Excerpted from the January 17 edition of Notes From the Rabbit Hole.
The broad markets are at a critical juncture and as Mr. Alan Gayle observes in the AP piece Wall Street rebounds after banks report big losses: http://tinyurl.com/9ozq9z "It's that tug of war between problems and promise." Yes Alan, it is, except that I would qualify the problems as being real and ultimately devastating and the promise as being nothing more than the 'hoped' for technical rally that the market is attempting in fits and starts.
The NFTRH working plan calls for global stock markets to stabilize, with idealistic sentiment getting whooped up in anticipation of the 'change' that the new presidency will bring to the US and its relations with the rest of the world. The plan also considers the traumatic over sold condition on weekly charts (with bullish divergence). The markets are due, but will that translate into something of substance?
Typically, the banks should be leading the broad market but a look at the Bank Index shows a red flag of bearish divergence to the broad market. Or is it? Can the wall of agony that the market is attempting to climb even as the Piggies tank be a positive sign? Yes it can, and I could see a 'wall of worry' pretense get constructed to go along with the Obama 'change we can believe in' (with all those old Clinton people helping orchestrate said change) hysteria and general 'the worst is over' noise. This may of course lead up to a very good shorting opportunity as hope springs eternal. You have got to love herd sentiment and group think if you actively trade the stock markets.
The BKX, representing the finest financial institutions of the illusion known as the US financial system, just keeps on driving lower in a tacit demand upon the new administration that 'you will not change anything with regard to reflation... you will dutifully carry on the policies set in motion by the previous administration, or else'.
The 20 day exponential moving average of the CBOE Put/Call Ratio does not inspire much confidence for a significant rise. The SPX (black line) tends to rally strongly only after a spike to the top line. Have we already had that rally? The little hitch higher to just under the 1.0 level does not provide a good platform for a sustainable continuation.
The structure of the CPC's EMA 20 is negative because if it follows its 'normal' pattern, any continued stock rally from this point should be relatively weak, or a sustainable rally will begin only after a drop back down to the .90 area, which would likely mean a test of or breakdown below the November lows before said sustainable rally begins. The minor caveat for the bulls is that the historic panic events of October and November have surely built some distortions into markets relative to what is and is not 'normal'.
But, what of the broad market? Let's take a look at the daily status of the S&P 500. The chart certainly does not inspire much confidence after our broad market tolerance level was violated with the breakdowns through the SMA 50 and EMA 20.
MACD is triggering below zero and is bearish. On the plus side, the market has had two up days in a row on productive volume in the face of bad news, and hope is waiting to get some play. The market is over sold by short term indicators like the Full Stochastics. I would not hesitate to call the last two up days a bearish flag if not for the relatively good volume and again, a weekly chart shows that the post-holiday bearish action is but short term noise as the market continues to grind out a would-be bottom.
The conclusion is that a test of, or drop below the Q4 lows remains very much in play short term. I would expect that if the market continues to rally from here, it would be a weak rally indeed. If however, a final plunge were to occur near term, driving the CPC to a more productive level, we may get something of substance eventually. Incidentally, the VIX, which I hope to look at on the blog again shortly, is in alignment with the CPC message.
There are many wild cards in the mix including da boyz (AKA 'the goons') settling back in after the low volume holiday melt up, a historic presidency in ascension that will no doubt inspire historic levels of hope following what was historic and climactic downside action in a national Ponzi scheme of historic proportions. If things play out according to plan, we will get another chance at a historic shorting opportunity in a few months as being short 'hope' could work well.
If, on the other hand, the whole mess unravels in the face of the Obama ascension and fear once again becomes acute, we may actually begin to think about a brand new inflation-fueled bull market later in 2009 or in 2010. That, or the end of the economic world as we know it. All or nothing as it were.
As you know, as far as equities go, gold mining companies are by far my first interest in the current climate for reasons illustrated below, and all along during NFTRH's brief history. That is because their product is acting as if it were sane money in a monetary world gone insane even as these companies' cost inputs have gone through the floor in Armageddon '08. In fact, it appears that the fundamental picture is in transition from the lonely few (including NFTRH) writing amid the panic that 'the same forces driving the USD higher and gold miner stock prices lower are actually driving gold miner fundamentals higher' to an environment where this fact is becoming more readily acknowledged in the investment mainstream.
But there are other opportunities shaping up as the world considers 'change' and indeed does change. Some opportunities will be 'long', some will be 'short' as a couple recent trades illustrate (successful 'shorts' were completed in long term treasuries and real estate). Right here, in the middle of secular changes that the herd barely perceives, we will find opportunity in the ongoing tug of war that is likely to last a lot longer than the short term events described by Mr. Gayle above.
