"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.


Trader Dan Interviewed at King World News Markets and Metals Wrap

Please click on the following link to listen in to my regular weekly radio interview with Eric King over at the KWN Markets and Metals Wrap.