Thursday, May 20, 2010

Post Market 5/20

Significant levels of support were breached today, despite what appeared to be some sort of intervention in the Euro. The DOW closed down 376 points (3.6%), the SPX/NDX lost 3.9%, Transports 4.9%, and the RUT was the leader losing 5.1%. The SPX is now down 12.2% from the April 26 high.

Oh the wailing and gnashing of teeth! ZeroHedge’s Tyler posted this photo of the reaction from the CNBS anchor staff, very telling of the maturity levels found on that set, lol:

The internals were a mess. 98 new lows and only 7 highs on the NYSE – that is a sign of significant weakness, especially for a market that was recently at rally highs following 14 months of ridiculous up movement – yet, it is not anywhere near washout bottom type of numbers. Today 98.6% of the volume was on the downside, a severe panic day. The problem is that it's not yet at washout levels of volume, this is important as it means to me that the selling is likely to continue.

The day began with the SPX breaking beneath 1,100, that was key support and then it went after the 1,066 pin lows from the “flash crash,” nearly making it there but closing on the day’s lows just above at 1,071.

Below is a 3 month daily chart of the SPX, you can see that we closed well beneath the 200dma (red line), and also below the green line which is a 20 year uptrend line. That uptrend line is important, it is the line that caught the lows in 2002 and 2003 but was broken in 2008 and now again today:

Let’s zoom out to a 20 year non-log scale chart to view that green line in context… see how it stopped the decline in 2002 and 2003? This is a monthly chart, note that the 200 MONTH moving average is just below 1,050. The RSI is on a fresh sell signal and is exiting the overbought area. Finally note the falsely steep slope of the bounce and look at the range of this month’s candle – it greatly exceeds the range of any of the last bull market’s candles. That’s because this is not and never was a bull market:

What’s clear to me is that from the April 26th high we moved lower into the 1,066 low and bounced. That’s wave 1 down and 2 up. For the past 6 sessions we have been moving downward in what appears to be wave 3 – it has all the characteristics. Wave 3s cannot be the shortest wave. Wave 1 was 155 points. If you subtract 155 from 1,173, you are left with a minimum target for wave 3 of 1,018 - minimum. Zooming further out we can see that there is support in the 990 to 1,020 area:

As you can see on this chart of the SPY, volume was not at panic levels:

The major indices except for the Transports and the RUT closed beneath their 200 day moving averages. That’s bearish.

The Transports broke below, and closed below the May 6 pin lows. That sets up the potential for a DOW theory sell signal, needing only for the Industrials to break 9,870… some technicians would say it’s already happened based on a closing basis as we closed below the prior closing low on both the Transports and the Industrials:

The RUT came very close to closing below the pin lows as well.

More ominous for me is that the entire globe is melting down. Europe, Asia – including Japan and China, Australia, Brazil… all are now moving significantly lower. The western world, awash in debt and false accounting is clearly in deflation mode once again. Note that the psychology is different during this decline. The latest trillion for the banks didn’t help, it hurt. That’s because they can’t fall back on false accounting more than they already have with mark to fantasy. The added debt based money never was a solution that was going to work; it was simply the greatest robbery in the history of mankind.

What’s worse, technically, for the world markets is that the Emerging Market Index not only broke below and closed below the May 6th lows, but it also broke below and closed below the February lows! So much for the theory that emerging markets were going to lead the world. This index is now back to where it was in July of ’09:

The financials, of course, are sick and broken. Should defaults begin to occur in the global debt markets, the banks that hold those debts are toast, even with mark to fantasy. Thus, my conclusion is that this is the wave down that ushers in meaningful change. Unfortunately I think that people who currently hold power will not give it up easily. You are about to be distracted with “other events” that history says are coming.

You will be led to believe that there are no solutions other than austerity. That is patently false, it’s only true inside of the debt-backed money box that supports their power structure.

Moving back to the markets, the currency markets are ringing alarm bells. The Point & Figure charts for the Dollar, the Euro, and the Yen are now all saying the same thing – that should worry you because what they are saying is that they still have about 30% further to travel. The Dollar, of course, has been strengthening and now has a target of 112:

The Euro has a bearish target of 92:

And the Yen has a bullish target of 151, or about 35% higher than here. That’s a bad thing because most of the world has been short the Yen and the further unwind of the carry trade means more deflation for Japan and the world:

And that’s the FEAR, isn’t it? A self-reinforcing deflationary spiral? That’s what the markets are saying, and it’s exactly what Bernanke thought he could prevent. They can’t because of the psychology shift. Never again will they be able to toss trillions at the mortgage market on behalf of the bankers – the people now are familiar with that game and they're tossing politicians who were bought and paid for enough to vote for it.

