Wednesday, March 18, 2009

End of Day, 3/18

So, when you are a Central Banker and you’ve run out of ammo by lowering interest rates to zero, what’s left? Throw money from helicopters. That’s what Bernanke said he would do, and that’s what he just did. It is a desperate move, a move of last resort.

While the $300 billion designated to buy the long end of the bond curve isn’t *that* sizable in comparison to the size of the bond market, it is a start, one that surely will lead to more buying in the future. They will have to. I highly doubt foreigners will continue to buy our debts under these conditions. Once that selling starts, or if they simply stop financing our debts, then Bernanke could wind up being one of the only buyers of debts at such a low level of interest rate. I see the potential for a nasty, nasty, spiral. While it may take a while to come, the odds are now high that it will.

The spiral begins when investors overseas stop to finance our debt or begin to withdraw – this may have already begun. Bernanke buys to drive rates down, but in the process devalues the currency, making low rates of return even more unattractive – more investors leave. So, to keep rates low, he buys even more and the spiral continues. UGLY if it gets rolling.

A lot to cover tonight and I’m running late because of the other articles and computer malfunctions, so let’s get looking at what happened today… The DOW gained 90 points (1.2%), the S&P gained 2.1%, the NDX rose 1.2%, and the RUT gained the most, rising 3.5%.

The XLF rose a gigantic 10%, IYR rose 5.2%, GLD jumped the equivalent of $60 from the low this morning, and the TNX (10 year treasuries) lost an astounding 15.7%!! Those are huge moves.

Internally it was another very bullish day with advancers leading decliners by a 4 to 1 margin on the NYSE, while volume was 89% on the up side. New lows expanded by just two, to 19. The McClelland Oscillator is above 300, a level which is very overbought and usually leads to sizable declines.

To the Charts…

The 10 minute SPX shows a rising channel that is unbroken under its current configuration. This still has a rising wedge look to it with a throwover on the FOMC announcement. The stochastics are mid-range here, but extreme overbought on all timeframes through the daily. The percent of stocks above their short term moving averages is also extreme:

Next is the NDX which shows that rising wedge quite well. Again, a throwover after following the top trendline. I don’t have it pictured here, but the NDX is now above its 50dma, and today it pinned the upper Bollinger and retreated – pretty bullish overall, but very extended short term:

If we zoom out at a 3 month chart of the SPX, we can see that today’s candle pinned the green 50 day moving average and then fell back inside the wave 5 channel, meaning that it’s still quite possible that we may still be in wave 4:

Here’s the SPX P&F… note that it clearly shows we are coming up on resistance.

Here’s the same view on a 1 year chart showing how close we are to volume resistance. I note that the weekly charts just issued new buy signals on the stochastic for all the major indices (they just crossed and a decline tomorrow could actually uncross them on my settings):

The DOW one month daily shows that it is still under the 50dma, overbought, and that today had rising volume. The volume was higher across the board which sometimes can mark the end of a move, but there’s no doubt that the rise over the past seven or eight days has been very powerful and could extend. The confluence of resistance, the 50dma and upper Bollinger should keep prices from running too much higher before a correction occurs. This run is one of the longest, uncorrected runs in the entire bear market to date:

The XLF had a huge move on higher volume, winding up OVER the upper Bollinger. That is usually worthy of at least enough pullback to get back underneath it, although overall it’s very bullish looking:

The P&F chart for the XLF has a new breakout target of 15.50… that’s a LONG way up in percentage terms from 9.40:

This is a one month chart of TLT (20 year bond). Monster candle with a huge range, however about half the move came back off. Perhaps people quickly assessed the implications? We’ll find out soon enough… it was obviously unable to break free of the upper range of the latest channel:

The range on the TNX candle today was so huge that I had to zoom out to a 3 month view just to see something to compare it against. MONSTER move. We will have to watch bonds closely, this became even more important today:

Here’s a 6 month chart of GLD. That’s another monster candle on monster volume. The game that was played here today was NASTY and I believe it was INTENTIONAL and done with malice by those who knew what was coming today. No, I can’t prove that any more than I can prove that the Fed has already been monetizing the long end of the curve (which I think they have). However, the breakdown below that 6 month trendline, on volume, was classic and had everyone heading to the exit in their gold positions, then wham. That’s the type of manipulation that makes our current markets look like something that is just not worth playing in or with. I can’t think of a better way to destroy investor confidence. The Pigmen running this type of deal are going to get no sympathy when they finally get called out for what they are:

I flipping through my charts and noticed how perfectly the Major Market Index, one of the biggest, touched the pin low from November. The S&P is already well above that pin:

Next is a dollar daily chart showing the huge breakdown in the dollar today. It closed well beneath the 50dma:

The CBOE Total Put/Call ratio reached an extreme today at just .65… this is one of the lowest readings in the past two years:

Here’s a 3 year chart of the P/C so that you can see how this low compares to others. It’s difficult to do analysis on this chart, but if you line up the spike lows you will find that in this bear market those have corresponded closely, but not perfectly, with at least intermediate tops:

The Doc just sent me his thoughts on today’s action and I thought I would share them with you as his thinking is clear and rational:

Okay, I did some thinking and reading about the Fed's actions today. Here's what we know. Nobody knows what the unintended consequences will be and nobody knows for certain what's next. Anyone who claims they understand what this means for the markets is guessing. I think the long term is set in stone that we are at best headed for Japan. The main difference with Japan being our debtor status which means we are in even deeper shit. At worst we are heading for Mad Max which I also think got a little more likely today.

The bottom line for trading is I think today IS a game changing event to the fundamental environment. We need to pay very careful attention to the trends established off of today's action. Whatever we get, gold up, stocks up, stocks down, bonds up, it doesn't matter the trend, find the channel and play it, don't fight it. I think you need to abandon all pre-conceived notions about what we might be heading for in the short and medium term in all asset classes.

I still think it is most likely this is all part of wave 4. If the market picks up and starts to anticipate the logical end game to all this wave 4 could even end right here. That said I'm going to have orders ready to bail on equity shorts on a break over 800. If 800 does break, oil and gold should do very well so I like the hedges there I may not get long right away, but I'll change my strategy from short the pops to buy the dips as long as the channels hold up. My guess is 800 won't break until after opex if it does.


Thanks, Doc. I catch your drift about looking for a shift in the trends. I don’t think this is game changing in regards to the fundamentals the way I view them, I think this is a part of the degenerative process. This is what it looks like when debt saturation occurs and the government/central bankers are taking last step desperate measures to save the old system (or intentionally crash it, depending on your conspiratorial point of view).

At any rate, the debts are still there and still have to be serviced while the underlying math is only getting worse. Yes, the actions will help the financials and the banks, AGAIN. We could very well start to see different leaders and reactions in different equity, bond, commodity, and currency segments. All will have to be watched with an open mind, I agree. We’ll keep channeling and the trends will present themselves.

The Fed increased their balance sheet from $2 trillion to over $3 trillion today, a 50% increase in one day – all on their own, with no oversight from anyone. Today reminded me very much of the day the TARP was announced, the day I wrote Death by Numbers.

I’ll have to revisit that soon, the math is only getting worse. For my family of 4, it got $15,000 worse today. The TARP didn’t change anything, although the politicians and bankers credit it with avoiding a complete meltdown of our financial system. I completely disagree. I credit it with ensuring a complete financial meltdown. Today’s steps are just another step along the way to the destruction of yet another fiat currency experiment. It barely drew attention in the mainstream media that I’ve seen so far. Printing money, however, is the last resort of fiat monies when all else has failed (good choice of songs, Point).

The Eagles – The Last Resort: