Market Does Fine, Without Jobs, Without Economic Activity

Markets continue to soar.  Nothing is going down, with the exception of oil.

Stocks, bonds, precious metals all are maintaining strong levels despite the fact that more than 26 million people have lost their jobs in the past month.

But this is my last call for a sell as we move to the .618 Fib level.  Experts contend that moving above that level can signify a trend change.  Once again, I will have been wrong about this market, just as I have been wrong about the market since 2009.  In the end, it doesn't matter, does it?  In reality, your assets are worthless!

This chart exhibits the level of the M1 money supply.  We can see that since 2009, the money supply has more than tripled.  Has your salary?  Not likely.  Unless you control the means of production, which seems to be shifting more and more to the hands of the government and government cronies, we are all in the same boat.  Any wealth that you believe you might have is an illusion.

The fact that the Federal Reserve has been printing unlimited amounts of money now cannot be denied.  Yet the effects of inflation have yet to be seen in obvious ways like in Venezuela.  But while we are blinded by the reality, that is the inevitable outcome.

Seems that any market analysis is pure folly.  There are no markets anymore.

Here is the cost of money, very close to $0.  Soon, like oil, holders of money will have to pay others to take their money!  Hey, that's what is already happening in Europe!

MONTH ENDS ON THURSDAY

As I discussed in last weekend's writing, we are doing a three month test of the highs, more pronounced in the QQQ instrument that is a proxy for the Nasdaq and tech stocks in general.  In premarket this morning, we are at 217 so a mere 2 points away from the monthly closing high.

The next couple of days will be interesting.  In the end though, whether you win or lose, the money you win or lose is quite worthless.

Market Chaos - Across the Board

As suggested in the last posting, the market was in the process of topping.  I had anticipated a three-week test of the high but prices continued to overshoot for one more week before collapsing.  What has occurred since has shown some fundamental weaknesses in the system - and that is, too much debt.

Hardly any market instruments were spared any pain.  Stocks tanked while bonds soared, but then experienced extreme volatility.  Gold, considered to be the ultimate safe haven also gave up gains that took the metal past $1,700.  In my stock universe, 163 stocks declined while only 3 advanced.  83 stocks were below a -2 standard deviation on a 20-week average.  Statistically, there is only a 2.5% chance that a -2 reading may occur, in a normal environment.

Of the three stocks that rose, I'll add UPS to this posting.  It may rebound some 12 points from it's current 94 level before meeting serious trendline resistance.

On other positive notes, stocks and gold both held a .328% retracement level, generally indicating overall continued strength in both.  However the weekly stochastic indicators point to lower prices that might continue for some time.

In the SPX weekly price chart, we can also see that an important trendline, a 250 week exponential moving average that offered support in the past, continued to hold.

While that is encouraging, one rule I generally follow is that when markets go to oversold levels on a weekly basis, I look to my Size indicator.  General rule here is to stay with the trend until Size reverses.  As can be seen here, Size is soaring and it may take some time for it to turn.

Another important indicator is the Stochastics.  Here is the 20-week stochastic reading

Rule of thumb here is that one would hold off on buying until stochastics begin rising from oversold levels.  Clearly we are headed down.

And while my Cycle indicator shows that we are at Cycle lows now, the cycle can work its way over many weeks/months before heading higher.

From a value perspective, I was adding SPY and some stock positions at the 250 week average.  My philosophy here is that if you can buy at or below a long term moving average, at worst, at some point you will at least get "regression to the mean" should prices continue lower.  

And while from my perspective, it was an appropriate opportunity for me to deploy some cash, one always has to consider that market wealth has been proven to come from proper asset allocation.  Other factors such as market time, stock selection and other techniques fall short of the benefits of correct asset allocation.  Another thought as markets gyrate is periodic rebalancing, enabling me to sell things at high levels and add money to areas that have underperformed.

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Bonds, while soaring to dizzying heights, later experienced extreme volatility as well perhaps showing signs of lack of market liquidity.    

While I normally look at TLT and use it in my positioning, I am posting here a shot of the 10 year interest rate.  We can see that rates fell below a major support line and fell all the way to 0.66% before rebounding to 0.95%.

At the time rates were plummeting, seemed that the general thought that rates would go to 0.  The Federal Reserve entered the picture adding boatloads of additional liquidity.  While some commentary suggested that money was not going to create a vaccine for the current health threat, there may be other market stresses that are being ignored.  Many factors are causing stresses to the dollar supply and there appears to be a dollar shortage.  While don't have expertise in this area, my readings have shown that stresses in the oil market, as oil has sold off to $30 a barrel, have been one cause of concern.  

The DXY chart shows a big surge of some 3% this past week in the dollar.  But it's important to note that the long term trend is down and like the SPX in my last post, DXY is showing a similar three-week test of the highs, the failure leads to sell offs.  With lower interest rates continuing and massive amounts of liquidity, in my mind, the dollar is worthless.  Yet in the mix of world-wide fiat currencies, it is the "cleanest shirt in the laundry bag" so to speak.  Yet, it remains troubling to go to cash as it appears that the Fed may be "monetizing debt."  One would think that massive inflation is on the horizon.  But how can we protect against this?  I have no clue at this point.

I had, as many others, thought that gold would be the ultimate "safe haven."  

But like everything else, gold took a hit this week.  The only positive is that it held the .318 retracement level.

One concern is that we appear to have completed a 5-wave up leg.  It's clear to see from September 2018 to recently, 5 well defined waves, three up and two down.  Many gold bears contend that this was merely part of a correction with gold destined to drop below 1,000. 

My Cycle chart offers no guidance other than that price is headed lower.  There are no other examples of the steep falling off of a cliff that we see in this chart.  One has to go with the Stochastics that are headed down in a more well-defined cycle.

As everything is going down, the general thought is deflation.  That is the worst news for the Fed, governments and corporations as the key way to get out of debt is to inflate it away.  This is not happening.  One can expect the Fed to be pumping more and more money into the system.  And while that should bode well for precious metals, there has been little logic to the metals market.  

A big cause of this deflation is OIL!

Oil prices dropped significantly as Russia and Saudi Arabia disagreed on production cuts.  Some have commented that some intent might have been to try to destroy the US Shale Oil industry which relies on higher prices to survive.  

Years ago, I had thought that the shale industry would be toast as they needed prices from $80 - $100 to survive.  Yet news of massive debt defaults in the industry never crossed my desk.  It had been mentioned that the industry gained efficiencies and in the end, Zombie, debt-ridden corporations can ride things out indefinitely when interest rates are near 0% and the government is intent on maintaining the industry.  I have heard that President Trump is taking advantage of the low oil prices to fill up the strategic reserves.  While I don't intend to be political, Kudos to the president for taking this action.  I recall when President Bush was adding to the strategic reserves, it was when oil was at $140 a barrel.  

Similarly, oil stocks have been "clubbed . . ."  You probably know how the rest of that cliché goes.

I had been buying some oil stocks in this decline.  Timing wasn't exactly spot on but seeing what I had considered to be quality companies going for well under what I had hoped to buy them at previously prompted me to take action.  

When I ran a derivatives department years ago, I mandated that my traders NEVER short oil.  Just too explosive a market to play with in my mind.  For the long term, it seemed like a good value proposition.  On the environmental front, I expect that companies will gravitate to clean energy as many have already been doing.  I don't think that the oil industry will go away.

Finally, on my stocks list, I mentioned that only three stocks were up in my universe.  

I took a look at UPS.  Don't know the fundamentals but I assume cargo continues to fly.

Looks to me that a bounce to the trendline could be possible.  Beyond that, one has to see how this market shake-out proceeds.

It rebounded nicely on Friday rising nearly 10% to close the week out with a slight gain.  Still at these levels, it appears to yield better than 4% on the dividend front.  Suppose that trying to buy dividends is also dicey (I had bought some OXY last week - ouch!!)  But what else can we do?  I don't have any answers.

In the end, the key is to stay diversified.  Again, our wealth is not accumulated due to market timing or stock selection, but asset allocation.  I'll try to dig up my presentations on this and add it to the blog site.  I'll also plan to add the risk assessment questionnaire to help you determine your risk, along with model portfolios based on your risk level.

Lower Rates Stop Working - What's Next?

Stocks around the world declined this past week, led by European shares.  US shares, despite joining in the sell-off on Friday, declined only slightly.

As mentioned last week, Silver was looking like it was ready to pop and sure enough, it did, rising more than 5% this week.

More European bond buying by the ECB appeared to be the stimulus for the sell-off.  They will begin buying corporate bonds in a continuing effort to stimulate the economy.

In the past, more free money boosted stocks but over time, the effects have been less and less.  This week, a typical European market looked like this:

More Central Bank meetings coming up next week, including one with the US Federal Reserve Bank.  What can be said about that?  Doesn't really matter what Janet Yellen says, computer trading programs react to any comment with buy programs boosting prices back up to the highs.  Usually the volume is so light that it leaves many scratching their heads.

Don't have the precise info in front of me, but reports have shown that Hedge Funds and Major Banks have been net sellers for the past 18 weeks, yet US stocks continue to hover close to the highs.  WHO'S BUYING?  is the big question.  Can't say that I actually know, but as mentioned last week, it had been reported that the group Anonymous hacked into the Federal Reserve trading accounts and found that it is the Fed that is accumulating massive positions in an effort to keep the markets up.  Other reports have speculated that should European markets continue lower, the ECB will be buying stocks aggressively.

It's wonderful when you "have money to burn."

We may never know until it's too late but if the Central Banks are truly buying stocks with money created out of thin air, can equities really have a value?

It is a bit disturbing if one considers the consequences.



CONTINUED LOW INTEREST RATES

There was a time when there was a correlation between interest rates and the stock market.  I first started blogging about it in 2005 when rates started moving lower while the market moved higher.

It got pretty crazy there for awhile but then rates and the markets did come back together and in a hurry!

Isn't it interesting that the SP 500 dropped dramatically to match up with the interest rate?  Notice the very strong correlation between the two until external forces began trying to repeal the market cycle.

