Ship Of Fools
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, January 5, 2015.
Apparently Americans are feeling optimistic about 2015, at least according to a bought and paid for mainstream stream media. And why not, as on the surface things look great - right? Unemployment is low if you don't include participation rates; the economy is strong if you believe government bureaucrats and Wall Street liars; and, nowhere else is this sentiment be better expressed than in the stock market, which pushes ever higher to new lofty levels seemingly every day. So if you are in the stock market it's great to be an American right now, because the world is at your feet with all the money flowing in, evidenced in the strong dollar($).
Unfortunately for most however, it's only the rich who fall into this category, with the top 20% of the country's wealthy owning 85% of assets, and the top 1% almost half. But it's only the top 1% of the top 1% who are actually getting richer, the Warren Buffets of the world if you will, with everybody else losing to the slippage and diminishing returns of exhausted Ponzi finance, which will accelerate moving forward, eventually consuming those who think they have escaped to Elysium as well. Because castles built of sand are subject to the elements too, no matter how much spit is used to fortify the walls, so don't kid yourself.
Such is the nature of we humans of course, resorting to fantasy and delusion in attempting to escape worldly confines, which is the premise on which justification for fraud on Wall Street is derived. Increasingly diminished accounting standards, deceitful and crafty data (think GDP, incomes, etc), and generous growth forecasts are just some of the dishonest elements that have gone into producing the strongest stock market rally in American history these past six-years, and the party is not over yet as investors are expecting a good year in 2015. At least that's the 'party line' - the propaganda put out by Wall Street that's supposed to explain why stocks go up - because the investors want them to do so.
Of course this is all part of the game when playing with greater fool theory, where because America's wealthy are essentially fully invested, stock promoters must continually attempt to draw marginal money into the fray from holdout conservatives, the bottom 80%, and foreigners (an increasingly impoverished periphery), which will eventually be their undoing. In case you didn't know, this is how 'the rich' view 'the poor', as fools to be exploited. Unfortunately for them however, the rich will not be able to escape their humanity once the debt bubble bursts, likely predicated by the larger derivatives bubble, because we all live on the same 'ship of fools' whether you like it or not - where nobody gets off without paying a price.
This, is the message behind the likelihood we are at a precarious Grand Supercycle top in stocks, where like equally profound tops throughout history, nobody, including a clever and unscrupulous ruling class, gets out the collapsing Ponzi unscaved. Certainly Japan is the West's 'poster child' in this regard, unable to exploit an aged population further, and with no colonies to ravage further. America, with its aircraft carrier groups and military bases spread around the world, is the sole remaining super-power in a position to exercise such reach; however again, few prospects remain, forcing them to take on the other 'big boys', which is proving challenging to say the least.
In fact, it's this dynamic that should be the 'showstopper' for the American Empire, the Anglo-Zionist elite (also known as the 'deep state'), the West, or any other group of greedy rich pricks wrecking the world you care to identify. Because this lust for money and power is killing us all, literally, where these compulsions will eventually be reflected in the stock market despite best-laid plans. Plato identified this condition long ago - that human beings "are deranged, frivolous, or oblivious passengers aboard a ship without a pilot, and seemingly ignorant of their own direction" no matter how far up the food chain they reside - and that we are quite possibly beyond salvation as a race.
Sound crazy? Sound like we are a tad pessimistic, if not clinically depressed? Perhaps this is true to an extent given the circumstances, however at the same time, at least I am willing to live within the realm of reality, not in the materialistic and self-indulgent dream world that most, especially the poor, aspire to attain. Is this supposed to be how one measures sanity in an insane world? Because it's a funny thing with humans - when they don't have something, they want it more. But even if they get wealth and riches, rarely are they happy, which is why insanity grips the species, causing us to do things that hasten our own demise. The Vatican, which is one of the most powerful financial entities in the world, has awoken to this fact (that their greed is helping to kill everybody), and is speaking out about it through the Pope. Now it would be nice to see them do the Christian thing - for real.
