"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, May 4, 2013

Fed Induced Stock Market Mania

After watching the effects of the mediocre payrolls number yesterday (Friday) which culminated in a push over 1600 in the S&P 500 and a print in the Dow over 15,000, I thought it might be useful to note a few things about this most recent example of a hysteria.

I am on record here as stating that the entire stock market rally is nothing but a Federal Reserve induced bubble brought about by artificially low interest rates starving investors for yield elsewhere. The Fed, along with the Bank of Japan and the ECB I might add, are determined to corral investors and herd them, unthinking like cattle, into equities; the goal being to create an atmosphere of general euphoria towards the economy boosting consumer confidence in the hopes of inducing them to take on more debt and spend.

This is akin to building a towering skyscraper on a foundation of PLAY-DO. It may look wonderful and draw gasps of admiration but it has no stability and will not be able to withstand any external shocks.

I know what the perennial perma bulls are saying - stocks are cheap and corporate profits are good so the path of least resistance is higher. They have been right so far judging by the tape. However, to point to a jobs number that is less than 200K per month, now some FIVE YEARS after the onset of a horrible recession as if it is evidence of a recovery strikes me more as ROSE-COLORED GLASSES analysis rather than solid reasoning.

Consider some of these statistics - The number of high school graduates here in the US each year is near 3.2 million. About 2/3 - 70% of them go on to college. That leaves us about a million who will look to enter the workforce.

The number of college graduates each year here in the US is somewhere near 1.8 million (these vary from year to year and this is based on data that I have ferreted out - it is close but not an exact number).

If we assume that the lion's share of these college graduates do not go on to pursue Masters or Doctorates, (it seems the percentage of those going on to obtain advanced degrees is between 30%-40%) then we can still come up with a number of potential NEW job seekers from college near 1 million each year.

Combine them both and you end with somewhere in the vicinity of 2 million new job seekers each year. Please keep in mind that I am not attempting to be a statistician here; rather I am trying to jot down some quick thoughts on the back of a napkin for analytical purposes.

Do the math. Divide 2 million by 12 months in each year and you need about 167,000 new jobs each and every month just to keep up with the population growth.

Please note that this does not even deal with those currently unemployed and looking for work. Also, it certainly does not take into account the type or nature of the jobs being created. How many of these jobs that were created in yesterday's payrolls number were part time?

Either way, it is difficult for me to get all revved up about the recent numbers to the point of using it to drive stocks to an all time high. If you are barely adding enough new jobs to keep up with population growth, you are certainly not seeing a vibrant economy that is GROWING robustly. You are muddling along; that is what you are doing.

Now whether that justifies stocks at all time highs in the minds of investors, I will leave that to the Ra-Ra crowd but count me out. As I have said often here - this is a traders market and they should enjoy it while it lasts but reading anything other than that into it regarding the true state of the US economy is a fool's errand. It is the result of QE1, QE2, QE3, QE4 and now the Bank of Japan's version of QE along with the ECB's act in raising the spectre of fining banks for NOT LENDING by charging them interest on parked reserves instead of paying them interest.

Enough of my soap box renditions for the time being however. I want to note something on the price chart that is noteworthy.

I am using the emini S&P 500 because of its deep liquidity although I will often refer to the Russell 2000 because of its usefulness as a risk sentiment indicator.

As you can see, since the beginning of this year, the chart moves from lower left to upper right, a powerful uptrend. Note how the MOMENTUM indicator follows the price up until the middle of February of this year.

Let me digress a bit here to note that I am using a 28 day momentum indicator smoothed by a 5 day moving average of get rid of some of the sharp spikes and dips. I am interested in seeing the general pattern and not each spike and thus the reason for smoothing the data.

In the middle of that month, we recorded what is the first of THREE DOWNSIDE REVERSAL PATTERNS. I have those noted in the ellipses. Do you see what I am seeing here? Note from that point forward, the upward momentum in this market continues to decline even as it has gone on to make one new high after another. This has occurred even though we have recorded an additional TWO more downside reversal patterns.

Just this past week on Wednesday, the market experienced a very strong reversal pattern on extremely high volume that was totally contradicted, yet again, in the next two days' worth of trading. Of course, the Friday rally blew right through the top of the reversal pattern. Yet, momentum did not register a new high for the move.

What I am describing here are classic textbook cases of negative divergence. These are all warning signals that the uptrend is losing momentum but so far it has not mattered one bit. When you have the equivalent of $160 billion of funny money being conjured into existence each and every month by the Fed and the BOJ, downside reversal patterns, normally one of the most reliable technical signals that exist, are invalidated time after time due to the "BUY the DIP" mentality that has been created in the herd compliments of the various Central Banks.

