"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Saturday, February 23, 2013

Stock Market Ignores Downside Reversal

Apparently the equity bulls are right back to work after "suffering" through a whopping two day correction in their permanently rising stock market. As you know by now, stocks took a beating on Wednesday when the FOMC minutes were hinting at some internal dissension among some of the various FOMC members in regards to the duration of the QE program. They then saw further selling on Thursday but come Friday, were right back up again completely erasing the losses of Thursday and cutting into the losses made on Wednesday.

It appears that traders have now come back to the view that the loudest voices in favor of cutting short the extent of QE were coming from the NON-VOTING members of the FOMC. The talk now has become that the VOTING MEMBERS are not going to cut anything short anytime soon.

I expect Bernanke to say as much in this coming week's appearance before the Congress on Tuesday and Wednesday.

If that is the case, and Ben issues soothing words to the crack addicts, then expect the equity bulls to go right back to doing their thing and driving stock prices relentlessly higher. If he even hints at some sort of agreement with the early cessation of QE, then Katie bar the door for stocks. We will certainly be watching very closely to see how the precious metals respond to this.

Notice the chart below - I have set up two indicators for you to observe. The first is the ADX or Directional Movement Indicator that it is more commonly known by. The black line is the ADX. IT rises in a trending market and falls when the market is not trending or in the process of consolidating (market tends to move sideways). Note that the BIG DOWNSIDE REVERSAL pattern in the S&P 500 that I noted earlier this past week caused that line to finally turn lower. That indicates a break in the uptrend. That being said, there is still no sell signal in this indicator. At this point it is indicating a pause, nothing more.

Normally, one of the most powerful technical indicators is one of these downside reversal patterns that come on huge volume. Typically they portend the end of an uptrend, especially one of such long duration and one which has experienced such few corrections over its course. To witness the eagerness of buying which we saw Friday is therefore no mean thing! You talk about "animal spirits" of investors. These guys are so juiced up that they could power light bulbs with their bare hands!

Note also the indicator below which I will leave nameless for the time being. It basically measures momentum. What I have been watching since the rally at the beginning of the year has commenced, has been the loss of upside momentum even as this market has made one new high after another. In other words, this market keeps grinding higher and higher and higher even as more and more momentum or upward energy is dissipating. I get the sense of a market that is at levels that are so ridiculous that more and more traders are getting increasingly nervous yet no one wants to aggressively sell the thing out of fear of the Fed's punch bowl.

We have seen what will happen to this "national security concern" if it believes that Uncle Ben is going to beginning preaching the virtues of monetary sobriety. Is there anyone out there who genuinely believes that the Fed is going to make sure that it crashes the stock market? Just who is in control here - the investing/trading class which just pitched a hissy fit over the FOMC minutes or the Fed which has now become captive to its own QE program.

Think about what we are witnessing here - The nation is addicted to cheap money as much as it is addicted to hedonism and vice and yet the Fed cannot pull the plug or more aptly, cut off the supply of the drug for fear of killing the patient. Our political leaders cannot cut a measely 2 pennies out of a dollar's worth of spending without telling us that Armageddon is about to occur; the madman running N. Korea is working on intermediate range nuclear missles and is even disturbing its only ally, China by so doing; Gasoline prices are topping $5.00 in some locales; Social security tax increases are hitting the entire working population and further scrimping already dwindling disposable income; health care costs are going UP not DOWN as we were assured that they would be once the grossly misnamed "Affordable Health Care" act was deceitfully rammed through Congress; we've got surveillance drones flying all over the damned country spying on us and yet everything is just peachy keen...

I have said it before and will say it again as much as it pains me to do so; America is going the way of ancient Rome as surely as the sun rises in the East. The Fed is doing the modern version of coin clipping. What is next, price controls under edict of death for merchants who hike them? No worries however - the stock market is rising so all is right with the world.


  1. Insightful post, Dan -- both the current and practical economic analysis in the beginning and the larger perspective shared in the last two paragraphs. What we know to be certain is that "honest" money will have its say when the "drug" money accelerates towards it destructive end. It is, nonetheless, impressive to see the temporary "magic potion" that the economic "diviners" are able to "brew". And, for a time, the sheeple "addicts" loyally follow the next tipping of the freshly brewed "pot".

  2. Dan,

    I'm starting to think BarterTown maybe isn't such a bad place after-all!.


  3. Hi Dan, Here are some more stats for you... Since 2006: ECB+BoJ+BoE+Fed balance sheets + Global FX reserves are +150%; global GDP is +25% (US GDP +16%). Time for me to again read my old copy of "The Decline and Fall of the Roman Empire"?!

