Tuesday, October 4, 2011

Morning Update/ Market Thread 10/4

Good Morning,

Equity futures are lower again this morning after key support was broken yesterday and a new closing low was made on most major averages. This morning the dollar is slightly higher, bonds are slightly higher, oil is lower, gold & silver are slightly lower, and most food commodities are continuing lower as well.

No economic data out so far this morning, but Factory Orders are released at 10:00 Eastern.

The breakdown in oil I pointed out yesterday is significant. There is support in the $70 area now, but below that the H&S target is $45. That price level would be good for the economy here, but bad for the oil producing nations who are as addicted to dollars as we are to their oil. Again I note that every single excursion in the price of oil above $80 results in a turn down in our economy. Combine that effect with macroeconomic debt saturation and you are going no place fast.

Below is a 3 month daily chart of the SPX. You can see that a new low below the August lows was made yesterday. The trend obviously remains down, and this break is targeting the 1,000ish area on the SPX:

The DOW Industrials also made a new closing low yesterday – not an intraday low, but a closing low, and that’s the one that matters. This morning it is making new intraday lows on the open:

This new low on the Industrials confirms the new lows made earlier on the Transports thus it is a minor degree DOW Theory sell confirmation that wipes away the potential non-confirmation had the Industrials failed to make that new low.

Instead, DOW Theory is working on a MAJOR degree upside non-confirmation which is often in place at major market tops – and one is in place now. This happened because the Transports recently made a new all-time high, but the Industrials did not even get close. Below is a 5 year chart of the Transports showing the recent all-time high in the circle – barely:

Below is a 5 year chart of the DOW Industrials. For the DOW to now confirm the Transports upside new high, it would have to travel almost 4,000 points up from here – not going to happen anytime soon, and this is a major degree DOW Theory non-confirmation:

Now let’s talk about why the Transports hit that new high in the first place. Fundamentally what was the reason? Was energy so cheap that the transports deserved that valuation? No, oil was shooting the moon at the same time. What was happening is that QE2 was pushing billions of paper fluff into the markets where the HFT private bank speculators were fluffing up, pumping up everything and anything they could – all the way to ridiculous valuations in the “Fed’s” attempt to create inflation. Not only that but the accounting standards that produced those earnings have never been looser, and corporate “profits” in general are vastly overstated due to the mark-to-fantasy world which has been allowed to propagate.

Just yesterday rumors were flying about American Airlines being on the verge of bankruptcy! How can that be with the Transports still so close to an all-time high!? It can’t be – it simply doesn’t add up. But of the two, AMR bankrupt or Trannies at all-time highs, I would tend to believe that AMR is bankrupt. And the cost for AMR to access capital is shooting higher, just like Greece when investors began to finally come to grips with the impossible math.

In short, the Transports at all-time highs was nothing but fluff, and like the marshmallow it was, is now melting when a little heat is applied – ditto for the broader market in general. But this DOW Theory non-confirmation is major league and should not be ignored.

Remember back in 2009 when the financials were coming up off the bottom? Because they were so low, the rise in percentage terms sounded quite large and led many an idiot on CNBS to proclaim that they were the best performing sector. All the while I was pointing out that, no, they are the worst performing sector, even with all the trillions being pumped into them. Looking back in hindsight now at a 5 year chart, I am clearly once again proven correct – just look at the non-confirmation of the financials compared to the Transports in terms of getting close to making new highs, miles and miles away:

Remember, this XLF performance is with “record earnings,” quarter after quarter of perfect HFT trading, and we know that the market is not real, it is these same players who have made it not real – yet they are not buying each other’s stocks to the same heights… why do you suppose that is? Could it be that they know the rot is hiding under the carpet? Oh yeah. And this non-confirmation is critical, never have the major indices just climbed and climbed without the financials coming along for the ride.

While we’re looking at the big market picture, let’s examine a 20 year chart of the SPX. Here you have a major league double-top and collapse. Then we get a straight up bounce on the back of trillions in paper chasing and false accounting. Already the current decline has taken it back below the long term uptrend line, the dashed green line:

Now look at the dashed blue line that is down slopping – there you see the bottom of the potential channel, where if stocks continue on the present trajectory will arrive at that line somewhere around the 600ish (or slightly lower) level. Will it get there? Don’t know, but that’s probably real close to where it belongs with proper valuations and the fluff removed.

History proves that it is the second major wave of deflation that creates the real change necessary to rebuild and to start anew. If that holds, then this wave down is the actual buying opportunity of your lifetime, and probably of your children’s lifetimes. Yes, this is a monetary condition – one that is going to continue to produce hugely significant “other events.” But it is those very other events that will change the system and clear out the debt – it is coming.

If you’ve been following my advice, you got “real” a long time ago – you have shunned the markets except enterprises you know are real, and you hold cash, and some precious metals. At some point you are going to want to participate in the markets again once they have been washed clean of the criminal enterprise. I don’t think picking an exact moment is a good strategy, and I don’t think staying out forever is a good strategy – the system will change, but it may or may not change overnight, that change may be sneaky and incremental. And I propose that at some point the market gets so low that you have nothing to lose by participating – the reason being that if it continues into nothingness, then society would have broken down to the Mad Max level and your money will no longer be of any value regardless.

So, what I will say I plan to do is to continue to invest in my business that I know is real. And I will also begin to look for opportunity with income producing properties and also in the markets. One strategy for the markets will be to begin buying in incrementally once the SPX gets below the 1,000 level. Not all at once, perhaps 10% at 1,000, then another 10% at 925, then another 10% at 850, etc., so as to be fully invested with whatever you plan to have into the market by the time the SPX reaches say the 550 level (don’t give up all your PM). Again, if it goes below that level it really won’t matter. And regardless of what new money system comes along there will still be real businesses left.

One last thing… yesterday the VIX closed above the upper Bollinger band. This is the setup for a market buy signal that will be triggered once it closes back inside of the Bollinger band range. It may not happen for awhile, and I would consider any move higher just another wave to be sold, but it may be a wave that lasts a while as we now have 5 waves lower in the general markets.