Here is the same chart scaled down to a 12 hour time frame to show a bit closer look at the market. This time around I have noted the VOLUME. Can you see the extent of the downside volume (BARS IN RED) compared to the upside volume (BARS IN BLUE)? Downside volume has been exceeding upside volume for the most part over that same time frame that we were looking at in the above daily chart, namely since the middle of February.

I can only explain this as saying it is eerie. I get the distinct impression in looking at the internal components of this stock market rally that it is a market that really does not want to be moving higher, and yet it is. The volume, plus the waning of momentum, tells me that this market is seemingly being forced higher even though it wants to go lower. Call it a GRUDGING RALLY. If this were any other price chart for any other stock or any other commodity, I would look to sell it. Not so with this monstrosity of nature - it just keeps going higher and higher and higher casting off one technical signal after another.

No doubt a goodly number of shorts are continuously getting squeezed out and that is contributing to the upward movement but I keep coming back to the same point - who in their right mind would be chasing stocks higher and higher given the deteriorating internals of this market?

I am not sure how history is going to record this period but I suspect, after the bubble finally pops, (and who can say how high this thing will go before it does), commentators and pundits will all point to the warnings that were repeatedly ignored and will provide copious illustrations of quotations from various players of this day explaining to those of our time why stocks were a great buy, all the way up until the final moment that the bubble burst wide open.



  1. What this could be is a massive 'distribution top', whereby the smart money is continually exiting through the side door.

    There is no real liquidity in the market as numerous phony and real "flash-crashes" of recent weeks demonstrate.

    We are going to have a real catastrophic end to this in short order.

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  2. I wonder if the "sell in May and go away" saying will hold true this year.

  3. Last Wednesday was a non-POMO day, I wonder if the other two downside reversals were also non-POMO days? I wouldn't be surprised that if QE where to end if Gold was to rocket higher, as who would have the funny money to sell short 100's of tons of paper?

  4. But maybe there will be a rotation from defensive sectors to materials & mining sectors.

    For gold stocks, currently there are 7 insiders buying for ever 1 seller.

  5. The Dow will continue to frustrate bears with more & more new highs.

    Reason is because capital is flowing to what is perceived to be a "safe haven" in blue chip equities.

    Dow crash is not due yet. Not til 2016-17, which is 8.6 years after the last crash.

  6. "the goal being to create an atmosphere of general euphoria towards the economy boosting consumer confidence in the hopes of inducing them to take on more debt and spend."

    Dan, I just can't believe that these guys are that stupid :(
    I mean noone in his right mind would do that, knowing the end resultm would they?? This is too scary to be true.

    "I am not sure how history is going to record this period but I suspect, after the bubble finally pops"
    Do you think theere will be a day of recknoning eventually? Seems that this QE to infinity is indeed able to prop up a monstrosity anomaly market to the sky, regardless of volume and divergences. If every sane people already left this market, leaving it to a few algos and QE manipulators, what in hell will we need to have a krach? (at least as traders we can short and benefit from corrections...)

    1. HdH - cannot not be a day of reckoning, right? QE won't stop, interest rates will never rise, but one could imagine a critical bank getting in trouble and start the whole edifice tumbling. Then of course it's a self reinforcing downward spiral (especially w/ the 'assets' of equities through ETFs that central banks are putting on their balance sheets)

  7. Japan and Europe are looking worse with every passing day. So capital is flowing in to the US...as the Fed is making the stock market one of the few liquid options available.

    On a global scale, the US is looking like the safe play, the mother ship, if you will. This could go on for a while. Despite seeming so nonsensical.

    1. CAE - don't disagree. BUT. S&P div yield is under 2%. From 1960-1994 the S&P did NOT yield LESS than a 2.7% dividend. Mean is well over 4% since 1870. To paraphrase Churchill, the stock market is a Keynsian experiment wrapped in a Greenspan-Ruben-Bernankian bubble.
      For annual data from 1960
      For Mean / Median since 1870

      It is hard for me to imagine many companies increasing dividends given flat topline growth for most industries. Bottom line growth has come from ruthless 'efficiency'. To take an example from the airline industry- passenger miles flown has increased over the past 4 years or so, but # of flights has decreased. load factor is near all time highs due to cutting flights. Or Walmart's inability to keep shelves stocked in some stores due to excessive cost cutting. I'd imagine automakers don't have much fat to cut from unions/1st world wages. Companies, I'd imagine across the board, don't have many levers left to contain costs.

  8. Now there is talk that equities are already in a new secular bull market provided the Nov 2012 bottom holds, which sounds completely ludicrous to me when the real economy is still sooo stagnant. Any views on these ultra bullish views? But i do agree that this insanity can last longer than most bears can stand.