  4. > The nation is addicted to cheap money

    In the real world, interest rates are jacked up to usurious levels for the "little people."
    Although the banks and institutional people have access to cheap money.

    Don't use credit. Last time I took out a loan was 15 years ago. I pay as I go. This raises all the red flags in the credit system. I have no access to this cheap money. The system is working beautifully as intended.

    As long as the general population in USA is sinking into the ground economically, the political apparatus (fake political parties) in the US will have done it's real intended job - help deplete the wealth and savings especially of the middle class. The country has been going the way of Rome because that is what the NWO globalists decided a long time ago. Too bad USA citizens won't wake up from their coma of enslavement.

  5. Dan,

    You seem to be a bit bothered by the talk of "backwardation" at present. I think you also know the split in paper and physical will occur at some point, just not yet. Also, you removed TF as a blog follower. I see also he posted more backup and is giving more credence to the argument for backwardation. You are a trader, and see trends, and profit from them. You also are a firm believer in sound money practices. So, I take it this is what separates you from speculators. Another of your blog followings is Trader Garrett, who also is of sound money, but probaby is a bit more speculative in nature on some of his miners. Jim is Jim with a long horizon, Turd is Turd and he is very speculative with a bias towards continue bullishness even in short term, with several bad calls. Thanks for all your charts, wisdom and understanding with an emphasis on a near term cover of the speculative shorts!!!!

    1. White Wolf;

      Gold is not in backwardation. I do not know how to say it any clearer. Those who continue to advocate that it is are simply ignorant of the structure of the futures market. Remember, these are the same guys singing the praises of backwardation just before gold imploded near $50 in a single day to the downside.

      As a trader, I cannot emphasize sufficiently how reckless some of these guys are with their trading accounts. One does not survive long in these markets by being foolish or by being a Johnnie one note. At this stage in my trading career, I do not buy based on hope. I need confirmation before i put capital at risk. Yes, I will not generally catch an exact bottom or top. Who cares? we do not need to do that to consistently make money and when all is said and done that is the ONLY thing that matters to a trader.

      In regards to Trader Garrett. He is very sound and one of the few guys out there who understands markets from a trader's perspective. We have both been schooled in the University of Hard Knocks. There is no better teacher. We both take into account all three trends before we trade - short term, intermediate term trend and long term trend.

      As far as TF goes, he has become too much of a sensationalist for my taste. He makes too many reckless calls. I cannot in good conscience refer anyone to his site because of that tendency of his. that would imply that I endorse this sort of thing and I do not. He needs to get burned a few more times and then he will learn to be more cautious and less reckless.

      As far as any credence to backwardation; there is none. the futures board does not reflect it and until it does, those who advocate this nonsense are just pissing into the wind and you know what happens to them that does that!

      Jim Sinclair is a close friend of mine and has a long term horizon that will be proven to be absolutely correct. He probably has forgotten more about gold than most people will ever know about it. Jim is a treasure and I for one wish that so many of those who single him out for attack emails would show some damned gratitude for the hours he spends attempting to educate people as to the realm of finance. I still remember him giving away gold coins back some 5+ years ago to people as a reward for learning. HOw many guys do you know in this gold community have ever done that???

  6. Dan,

    I value your blog. I got a little reckless buying dips and buying near the major support areas. I have not lost any principal money since 2009 (Does not mean I will not in the future). I understand macro and micro econ, financial statements, etc. making this market an unbelievable ride. I am but a Rookie still learning. Your site is a treasure and being a a guy that learned how to chart excel spreadsheets early in the late 80's I am now a bit "addicted", but will not, I repeat will not, lose all my money. I do appreciate Jim, his analysis, and being employed by the banking sector (wearing on my conscience due to the way they lend money nowadays; esp since they STOLE the golden goose) I understand more than I care to understand. Sometimes Dan, I just wish I was completely ignorant, therefore, not concerned about what is happening. There are many bankers I know that are clueless, and march to orders rather than ask deep questions. I too believe that Jim is one great guy, with a huge heart. I am a dog lover, but, when my pups were threatened by a couple of unfriendly pits owned by a less than intelligent neighbor, I almost lost my freedom due to a threat to come back and take bird shot to his flock. I was raised to respect money, but, have had a few downfalls myself. Just trying to hang in. Kinda thought you wanted to let TF know he is out there. Thanks for the response.

  7. I also wants to say thanks Dan. Really you had done a great job. This shows that only these types of person can stand in a stock market whose brain is running continuously. Really impressive.

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  18. Thursday but come Friday, were right back up again completely erasing the losses of Thursday and cutting into the losses made on Wednesday. Investing in the Stock Market

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