"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, October 18, 2014

S&P 500 Performance Compared to Federal Reserve Balance Sheet

A couple of charts for your weekend reading.

The first compares the S&P 500 to the overall size of the Fed's Balance Sheet.

The next compares the overall rate of growth of that same Balance Sheet on an annualized basis. Note that slowdown in the RATE OF INCREASE in the Fed's Balance Sheet.

This is important to note - the Fed's balance sheet is still expanding, albeit at a declining rate of growth over a 52 week look-back period.

The Fed, of course, threw the markets are curve ball last week when their minutes announced that the "disinflationary impact" of the strong US Dollar was forcing them to revisit their previous plan of hiking interest rates. Essentially the stronger Dollar has been working at cross purposes to the Fed's goal ( a goal that of the rest of the Western Central Banks also share I might add ) of inducing a 2% annual rate of inflation.

The markets readjusted to that new information by effectively stalling the sharp climb in the greenback. The Dollar chart has not however turned bearish - rather it has merely halted the uptrend for a while.

Traders and investors are going to continue closely monitoring economic data releases, especially the payrolls, to see if there is enough strength to allow the Fed to move back towards a mid 2015 hike or if the data is simply too weak. Right now no where knows for sure thus the most likely path of many markets is one of consolidation or sideways trading. Uncertainty has been injected once more by the Monetary Masters.

The easy money might be over in some of these markets for the time being as trendless markets have a nasty habit of whipsawing traders mercilessly. Lots of hedge funds can and will be chopped to shreds in such an environment because their computers are too damned dumb to trade ranging markets. They are great at making their owners look like geniuses when a strong trend is underway; when the trend dies or halts and the markets take on more of an aimless or bouncing behavior, they cannot trade them. Many will go the sidelines understanding the limitations of their mindless machines.

Trading range bound markets requires real skill, and real finesse in accurately reading a market - as just the time the computers get all bulled up, the market reverses on them. Same thing goes in reverse when the markets look most vulnerable to dropping lower - they reverse higher leaving everyone who sold them having sold into a hole.

Traders - tread lightly out there and do not be reckless right now.


  1. Dan- thanks for the charts today and some wise advice. Lots of black swans flying around! Since I don't do day trading, will need to stand aside or stick with small positions and widen stops for the volatility.

    Maybe the mid term elections will help bring more direction to these markets. A change in majority party in the US Senate could provide a catalyst the market needs for a more vibrant US economy.

    1. Trinity trader;

      You are welcome.

      My concern is that with the current lawless one in office, he will be "liberated" to take even more unconstitutional actions after the election. I am beginning to wonder if the US stock market has now reached a point where the inept, incompetency of the federal government is shaking confidence of investors.

    2. Agree - the community organizer may become even more emboldened to go it alone. The veto pen may also "go to work" if congress starts to pass legislation to roll back some of the regulations and other anchors that have been weighing on the economy for the last 6 years.

  2. Dan, I just wanted to take a moment to thank you for all your analyses and explanations. I have learned a lot from your blog. Enjoy your weekend!

  3. Dan, excellent "macro" comments on market dynamics, and their many perils. This is exactly the kind of common sense advice that helps to avoid losses. Two thumbs up!

    1. Rico;

      Thanks! very tricky trading environment out there in some markets,

  4. Excellent charts that show the positive correlation of QE to the price if stocks.

    On a previous thread there was a suggestion that The Fed would act to lower I come inequality. It is
    Plausible that they could do so my preferential buying of subprime it low down MBS. That does seem pretty far outside their mandate as I understand it. It would make me feel sick as homeownership for everyone from the Senate was one of the causes of the financial crisis.

  5. Larry Williams comments also this week on SP which could be down once more time before going up again. The reason is about small speculators buying too soon

  6. @Peter,
    I've answered your question on the previous topic line.
    Plus to make it clear one more time : I am not here to prove anything, and for sure not that I have credibility as a trader even though I don't live from it. I'm simply sharing the technics I think make sense, so that people who are interested can try them and make their own opinion, and hopefully make some money with it.
    I have nothing to sell, especially not myself.

    1. And just when I think your trading cant get any better, there is this spectacular oil trade.

    2. Hi Arnie,
      I have the great luxury to be able to wait for converging T.A signals to get into the market, because I'm not trading for a living;
      So I can wait a lot, watching only a few markets (ten max), and, say, increase my odds of success by being very selective in terms of signals. Plus I think I've been lucky a bit.
      Probably if I had to make a living from it, I would have to become less selective, and of course, would make more losing trades.
      imho one of the only way to remain selective enough and make enough trades so that you can live from it without risking too much on one particular trade is to monitor plenty of markets, i.e the need of programming, receiving automated alerts on some specific configurations which can be very difficult to program.
      I'm absolutely not in this field yet. This would be if it would become my full-time activity.
      Plus I'm talking about a purely technical aspect.
      Dan has a cutting edge here by having a vision on both technical and fundamentals for very specific markets directly influenced by fundamental elements.
      I find it very interesting.
      But all that to say, that I am obviously not a real trader, and if you someday decide to rely on someone else to manage your money, you should only rely on someone who proved he can make a living with it, and only with it, over several years.
      That is why, with other reasons, I would decline to manage any other person's money.
      The point here is only to share for those who'd like to trade as interested amateurs, just as I do. And maybe I'll learn from other traders who come here as well about their own techniques.
      Have a nice sunday,

    3. Hubert, I answered your previous post. I am curious, that is all. You explain it perfectly. I also follow the work of others, or I wouldn't be on this site, the lazy man's way, but also try to consider other factors, such as fundamentals, psychology of the markets. I even think instinct acquired through experience is very important, which we might call hunches. As for relying on someone else to manage one's money, not a good idea. I am interested to know how many people using this site, apart from Dan, are successfully making a living out of trading. It would be a most interesting statistic if it was verifiable. Maybe Dan has some information on this.

    4. Peter Dykes;

      I honestly do not know how many who read/post on the site might actually be full time traders.

      This is a very demanding profession which can quickly "punish" you if you have an off day and are not mentally alert at all times while working positions.

      It is also one of the reason that I do not trade everything that moves out there. I focus on specific markets that I have come to know very well over the many years I have been doing that and thus have a good sense of the fundamentals that drive it. I love Technical analysis but I am first and foremost a fundamentalist.

      I like to be able to understand the "why" of price movement not just the fact that prices are moving. Pure technicians do not care about the "why" behind a move. I also think it is one of the reasons that so many traders get eaten alive by false reversals, bear traps, bull traps, etc nowadays. They have no idea whether or not the moves in price are legitimate and thus get snookered into chasing a move in the opposite direction of what the fundamentals would dictate.

      That being said, I am always glad to see Friday afternoons arrive! :o)

      It means two days of sanity for me before having to head back to the mental ward called the markets! :o)

    5. Peter and all
      I am in HDH's position. Work full time for a living. Fascinated by the markets and trading for fun and profit.

      I do follow the fundamentals but will make a contrarian trade if I see a setup I like.

      TA is not a discipline in the rigorous mathematical sense but rather imperial deductions of relationships that repeat in the behavior of the markets. In that sense it can be regarded as an analysis of people's psychological behavior. The things that make it difficult and trip up the HFT and their black boxes are things that change the trend.

      To a large extent the hedge funds and HFT have become the market and are part of the reason indicators stop working as they change their programs.

      Fundamentals likely will wing out in the long long long term but hopefully I, my children, and grandchildren are log gone before some of the things the gold permabulls are counting on come to pass.

    6. Umm the whole point of gold is to sterilize and hold money still. And keep it out of necessities (that includes housing) thus keeping prices low and competitive.

      But just like before WW1 and 2. We will probably go from peace time keynesianism to wartime keynesiansim and back before the market can remedy the situation.

  7. Thanks Dan...and HDH (and others) for your effort and reasoned outlooks on here.
    Much appreciated. :-)

  8. Dan, your answer surprises me. I thought you were 'fundamentally' a technician. When you have to judge fundamentals you have to make subjective decisions involving your insight and experience. That is what makes it so difficult - not to mention timing, the most slippery aspect of all! It is no wonder few people will succeed at it, especially when gauged over a long period of time.

    We can also talk about the psychology of the market, which includes the influence that t/a itself actually has on the market, which therefore becomes a fundamental as well. If many people follow t/a it must be a major fundamental and has to be taken very seriously by any investor, quite apart from whether there are intrinsic mathematical principles that govern it.

    Thank you for your answer, it makes complete sense.

    1. My view is that eventually fundamentals win out but in the short term, technicals always win. The reason is because the large speculative forces at work in the markets nowadays are pure systems traders which mean they run on TA and nothing else for the most part. Their computers simply follow price movements.

      Guys like me who try very hard to get a solid grasp on the fundamentals can then use that computerized buying or selling to take positions. That being said, I NEVER take a position that is opposite a technical move, even in a market that I have a solid grasp on the fundamentals, until I see a technical signal that the market is moving back in line with the fundamentals. These mindless, brainless hedge fund machines can run you over in a New York minute if you get on the wrong side of them.

    2. That would explain your view on gold and silver, which is technically very bearish, but may well have good long-term fundamentals. I am inclined to the same view.

  9. all right less than 2 hrs and futs reopen, such as TF ES NQ GC HG CL EC etc, even cattle til 10/27! ...have to place TF 1st as RUT was up +2.75% on the week while SPX NASDAQ were red.

    coffee the continuous chart a real poor day friday got coffee below it's april high.
    ...is that a tell for soybeans on brazil weather.

    with just the New Zealand market open at this time of the week market liquidity is super thin... euro off about 12 pips now. just looking from oct. 1st, which was the new qtr beginning, DX and GC charts are fairly perfect inverses.

  10. SPX has been down 4 weeks in a row. Its only been down more once since Jan 2009; that was May 2011.

    well barrons big money poll yest. magazine is still against treasuries:
    Barrons Big Money: current 10-yr yield 2.2%. 95% see yields over 2.5%. 79% expect yields over 3%.

    three SPX -10% corrections since 2009: VIX peak was $SPX bottom only once (2012). Bottom was +28 days after VIX peak in 2010 and +40 days in 2011.

  11. bada bada boom ES NQ reopen followed the big money poll in stock index futs. or is it 'china injecting funds to banks'. or was it all the people asleep in asia when usa made the move friday and they need to catch up.

    Dan's 1900 SPX looks real good for a pivot, also the august low and 200-dma at 1905-06.

    in Ags Managed funds in latest week increase (net) +40K contracts in 5 major ag markets including 8K each in meal/wheat, 16K in corn and 7K in beans. cot is only thru last tuesday ...on cot it was a reduction in the short totals that got them net longer, thru last tues.
    ...crop progress monday nite.
    nov beans options go off the board 10/24, large open int. at 9 and 10 strikes.


  12. All the Feds did was create a bubble in bonds by pretending the banks are all saved. Anyone looking to park money, including China, was doing so in US bonds even at or near a negative rate. If the regular markets show any signs of life at all, everyone will dump government bonds and go corporate bonds or stocks.

    Walmart announcing downward guidance for Xmas sales and mid term conditions like less new store openings was probably more responsible for markets freaking out. Housing starts and permits didn't help either but you never hear about those things if they cast a bad light esp. right before an election.

    Crash? Probably not. Slow build back up for the next couple of months, probably yes. Mainly apprehension with a few different pandemics going on at the same time with a wait and see attitude but that didn't stop the airlines from taking a hit. (Could be why the US wants to keep planes in the air, at least until voting is done)

    Better idea of what to expect in the short term, after the election results..

  13. I am full time trader as well but not yet having home run much. Actually I short big Sp500 at 2000 but am out too early. Entry not my problem now but exist and money management. I stick to trend in forex, swing in futures and day trading for Sp500. May be I chasing too many rabbits. I just learn that day trading not every day, just 3 times of a year profitable for trading sp500 when volatility highest. My mentors (Larry, Bob Buran, LBR) almost from USA who know nothing about forex. That why my trading strategies very messy. I need to focus to forex again where a big trend can stay longer

    1. I urge Larry to focus on forex where so many traders outside USA can learn from him but he not interested. LBR not care about forex neither. Bob Buren even don't think about index. He just like trading stocks. I stop recommending them when I discovered US regulators ACTUALLY hate forex. They don't want their citizens trading forex at all

  14. Thank you for everything you write here Dan.

  15. Big gamble, big implications.

    That's a big reduction in domestic notes. Japan anticipating they eventually become worthless?
    Japan GPIF to Boost Share Allocation to About 25%, Nikkei Says

    By Ken McCallum
    October 19, 2014 11:00 AM EDT

    Japan’s $1.2 trillion retirement fund will increase its allocation target for shares to about 25 percent from 12 percent, the Nikkei newspaper reported without attribution.

    The Government Pension Investment Fund will also boost its holdings of foreign bonds and stocks to about a combined 30 percent from 23 percent, while reducing domestic notes to the 40 percent level from 60 percent, the Nikkei reported on Oct. 18.

    Investors are awaiting any word from the GPIF on its new allocations after a government-picked panel advised it to reduce bonds to boost returns. Takatoshi Ito, a member of the panel, said his personal recommendation is to increase the target for Japanese and foreign stocks to about 25 percent each and cut notes to around 35 percent.

    The fund can adjust its share allocation to six percentage points higher or lower than the target, meaning that after the change it will be able to hold about 30 percent at most in domestic equities, the Nikkei reported.


  16. Gold wants to go higher so SP would decline. The first hour of US opening up, likely down later on the day. Yesterday also breakout so today highly reverses to the mean. If stopped out , short again tomorrow

  17. Took initial positions in XLE and FRAK today--good risk/reward ratio, IMO. We'll see.

    1. Let's see. I took a position in MRO early this am. Same idea--limited downside, producers were up despite oil. Also -MRO made a clear double bottom so easy to set stop. As well, it's one of the few oil companies that has positive fcf.