Would this help? Probably not. The greedy bastards of the world will never recognize this is happening and populations will continue to grow through technology and resource exploitation, which is how the greedy bastards plan to make money, until we literally pollute ourselves to death. And this is already happening, and accelerating, with the global population now at 7-plus billion people, and growing. So, make no mistake about it, this is real and something one should endeavor to protect yourself against through all means available. This means not only reducing your carbon footprint in the world, and perhaps even speaking out about our growing problems in this regard, but also protecting yourself financially from the economic collapse these dynamics are forcing on us as well.
Moving away from physical environmental concerns then, but not entirely because if you truly understand it, pricing differentials between share (growth based) paper markets and physical commodities measure the speed(s) at which we are burning off the essentials of life, and the necessity to either speed up or slow down these rate(s) in order to preserve a future. Chief amongst these measures within the human experience at present is the Dow / Gold Ratio (DGR), with gold being man's most prized commodity money, although it could be argued (by the status quo) gold is no longer money because it neither sets any currency standard, or is used as fungible currency in everyday life by the multitudes. This condition set is most likely transient however (some form of a gold standard is likely to return), so we cannot agree with such folly, as with the unnecessary and accelerated burning off of our resources as well. (Do people need to drive gas guzzling SUV's even when petrol prices are low?) It should be noted in order to reach a 50% retracement with gold at approximately $950; this would put the Dow in the vicinity of 23,000 (see weekly and monthly plots in Chart Room.) (See Figure 1)
And when the DGR is rising, people are in fact burning off more precious natural resources and creating more pollution than when anchored money restrains man's activities, because rising gold prices work to keep his excesses under control. As you can see above however, within the context of the cyclical counter-trend rally in which we find ourselves at this moment, it appears the 1%ers and their ilk still have more room to ravage the earth, meaning stocks are likely heading significantly higher in 2015, and gold lower, possibly (likely) down to test the large round number at $1,000, and below. (See channel breach target ~ $950 below.) The fact that this would likely mark a Grand Supercycle top in stocks, and perhaps something more profound (think a showstopper for civilization as we know it - is Japan signaling such an outcome?), which could make 2015 an important year in man's history, to say the least. (See Figure 2)
And again, this is why stocks continue to march ever-higher, where as discussed previously, and as can be seen below in Figure 3, where once the S&P 500 (SPX) gets above 2080 on a sustained basis, it will have broken back into the (primary) long-term channel. What does it mean if this occurs? It means that both the indicated Fibonacci resonance (~ 2400) and channel top targets come into play, meaning the SPX could be propelled as high as 2600 as stubborn (insane) short sellers / hedgers are squeezed out of their positions en masse once again. The question then becomes will this be enough to finally break these characters, given this insanity has been going on for some three years now essentially? Given we are likely never to make another bubble above the primary channel like that witnessed in 2000 because the US middle class is being destroyed due to life cycle, and if the Bollinger Band® Width Indicator has any predictive value remaining, 2015 should mark the top for the SPX, sometime around summer if the indicated descending / contracting triangle runs right into the apex. All we need is for tech stocks to break back into 'extreme bubble territory', as indicated below, and this would be a piece of cake. (See Figure 3)
Technical Note: If the SPX is unable to break higher, two things could happen. Obviously, stocks could break lower, but until the SPX / CBOE Volatility Index (VIX) Ratio (see Figure 4) closes below the 21-month exponential moving average (EMA), this second possibility remains, that it could crawl up the bottom of the long-term channel seen above until later this year before it breaks lower on a sustained basis. It should be noted such an outcome is looking increasingly likely given the mixed technical / sentiment related factors that are discussed at length further below. What does this mean for gold? Lower prices in all likelihood (think gold to 800 or lower), where it would need to fall further if the DGR is to make a 50% retracement. It may not need to make such a big move higher given how it collapsed all the way from 45 to 6 in one movement over 11 years, however with a deflation scare (and actual deflation in non-subsidized economies) ahead of us at some point, caution is still the word.
