 again. We can't rule out a Syria/Middle East related gusher that reaches into our resistance zone again, but the technicals are no longer supporting the rise, and rallies bases on the rumors of hostilities tend to be painfully elusive.
  • Tbonds are rising after bearishness got too extreme, but the lows in yield and highs in price are likely in for the next decade +/-3 years. We've been playing the long side successfully, and will get back on that horse once a correction finishes.
  • Gold has 3 corrective waves up off the June lows, and silver is less clear, but both suggest at least several more days/weeks of lower prices. The potential for new lows under June's cannot currently be ruled out. And, breaking the July lows brings that scenario to the front burner.
  • Dollar continues to be bullish, since DSE suggested buying it last month around 81. As long as that support holds, 85 +/-1 is the next big bull's-eye.

Companies like MSFT are scrambling to get their new "thing" going, and will spend a ton of money in the coming years getting it wrong. The new thing for the next few years should be focusing on core competencies, so they can survive the struggle that will tank most competitors. But, erroneously, our current culture of "what have you done for me lately" means managements will be very busy accomplishing little, and doing more harm than good.

Meanwhile, the early rise is likely all of a 'c wave off the lows last week, meaning the entire bounce is over in wave ii up of '3 down, and wave iii down of '3 down is under way. If this is correct, last week's lows will be washed away in a surprising (for the herd) decline toward 1565 +/-15 on SPX. On the other hand, if today's high is only wave 'c up of A up of '2 up, then B down of '2 up, and C up of '2 up will test that 1675 level into the end of the week/early next week, as the Syrian strike issues get sorted out. Speaker Boehner just came out in favor of a strike on Syria, and that likely took the air out of the early rally. Congressman Kanter also now supports this strike. But, Congress is out for another week, so there is time for a lot of sideways!

By Wednesday the general conditions improved, as expected, and the M.O. shows this by rising to a less negative level, even though the a/d ratio was barely positive at 8:7. It was touch and go, after the initial short covering rally on the delayed missile strike story gave way to more imminent fears as John Boehner and Eric Cantor rallied their troops to endorse PBO's call for action, after Syria crossed the "red line" of using Chemical Weapon's. Unfortunately, the slightly positive stock index closings did very little to improve the Elliott Wave pattern's clarity, and unless there is a very large rally off the opening bell, the lows of last week will be broken, triggering very ominous implications to the market's chosen path; that of the wave 'iii down of wave iii down of wave '3 down. In other words, the worst of the worst for those caught "long and wrong".

During Tuesday's slow session, I was able to give some historical lessons that could be applied to the current situation. I'll try to do more of that this week, but regardless of that opportunity to document the evidence, believe me when I tell you that is exists, and has caused me to move to my most bearish positions in several months, and preparing to move to my most bearish positions of all time. We updated our analysis as the market made moves and our clarity the patterns continued to evolve, you'll notice that what happened on Tuesday was what we talked about on Monday.

  • Gold started catching up to silver's rise, and in doing so, both are now in position to fall to lower lows than the weekend's thin trading sessions. Silver should see a test of the low 22′s, while gold sees a test of the mid to low 1300′s.
  • Crude came off 112, but in doing so, only shows 3 waves down at this moment in time. Therefore, there is room for the higher range of our upside target zone to be reached; 118 +/-7. That will be quite a trick, likely requiring a missile strike or other violence/fear, etc., as the upper 3 sdb is at 114.50, and the 4 sdb is at 121. Regardless of another high or not, the intermediate term and longer forecast is for crude below 95, and likely below 75, thanks to the deflationary forces gathering as we speak.
  • Tbonds got spanked, making lows under those of August, but yields on the 30 year and the 10 year failed to make higher highs than last month. This divergence warns that something is amiss. The point may be mute, as the yields of these durations have bounced up to resistance as lower highs, and are ready to fall again, if they are ready to. • Dollar spiked on the economic news just after the open, but came right back down to the pre-data levels, where it remained all day. Very short term, it's a bit overbought, but has room into year-end to climb higher in UNexpected fashion.
  • 1675 +/-5 continues to be the ideal range for this week's rise to extent to, but it's not required. Breaking 1600 would be disastrous for the overall market, and even closing 1625 will bring the 'evil eye' of the bear.

Friday was all about the jobs data and the job creation number missed the "hopium" estimates, but the unemployment rate came down a bit. Whatever! Both are fudged numbers, and don't reflect the growing number of people permanently off the job wagon. More importantly, US is recalling diplomats from Lebanon, Turkey, other interests in the area, after Iran evidently ordered militants to target Americans in Baghdad and other cities. This is a warning to the US and Allies to stay out of the region, and not strike Syria in retaliation for nerve gassing their own people.

Overnight, the lows in metals were tested, then they exploded higher on the jobs data, signaling that the recent selling has reached exhaustion, with only an ABC off the recent highs. Euro popped too, dollar dropped, after Euro completed 5 waves down. 1.33 is still strong resistance, where this bounce should test, then rollover again in dramatic selling in the coming months. Greece's 3rd bailout, the one that was supposed to last until 2020 has failed again, no matter how much money is being thrown at it. Is that a harbinger for us to learn from? Well, it's failed in Japan for 25 years, now in Greece for 5 years, and I'm beginning to see a pattern to recognize. Hey, pattern recognition...we know something about that, right? Crude is a bit higher, but there is no highly confident play, as it'll possibly spike on hostilities in the Middle East, and fall every time those hostilities are delayed.

Expect the UNexpected, as the day is young... 

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Markets


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