So now fear and volatility are back. During bull markets the VIX does not exceed 40… today it exceeded 46:

VIX 3 month:

VIX 2 year:

VIX P&F target = 56:

These are high levels and the CBOE Put/Call ratio went to 1.5. That’s extremely high, a point at which market turns can occur… but yet these types of extremes are also where market crashes come from:

What happens in the markets tomorrow? It could be ugly, especially if markets overseas continue to descend. Be on the lookout for a high volume down move or intraday reversal that could mark an intermediate bottom.

I have been mentioning that I thought global markets are overvalued and clearly exhibiting signs of yet another bubble. I’ve been showing Hyman Minsky’s bubble stages and that you should pay attention to those stage 5 “wise voices (who) will stand up and say that the bubble can no longer continue. They argue that long run fundamentals, the ratios and measurements, defy sound economic practices. In the bubble, these arguments disappear within one over-riding fact – the price is still rising. The voices of the wise are ignored by the greedy who justify the now insane prices with the euphoric claim that the world has fundamentally changed and this new world means higher prices. Then along comes the cruelest lie of them all, “There will most likely be a ‘soft’ landing!”’

A couple days ago I mentioned that it now looked like we were progressing to stage 6 with the insiders already sneaking out the exits… and here we are:
Stage Six – Financial Crisis/Panic:
A bubble requires many people who believe in a bright future, and so long as the euphoria continues, the bubble is sustained. Just as the euphoria takes hold of the outsiders, the insiders remember what’s real. They lose their faith and begin to sneak out the exit. They understand their segment, and they recognize that it has all gone too far. The savvy are long gone, while those who understand the possible outcome begin to slowly cash out. Typically, the insiders try to sneak away unnoticed, and sometimes they get away without notice. Whether the outsiders see the insiders leave or not, insider profit taking signals the beginning of the end (remember who has sold their rental properties?).

Stage seven – Revulsion/Lender of Last Resort:
Sometimes, panic of the insiders infects the outsiders. Other times, it is the end of cheap and easy credit or some unanticipated piece of news. But whatever it is, euphoria is replaced with revulsion. The building is on fire and everyone starts to run for the door. Outsiders start to sell, but there are no buyers. Panic sets in, prices start to tumble downwards, credit dries up, and losses start to accumulate.

This is where you may see the “lender of last resort” who is usually the government. The government, although they were talking up a soft landing, are now forced to step in to prevent the crises from spreading to other sectors. Ironically, this is where the savvy investor who profited before, really profits now. With government backing, they are asked to step in and return “normalcy” to a now damaged sector.

The government’s attempt to “put out the fire” usually works. However, the conditions beyond the year 2010 will require oceans of water that the government does not posses. You must be ready!

I wrote that in the year 2005 and now here we are, trillions are not enough. Folks, there are major global events and change coming. Our monetary system, not just our financial system MUST change. Again, the powers that benefit from them will not just let them go while they sit quietly by and watch. In Thailand the people are setting the power structure’s buildings on fire. There’s more of that coming, it’s a legitimate fear.

That fear, by the way is not just psychological. Many market callers have written about “animal spirits” and market psychology, but what they don’t write about is the very REAL underlying triggers. When the rule of law does not mesh with nature, eventually the system breaks down and animal spirits are required to enact meaningful change. For example, the math of debt backed money doesn’t work – that’s REAL and there are limits. It is destined to fail. Likewise, the planet only has so much easy to get oil and a population and energy demand that is growing exponentially. There’s a REAL limit in there – we are not taking care of it properly, so animal spirits are required to enact the change that’s necessary.

While I have seen these events coming, I see that eventually mankind will take a leap forward. Unfortunately we may have to traverse those other events in the here and now. My advice is to get ready for those events… pray that they don’t come, but be mentally and physically prepared, be careful, and act conservatively.

Robert Prechter from just this afternoon (ht RRH):