Of course, if this was to be a repeat of year 2000 sequencing, then this should have occurred already, opening the possibility it never occurs. Such an outcome would make sense from the perspective a widespread bubble of this degree (the tech bubble of 2000) should not occur within the same generation (because of financial and psychological reasons), where although the nominal NASDAQ (COMP) might make it to new highs, the 'bubble aspect' of the move would not be duplicated. (i.e. when measured in real terms - using the Dow here.) Because even though the clowns on CNBC® would like you to believe the public is not participating in this rally simply because they are afraid, it's more than that, it's the fact the middle class is being systematically annihilated financially by 'the establishment', and that they could not participate even if they wanted.
Remember, 85% of assets are controlled by 20% of the people, and even though the top 1% could still go 'all in', with only 20% in cash, at these lofty levels essentially they already are, meaning the only way stocks are going higher is via continued acceleration of financial engineering - the financial repression (monetizations, zero/negative interest rate policy [ZIRP/NIRP], VIX suppression, precious metals suppression), accounting gimmicks, and buybacks. Unfortunately for the bulls, all of these means have already been exploited to their fullest potential; leaving only shear speculator grit and foreigners to fuel stocks further in 2015. What's more, it should be noted that black swans arrive out of what appears to be nowhere, making today's bulls (think SPX futures) perfect candidates for a shearing.
In relation to the January trading pattern this year then, and looking at a year 2000 comparison, as you may remember, in that year stocks fell hard in the first week (5% for SPX), but recovered into month's end, given volatility was already picking up with a Dow top at options expiry. Looking at this, the question then becomes why did it happen, and can such an outcome be expected this year? Answer: In 2000, most hedge funds and other traders were making big money on their trades, which is why stocks maintain momentum right into year-end, followed the sharp sell-off in the first week of January as traders were deferring the payment of capital gains taxes until 2001.
This time around, most hedge funds and active traders did not have big gains to worry about, which explains the selling in the last few days of December, because traders were not worried about deferring taxes. This is not to say long-term holders of stocks don't have substantial tax liabilities, evidenced by continued selling in the opening trading days of January, which is part of the explanation for the selling despite the stronger dollar($), a discussion that will be continued in further detail below. These guys will matter materially at some point, but it could be argued this point is not right now. What is important moving forward then, is the January Indicator, which has pointed to lower stocks over the past three-years with down finishes for the month, producing the opposite outcome by year-end because of how this affects speculator / hedger betting practices for the remainder of the year. (See Figure 4)
So, if January finishes higher this year, which again, would be opposite to the last few years, apparently this will cause speculators / hedgers to bet negative less, which would be a problem for stocks eventually, especially if momentum takes them higher right through the first quarter, just like in 2000. Of course it was tech stocks that led the broads into this blow-off, which as you know from comments above, has been a problem. Enter an idiot, or group of idiots, doubling the open interest put / call ratio on the NASDAQ 100(NDX) in one day last week based on the trade (weakness), which is the kind of speculation we need to see in order to have some semblance of the year 2000 repeat, and cause some degree of a breakout higher in tech stocks against the blue chips, pictured above in Figure 4.
Unfortunately, we also have the small speculators very long not only NASDAQ futures, but also the Dow and SPX as well. Add to this the head and shoulders pattern in the NASDAQ 100 / Dow Ratio, and the only conclusion one can come to regarding the stock market right now - is it's a 'fool's paradise' - where only the reckless can be long, and short-minded short. Perhaps this explains the weakness in stocks Friday set against the big move up in the dollar($). Is the party over for all the money running to the States for 'safe growth'? One does need wonder given other historical precedents. It would be nice to see a stronger January close this year from a contrarian's perspective - that's for sure. Because call what you will, the Mother of all Manias, or the central bank bubble, when this thing bursts, it's going to be a dusey, and it would be nice to able to identify probabilities in this regard. Again, in this regard at the moment, it's a fool's paradise, where it's literally impossible talk about such probabilities just yet.
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