YEAR-END RALLY!

Typically at final tops is an oversold rally among the Dow Components and flagship stocks that ‘juice’ the broad averages higher, but few of these individual names actually make new stock highs.  The implication is that investors will hit the ‘EXITS’ just prior to the ‘you know what’ hits the fan, but suckers in the public for what they feel is ‘a runaway move’. This course of action is identically repeated just weeks before the end of every major bull market top - simply because it takes a great deal of time for institutions to unload blocks of millions of shares to those buying in at these euphoric levels.

The illogical nature of the stock market should remind us that there always comes a time when investors will forcibly convince themselves (under some unfounded reason) - to gobble up shares of any company,   not knowing the stock is rising - because it’s being squeezed for its every last penny!  This certainly is the case with Apple, Google, and Amazon. But of course, they will top out just before or with the market as I previously explained.

Fortunately, there is still plenty of time before any of these meaningful signs of trouble - bubble to the surface. And while there are subtle warnings that are current, they do not provide any serious sign to worry, at least not yet.

Simply put, the stock market is set in motion to resume its year-end uptrend before the culmination of this four year Bull market cycle. And soon after this current decline bottoms out, it will be the very last worthwhile position for longs to accumulate shares into the final quarter.

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Darah

EYE OPENING BULLISH POSSIBILITIES

A market that experiences a climatic selling frenzy can often generate hyper-sold conditions which merit for a rally, but not one that is sustainable to recover from such severe technical damage. Instead what occurs is prices fall back at minimum to retest the prior low, but the decline in motion is not nearly as dramatic. Thereafter becomes a scrimmage between both buyers and sellers until a general support area can be agreed upon, and to where the next bottom can then be established.

Currently, the U.S. Dollar index does not at all reveal any convincing price action that is worthy of a true bottom. This has significance because many asset classes within the stock market respond inversely to the performance of the greenback currency.  Essentially by knowing the dollar’s next move can better prepare your analysis in other markets.

Take for instance the Daily chart I have below.

I expect this current bounce within a panicky decline to fulfill another low here within the next few weeks. Following what should culminate into a basing period, I anticipate a counter trend rally to emerge and set the stage for a corrective move in both stocks and commodities.

Bonds:

I don’t’ think I am stating anymore than the obvious about their being a major top in our U.S. Bond Market. The Federal Reserve clearly surprised many investors with the purchase of mortgage back securities, and not U.S. treasuries as was done with QE1 and QE2. Consequently, this holds very little incentive for bond holders to continue purchasing U.S. Debt and will likely look elsewhere to reposition at least until now through the election.

The technicals imply that prices have materialized into a classic Head and Shoulders formation, but more importantly, generated a decisive downward break of the long term cycle trend-line that for many months held as previous points of major support. The occurrence of these two specific bearish events structurally classifies our U.S. Bond Market as being in a confirmed downtrend.

Above all else, you should know that for any asset class- be it bonds, stocks, or commodities; all are driven by only two specific fundamental principles. How much liquidity is available, and how much of that liquidity is willing to be invested.

Emerging on the scene is a three headed monster that will eliminate all fears of liquidity ever running dry between now and year end. It being- the flight of capital from Europe into the U.S. Markets, the intended inflationary tactics instrumented by the Federal Reserve, and the outflow of money from U.S. Treasuries into undervalued sectors of the stock market.

I think at this point we can safely say that all bearish bets are off the table, for stocks that is. And nearly every broad market average index is on the verge of ascending to new all time highs, re-confirming the very expectation I outlined in post titled, “Are we to Blame Nixon.”

Stocks:

At the moment, however, the Stock market is likely looking at a consolidation period very similar to the month of August before it resumes its advance higher.

Since the Federal Reserve called to a halt a forthcoming grueling market decline by announcing its new supportive stance on aggressive monetary policy, I think it’s time that my longstanding target of 1565, give or take 20 points on the S&P 500 will come into fruition in the months ahead.

But when I say 1565, we will be so close to the previous 2007 bull market highs that the political incentive to send prices to new all time highs is more likely. This would create an even bigger illusion of both “the richer effect” and a true economic recovery.

Flirting with a new Paradigm Shift

It has been my long expectation that the Federal Reserve would uplift a sagging financial system by way of injecting more liquidly into our economic bloodstream.

On Thursday September 13^th, Fed Chairman Ben Bernanke announced Quantitative Easing 3, initiating the purchase of 40 billion dollars in mortgage backed securities per month on an open-ended basis.

A mechanical breakdown of this style of Keynesian economics is quite intricate, so I will explain only one chapter as it relates to our current fiscal model of growth.

Essentially by keeping rates at suppressed levels, homeowners are provided with the incentive to refinance their existing mortgage rate. A lower rate will in turn cause you to pay a lesser amount per month on your mortgage.This money that you save will in theory be used to spend on products and services offered by the very companies that create jobs in this country.

But as you know, any company with the purpose to accumulate generational wealth must be equipped with expanding profit margins and increasing revenue streams over long durations of time. This criterion is only possible when consumer demand is present.

