The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, January 4th, 2011.
Between the high frequency trading and other shenanigan's the bureaucracy's price managers employ to goose the stock market higher on a daily basis, one could think both it and the economy are better than they really are, but that would be a lie. In fact, you should know that the stock market is not designed to reflect what is happening in the economy, but rather contrary outcomes of the betting practices of gaming speculators who amazingly for the most part do not realize this, and even if the do, with market conditions in such a mature state, cannot measure sentiment effectively. This, is how the simple gunning of the money supply on a daily basis has maintained buoyant stock market for some time now, however at some point the consensus of bearish speculators will become exhausted on an extended basis, and the perpetual short squeeze will be over. That's what happened in 2008, and we all know what the stock market did once this condition took hold.
And as you know from our last commentary, widely followed sentiment measures have now reached bullish extremes not seen in quite some time, leaving only less followed measures (think open interest put / call ratios) and intermarket relationships to fall in line so that another meaningful correction (crash) could take hold again over the next two years, two years off (just past), and then two years on again. Of course this time around it could be worse than last, with public outrage and a sudden collapse of the US Empire not out of the question. Because what can Bernanke and company do with the catch-22 they face, where if interest rates rise the credit bubble will burst, which is the problem with their monetization practices; but to do nothing would also spell disaster as equity markets collapse. So, in the end it will be Mother Nature who finally decides which way it goes, Mother Nature and Murphy's Law, and the stock markets will come down no matter how much money is printed, as pointed out here by Charles Biderman.
But the pundits are attempting to have us think we are dealing with misperception, which is of course by design by the bureaucracy's price managers, and that things are not all that bad, at worse, a lighter shade of gray. Of course things are suppose to look 'just fine' at major turning points because this is a necessary condition to keep less attentive speculators complacent, and they certainly are that in a majority of key measures. (i.e. they are at record highs in some instances.) Mind you things could appear quite different in just a few short weeks (but more likely months) if the Chinese bubble economy bursts, which is the wild card in the deck moving forward that could change everything. (i.e. think black swan event as opposed to a lighter shade of gray.) Stock markets came out of the gate hot yesterday however, apparently confident no problem exists in this regard, and that even if one develops there's always the printing presses.
You should know this is all an illusion however, and that a bursting of China's bubble economy will be the primary black swan event of 2011 in all likelihood, marked by a deflation of various asset bubbles from the stocks to commodities, where you will remember from previous work (see Figure 6) we are awaiting key signals in this regard to confirm those already flashing red. But because price management is so prevalent these days, and with volumes so low, again, it could take some days or weeks for tops in the various equity groups to form, where for example over the Christmas holidays computers used to manage US stocks were adjusted to have large cap tech (think NASDAQ 100) underperform the blue-chips (thing the Dow) because stocks could be ground higher anyway (with light volumes), allowing the NASDAQ 100 (NDX) / Dow Ratio to be goosed higher now (supportive of the growth story), which is a condition that could last for some time yet. (See Figure 1)
Figure 1
And while prices could easily move higher for some time if bubble conditions are to persist, as suggested above at some point bearish speculators will become exhausted and refrain from making bearish bets in the options market and key US index open interest put / call ratios will fall (and stay down for some time), which will remove the fuel that allows the bureaucracy's price managers to maintain the illusion(s) both stocks and the economy are healthy. (i.e. the perpetual short squeeze will end.) In looking at a longer term chart accented with a CBOE Volatility Index (VIX) plot that shows prices are now on support, the big picture message below is compelling in favor of the bearish case coming sooner than later however, so one should act accordingly if conservative, which means refraining / scaling back on bullish trading / speculations. (See Figure 2)
Figure 2
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Good investing and best of the season all.