      A small rant -- it's amazing how few energy companies have free cash flow. Essentially they are not producing any shareholder value. Of the major integrated companies, only XOM has it (one of the best run companies in the world). CVX, TOT, BP….No. This is insane.

    2. ...Which is to say oil companies aren't much better than miners, and this at zero percent interest and cheap capital.

  18. AAPL earnings this PM--always quite a circus. A positive report will light a fire under the whole mkt, and get the whole bull running again--and vice-versa.

  19. 5 Days in a row #Feeders make a limit move... Expand those limits!!!

    breakpoint dude puts up a ton o charts:

    Coffee was down 5.60% today, 11.6% from 10/13 peak with more favorable weather outlook for N-Brazil. nov soybeans off 4.0% over same period.

    1. 77;

      Please make sure that any links you post here are safe from viruses. One of our readers had his computer crash when visiting the site you referenced.


    How much longer for S&P blues? It is not quite over yet. Be cognizant however, that interventionists would like to engineer a pre-election bounce with happy talk from the Fed, followed by standard Santa Claus rally into the finale. Gold may rise for a week or two, and then get zonked. These are the psychological 'fundamentals' that move markets short-term, regardless of the real fundamentals, which may kick in as Black Swans later because they have been disregarded and repressed for so long (like coiled springs), thanks to media collusion, and lying FEDSPEAK, leading to complacency and unpreparedness by the investing public.

  21. Hi Dan,

    So...would you short the SP500 here and now at 1899? with a stop loss at 1902?? :) :) :)
    Or does it look like we are going to break upside?
    I'm undecided.
    Any hint?
    Have a nice day all...

    1. At the moment I'm waiting with a small sell order at the ema15 daily.

    2. Perhaps another clue…VIX (Index not etf) retraced 61.8% of its move from 11.5 to 31.86. I would guess that if it continues to decline, the market will have shrugged off risk and corrections for the time being.

    3. yes, I'm not watching the VIX in my T.A.
      I should, but I'm not familiar with it.
      Can't watch too many instruments :)
      Anyway, I imagine the guys who were short volatility ten days ago. Boom.
      OK I'm waiting for the SP500 at 1912.
      I should monitor this but I want to go to bed.
      Maybe I'll leave my small sell order in place anyway and see what happened tomorrow morning :)
      Good night,

    4. woops?
      Just a detail, but on the 4 hour candle chart, we have imo an inverse head and shoulders, neckline 1900, and so we are already breaking the neckline up.
      The target is the distance between neckline and bottom (1820) but upwards, so... 1980...?
      Well that would in a way validate the theory of a "tendance en ligne" which supposes that after breaking down from that strong upwards channel (the one on the 2 week candle chart, with ma20 parallel to channel and forming a line), prices will make a ultimate rallye, with prices able even to go above the last highs (2020) or double top, and then...the real strong steep correction comes.

      Who knows?
      I'm just following the scenarios I know.
      So you know what?
      As anything seems possible, I'm just going to remove my sell order completely and go to bed.
      I'd have to watch 1 hour candle charts to wait for at least a reversal of the MACD going up now to go short.
      I'm not going to wait for an upwards market throughout the night when I have no signal of weakness yet on the smaller time units.
      See you tomorrow.

    5. SP quite strong today. I have no idea.Thank for pointing out inversed HS.However very low volume so I am not convinced

    6. Just for fun-here's a chart of VIX and FIbonacci retrace:

    7. Thanks for the chart.
      Let's see if we bounce on 62%.
      I'd have started the fibs from 25th august low but it changes nothing.

  22. S&P sitting right back at it's 200 day. Wait...what happened to the Doomsday Crash? Omigosh I can hear the ZombieHedge readers howling from here. Reality stomping all over Dogma once again.

    1. Guess Eric missed last week when the Fed talking heads crawled out of the wood work and talked about extending QE longer and as a result stopped the stock markets from falling.

    2. That's the point, barney. Stopped...falling. Dead Doomsday Austrians notwithstanding. More buyers than sellers. Ever hear of it?

    3. Fact: The Fed exists, and it ain't going away. Fact: The Fed wields tremendous influence. Fact: The Fed IS part of the "fundamentals".

      It's the Dead Austrian Dogma that is the FantasyLand. Good luck trading on that crap.

    4. It is fantasy land Eric, or can you find a country that has endlessly printed money that it was actually successful in?

      Just the fact they can never end QE without the stock markets falling says it all.


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