  9. Bah let's simply be patient.
    The higher this monster go, the more it will krach and the more we will make money by shorting it as it deserves when the time comes.
    Remember Apple reached 700 $...and is now 400 $.
    Patience is key.

  10. Dan, just joined today and truly enjoy your work as it's always insightful. You are one of the best!

    As far markets, well, the Bilderbergs are in control until they're not! Yes, we should and must be ready!

    1. Vinnie don't mention Bilderberg here, some 'technical traders' will just tell you to snap out of it and just deal with the price trend as it is. stop the conspiracy theories ;p There is "no such thing as manipulation"/

    2. OK, I'll just move a long here. Thanks for the advice....

  11. since QE3 began the stock market hasn't been able to go down...
    Laszlo Birinyi, president of Birinyi Associates Inc. in Westport, Connecticut, told his clients on Friday that stocks are still tracking the 1982 and 1990 bull markets. Should the patterns continue to mimic one another, the S&P 500 could be set for another 20% gain this year, bringing the index to 1900, he said.

    the gold bugs just another week they're all bullish...
    real bottoms are made when nobody is bullish and mom and pop are afraid to buy it!


  12. just a couple simple observations from a retired retail commod brkr; we always used to say that the farther away the $ came from, either they were quite rich, or quite stupid; nowadays, the perma pm bulls always point to India and China physical buying as being so important and correct; how is it that those folks are that much smarter than this Californian? maybe they are not? The other stale argument is interpretation of COT by everyone; let me tell you, if it was the holy graile, Briese would not still be peddling his letter, but just trading for the last 40 years. steve from sparks, nv

  13. Been following since 2009. Made some $, got out, then started buying all the way down. Loaded with losses, but, all PM stock based, and down about 25% now. Will not sell and is considered the holly grail of my retirement. 77? What on gods green earth will finally shake these stock investors, TIME. The mom and pops are gone from mining stocks, but buying physical. Any risk manager will certainly look at potential downside and the Stock market has plenty of that whereas the miners are or have bottomed. They will be back and in my mind this time the real bubble will blow. Deficits from everywhere as far as the eyes can see, all central bankers printing worthless fiat, and all economic stats point downwards..only a matter of time. :)~ 77

  14. Thanks for the great tech analysis.
    I only have a small comment on your jobs analysis. If 3.2 million people graduate from high school, we also need to add the dropouts per year. (Maybe .3 million?). We do not really need to add the grads from college or further degree work. We KNOW that 3.5 million will need to be entering the workforce or gang-force WHENEVER they graduate. We can average that as 3.5 million per year. That is 290,000 jobs need to be created per year.

    Also, did I see you said 160 Billion dollars are created each month. That would be one million dollars for each job created. [ $160 Billion divided by 160,000 jobs ].

  15. Very nice read.I think this will be affect me in a really very bad way.This place is a very unpredicted and we never know what will happens with us here regarding stock and also about the stock price

  16. Reliance Industries Ltd will increase staff in its telecommunications business unit to 10,000 next year from 3,000 currently. The unit, Reliance Jio Infocomm, is the only company to have nationwide permits for 4G broadband services, but is yet to start commercial services. They have also finalized key vendors and supplier partnerships that are required for the initial launch of their services.

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  17. I agree with yoy. Great port. Sooner rather than later the QE carry trade will explote.

  18. This comment has been removed by the author.

  19. The upcoming changes you have discussed here about the market feels good . Thank you very much for posting here. Please keep update on stock market and commodity market.

  20. In their highest monthly outflow, overseas investors pulled out a record Rs 44,162crore (over USD 7.5 billion) from the Indian capital markets this month amid concerns over the depreciating rupee. The net investments withdrawn in June include outflows worth about Rs 33,135crore from the debt securities and another Rs 11,027crore (USD 1.85 billion) from equities.
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  21. U.S. stock pointed to a slightly lower open on Wednesday, as investors remained cautious ahead of the minutes of the Federal Reserve's most recent policy meeting, expected later in the day.
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  23. Mangalore Chemicals and Fertilisers shares locked at 10% upper circuit on Thursday after Zuari Chemicals and Fertilisers increased its stake in the company to 14%. Zuari Chemicals bought another 41 lakh shares of the Mangalore Chemicals from the open market on Wednesday. Earlier in April, Zuari picked up nearly 10 percent stake in the company, taking its total stake to 14 percent now.
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  24. U.S. stock pointed to a moderately higher open as investors eyed the
    release of highly anticipated U.S. jobs data, amid ongoing uncertainty
    over the future of the Federal Reserve's stimulus program.
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  25. The Fed, along with the Bank of Japan and the ECB I might add, are determined to corral investors and herd them, unthinking like cattle, into equities; Investing in the Stock Market

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