The problem is that our current demographics do not quite support this natural cycle of demand. The baby boom era still remains a large part of our population, and many of them are either living on a fixed income or exiting the work force. Plus you throw in the fact the rate of inflation is not keeping pace with their pay checks and you have a recipe for disaster.

So companies that benefit from the short-term effects of monetary easing are only profiting from an economically self defeating model which artificially compromises the absence of real demand.

Therefore you will always have pockets of society that get left out, causing the poor to get poorer and the rich to become richer. This development creates an even greater separation of socioeconomic classes over time.  

Resting on the Bernanke Decision

 Often is the case that the dollar will reverse just before or within days of a major anticipated news event. If I'm right, today's potential bottoming tail candlestick just shy of the Fed’s announcement tomorrow may be an indication of a Bernanke disappointment. On this basis, the dollar has bottomed and will likely undergo a sharp upward reversal into the remainder of this week.

If however the market likes what it hears since now days language itself is a measure of stimulus, then expect to see a sharp 1 to 2 day downdraft which will finalize this current decline.

Either way, I do not expect this deeply oversold condition to at all  be making any accommodations for QE3 tomorrow, or anytime soon for that matter.

 

IF the dollar does drop another day or two, Gold will likely make an advance to psychological resistance at 1800 before marking a short-term top.  Otherwise, a top is in, and prices should initiate into a corrective phase over the next 3 to 4 weeks stalling at its 50 day moving average.

I also want to emphasize that this upcoming pullback should reside anywhere between 1650 and 1700, but it may be the very LAST time this year we ever see the metal price trading here again. The reason being is a soon glory cross that will confirm the re-emergence of a new bull market.

 

Say what you want about moving averages, but they seemingly have provided as a worthwhile indication of trend changes throughout history. And while no indicator is perfect, judging by price alone, the yellow metal has certainly been acting very strong lately.

I expect by mid October this cyclical turning point will be within a larger framework of drastic inflationary measures pursued by all nations to artificially revive their homeland currencies. Consequently, Gold will materialize into a hyper-inflated market that decouples dramatically from all other asset classes.

Remember, 95% of people are not actually convinced of a GOLD BULL until the trend is in its latter stages. And only then does it become too expensive to buy. The only arguable explanation that would end the bullish case is until real rates surpass one, or at least when the public figures out that those levels can be realized.

I don’t see that happening anytime soon, do you?

 

Gold and Silver

We are currently witnessing a short-term commodity run that is wildly bullish in both sentiment and price. Suffice it to say, these pivotal times where Investors ignore risk, and are overconfident in their decision making actually mark key turning points.

Gold and silver have underwent a parabolic move, riding on the back of expected further easing from our Federal Reserve. This I can tell you will dissapoint many investors.

Consider this analysis.

All metals are now more overbought than their previous peaks of months prior. I would not see this as a concern had this just been on a daily chart, but it’s clearly visible now on the weekly chart.

Silver

 

Gold

 

This condition certainly adds weight to the bearish case in the coming weeks.

We may have a little more room to run for the very short-term, however, it would be unwise to overlook a pullback or even deeper correction looming just ahead.

September 6th Market update

Stocks:

What’s the worst thing that could happen?

The Dow and S&P go to a new high and form an even larger megaphone bearish reverse wave top.

The market is evidently defying gravity that for many has been psychologically unbearable, and unexplainable. The answer is a purely manipulated market.

The deep pockets on Wall Street are squeezing out every last penny in the remaining glamour stocks. Most of these “dogs” are trading for at least a 15% premium, and even within in a thinly traded market, it still is liquid enough to jam the shorts to new recovery highs.

S&P 500 Daily Chart 

 

I should also point out that the recent narrow range trading days have brought about a fairly oversold condition. The implication is that prices are likely to be within a bullish consolidation. SO, a potential rally from here may warrant a PRIMARY trend change at roughly 1430-1450 before the final 5^th wave is complete.

Preventing any catastrophe, the only evidence that would negate this stated bullish possibility is a confirming move below 1380 on a weekly closing basis.

 

S&P 500 Weekly Chart

Historically, when broader internal indicators are not only overbought, but diverging, you are basically WAITING for an intermediate decline.

The downward expectation has so far been totally absent and the fact that the market continues to defend the 1400 level is suspiciously bullish.

We know the downside risk overrides this immeasurable bullishness eventually, but until we see a steeper sell-off, the bulls remain in control.

Crude: 

Crude Oil will be one to watch. It moves in tandem with the market, but neither stocks nor the economy can withstand higher prices at the pump, at least not at this rate.

Crude Oil- Daily Chart

If oil can push a bit higher, it's less likely the market can sustain a strong upward advance. That’s why I think if there is one last hurrah in all markets, this has the potential to be it.

VIX:

 

The VIX being already overbought does not quite suggest a market top either. There is potentially a Head and Shoulders Top on the hourly chart that could allow more downside.

VIX- Hourly Chart

In my opinion, it will hold above the 13.30 level and set up a buying opportunity. This scenario would create a divergence between equities and the VIX, marking a likely reversal point.