"So where are we today?" you might ask.

It certainly looks very "discomforting."  Notice that rates are even lower now than when the market melted down in 2008-2009.

It seems to be understood that there will be "pain" when interest rates rise.  How much pain is hard to say.  Those who do not consider the fall out that will occur when rates do rise may suffer substantially.

While Central Banks fight the good fight to get things moving again, nothing really has seemed to work.  Many who study the world demographics will attest to the fact that many important populations around the globe are aging and are not spending at high enough levels to stimulate the economy.  Business formation continues to decline as increasing levels of regulation add to the cost burden of starting a business.  Yet just sitting on low interest rates much longer will have horrible consequences.  As we've seen recently, pension funds cannot operate in a zero interest rate world.  I read that the Teamster's pension amounts will have to be lowered to just $35 for each year worked, meaning that a worker who had put in 30 years will only be getting $1,000 a month in pension benefits.  Good luck with that!  Insurance companies cannot honor their obligations either.


INTERESTING TIMES AHEAD

As mentioned, the Fed will be meeting this week and then next week, the long awaited Brexit vote.  I can only ask, "what difference does it make?"  Not long ago, Greece held a vote to escape the clutches of the European Union and voted to exit.  What did the government do?  Nothing.

UK can vote to exit, but it won't matter.  The game will play on until one morning we wake up with the news.  GAME OVER!

Holiday Blues . . .

Major markets flatlined this week as Thanksgiving Day in the US apparently even shut down the computers resulting in little change.

As mentioned before, I was anticipating the three week test of the high on Friday so I for one was paying attention.  Throughout the week, SPY approached the 210 level but each time was repelled.  So while I can shrug off the possible test as a non-event due to lack of market participation, I did see the test and until the very end of the trading day on Friday, was watching to see if the machines levitated prices through the 210 level.  It did not happen.

Now, the weekly line chart looks like a setup for a three week test of the low!

Anything could happen in this crazy "data-dependent" market.  Friday's main even will be the Employment Report, the final report prior to the Fed's meeting later in the month of December.  The Fed has strongly hinted that it would raise rates in 2015 and are on track to do so at the December meeting, IF the inflation numbers are job numbers cooperate.

Rates hardly seemed convinced of the pending rate hike.  This chart is the TNX or the ten year rate on a daily basis.  Rates, after quite a rally, have been easing off for the past two or three weeks.

Do rates really matter?  Past market action shows that markets generally continue to rise even after an interest rate hike or two.  The Fed has made clear that even if they do raise rates, it would not be the start of a trend.

The Fed is truly between a rock and a hard place though as their ZIRP (zero interest rate policy) has distorted market prices in nearly every asset class.  In the old days, risk was priced based on the risk free asset, government bonds.  But no longer are government bonds priced through market interaction but based on Federal Reserve policy.  Quantitative Easing (QE) throughout the world has resulted in central banks printing money and buy up assets, resulting in higher bond prices and lower interest rates.  It appears that central banks are also buy up stocks to boost the stock markets.  This has been seen in Japan as well as Switzerland.  I read not too long ago that the Swiss Central Bank had bought more than a billion dollars worth of Apple stock. 

So it's evident that central banks will print more money, if necessary, to defend the market prices of bonds and stocks lest their balance sheets turn to dust. 

I'm sure that I'm not the only one who sees this.  Can the big firms with tons of resources available to research the markets not also see this and be lightening up on risk?  Who is absorbing all of the stocks and bonds that countries and firms are dumping?

Can you imagine why the Federal Reserve would fight to the death not to be audited?  I can.  The game would quickly be revealed.

It's interesting to see that the SPY weekly standard deviation chart has remained in its downward sloping channel.

Whether this past week's market action was an anomaly based on the holiday, is yet to be seen but the three week test of the high on price and standard deviation is a SELL for me.

Just as the weekly chart is a good setup for a three week test of the low, the monthly chart also reflects the same setup with September's closing low marking at 191.

Keep in mind that anything can happen in between December 1 and December 30 and price can still wind up testing the low on December 31 (or do we have again the holiday conundrum?).

For now, this is my tradable setup.  While a breakout to the upside above 210 would bring me in on the call side, I've gone ahead and bought some December 31 puts to play this opportunity.  While some sites I look at are looking at the current market move as a fifth wave of the six year bull market and expect SPY to run from 220 to 250, I have been skeptical from the start.  While I did call the three week test of the low and successfully exploited the signal, I was expecting a move down to 170 or even 150 before we resumed the move to higher highs. 

A move down in December would be great.  If we held up at the 191 level, I would be ringing the bell for a big move up to new highs.  Should we break down below 190, perhaps there would be much further to fall.  I try to be flexible in any case and usually have a protective position going the other way just in case I'm dead wrong in a big way. 

I think that if you are a long term stock holder, then you need to look at your assets just as you would your home, your business or other major assets.  You have some form of insurance on all.  Same thing with stocks.  If you want to stay long, you've got to figure out your "deductible" and then buy protective puts below the market.