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Perfect Information

The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, June 30, 2014.


 

To say we live in information age today is an understatement. Previously, technology gains were more profound and slower moving, providing innovation that had material impacts on economic growth and productivity. A hundred years ago it was innovation and mobilization in energy and the automobile that enabled hydrocarbon man to flourish, taking the human population to in excess of 7 billion people today. But this cycle has run its course, with hydrocarbon supplies in an accelerating decline, which posses increasing challenges for further profound technological innovation moving forward - because fracking won't do it.

Today, the Western establishment would have the weak minded believe that technological innovation in information is the new paradigm that will save you; however a well grounded person should quickly realize that information industries are not this at all, and are in fact illicit and predatory entities attempting to exploit target populations. (i.e. think advertising, NSA, etc.) As you likely know, information is being forced down your throat daily for a myriad of reasons, most nefarious in nature. A timely example, the trading information services CNBC would have one believe you suffer from 'information deficit disorder', and the only way this can be rectified is by tuning-in to their broadcasts and doing what they (the establishment) tell you to - which amongst other unwholesome ideas involves subscribing to as many (unnecessary) information gathering means as possible. (i.e. thank goodness fewer watch every day.)

Taking this a step further, and another nasty falsehood folks like those on CNBC would have you believe is, with all this information, you, as a money manager (of various degrees), have as close to 'perfect knowledge' necessary to time the markets, even if they seem to only be going in one direction, and that's up for stocks. Of course the real reason(s) stocks are going higher is not what you will generally hear about via establishment information sources like CNBC, because this information is generally propaganda oriented designed to influence behavior patterns (which will drive you mad given enough time), with a skew towards (over) consumption. No, in order to crack the proper understandings in this regard, one must look below the surface, which is where services like ours come into the picture. (i.e. because we are an information service as well.)

The stock market is nothing more than a bunch of interconnected computers running on algorithms, essentially a video game if you will, with no real attachment to the economy. What's worse, in reality it has become nothing more than a speculative cesspool these days, where price discovery is bough via casino like betting practices derivatives, extremely powerful (establishment controlled) computers, and money printing - all under the guise data on the economy you get every morning will provide you with 'useful information' you can profit from. (i.e. when in fact the opposite is true.) So you can have access to what you may think is 'perfect information' these days, but it doesn't matter if you don't understand how the markets will react to it.

Why is this? Answer: Because the bureaucracy's price managers have the computers set to fade bad news under the premise weak data means currency debasement rates will be accelerated by monetary authorities, which is bullish for stocks. This is why bad news is good, and good news bad. It's the fiat currency paradigm's self-correcting mechanism designed to facilitate price stability and perpetual economic growth by not allowing imbalances to develop. It's fraud and a dismal failure, because all it does is further enrich the top 1% by inflating asset prices while predicating diminishing returns associated with currency debasement that pushes cost structures higher. (i.e. stagflation.)

The fact this kind of behavior creates unhealthy mental conditions in people, and likely shortens life expectancy as opposed to enhancing it, is of course little concern to these types. One of these days however, the mania in fear that has gripped stock market money managers will abate, which will cause them to stop buying downside protection / speculations, in turn removing the support stocks currently enjoy via this factor. And while it's true other factors may be just as important (think official monetization and stock buybacks), the signal a collective failure is finally upon us will be when the CBOE Volatility Index (VIX) closes above the large round number at 20, and then trend-line resistance. (See Figure 1)

Figure 1

Up until now, it's been an exercise in mind control and expectations on the part of the Fed, where every week we have a Fed member out with a controversial statement contrary to their Official Policy Statement, which gives money managers a complex in thinking about the possibility 'change is afoot'. And of course this causes consternation amongst money managers to the point enough of them run out a buy a bunch of protection on their portfolios, providing the fuel for the machines to squeeze them out over and over again. It's amazing this Abbott and Costello like routine can repeat like this for so long, but part of the mind control thing is the constant bombardment of stimuli, creating attention deficit disorder - so in fact it's quite understandable.

Unfortunately for menacing and mind controlling masters however, even mentally challenged traders are beginning to realize little correlation exists between the economy and stock market, which removes the imperative to hedge / speculate on the downside. Once this becomes increasingly reflected in a preponderance of key open interest put / call ratios, the party will be over for stocks, just when the average 'wise guy' stops betting on downside outcomes. And it could (should) be like a vacuum when it comes, because at this point everybody who thinks they are going to get out of the market ahead of the next guy will sell together (thinking they all have perfect information), and the stock market will not like it, potentially yielding a flash crash like event. (See Figure 2)

Figure 2

Because when the herd turns there's nobody left to sell to except the government, not with present cash levels and baby boomers thinking about cashing out - not buying. This why the breakdown in the S&P 500 (SPX) / iShares Silver Trust (SLV) Ratio is so important (on top of the reasons discussed previously), because at the center, if the establishment cannot keep dominating its 'whipping boy', which is silver (in spades) for reasons discussed previously, then one should take this as a confirmation signal that the party is over for stocks market in the not too distant future. Again, what would be typical of a breakdown as the one pictured above is a test of the structural penetration, which comes in at approximately the large round 100, but could extend into the 102 area as well.

Further to this, it should also be pointed out what should happen within the larger sequencing is while the SPX / SLV Ratio should not move to new highs, stocks (SPX) will, triggering a bearish divergence, with silver (as measured by SLV) outperforming. If this sequencing is negated, with SLV falling precipitously in coming days, then all bets are off in terms of the extents of the moves possible. Such trajectories / possibilities were discussed here previously. Such a scenario is not likely at this point, noting all the diamond breakdowns in Figure 2, but possible never the less.

No, a more likely scenario can be sketched out using the other key ratios of particular importance right now, the SPX / VIX and Comp / Nasdaq Volatility Index (VXN) Ratios. The big thing to realize here is although the powers that be would have you believe volatility (risk) is under control, in actuality the proper way to describe this key macro-condition right now is in terms of compression - risk has been compressed through financial repression. This condition is expressed in both the repression (compression) of the VIX, and the sinusoidal progression being traced out in the SPX / VIX Ratio, seen here, in Figure 1; and the Nasdaq / VXN Ratio (see Figure 2), which while not tracing out a sine wave, is bursting higher in a Fibonacci resonance based advanced that appears to be close to completion as well.

So again, the sequencing falling into place here goes something like this. The broad market continues to blow-off into July (possibly running into August), dragging all things equity higher with it, possibly including commodities to some extent (especially crude oil and possibly including precious metals), until the mania in fear blows-off, and then stocks crash at some point once money managers / speculators stop buying puts (going short). Obviously the timing for all this to transpire is unknown, however some degree of the above scenario should trace out at some point assuming the markets are not completely broken (controlled) if people are still people, subject to the same stimuli, reactions, and compulsions that have driven our behavior throughout history.

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So, give us a try. One will not regret it if looking for insightful big picture thinking that keeps you on the right side of the trade.

Good investing all.

 

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