SPY ETF Technical Trader Analysis

The Chop-Fest Continues

Today is simply more of the same. Low volume, low volatility, and prices grinding ever higher seems to be the norm these days and certainly for the past 6 – 8 trading sessions. I would not be surprised if we see this kind of action all the way through the rest of August until we get closer to the Jackson Hole summit by the Fed at the beginning of September.

The price action is just slowly grinding into major resistance levels. The S&P 500 Index has a plethora of resistance levels overhead and the price action appears likely to test some if not all of those levels. If nothing changes, it would not at all be surprising to see prices test the 1,420 – 1,430 range in the S&P 500 Index. Should prices reach that level they will be at the 2012 highs as shown on the daily chart below.

S&P 500 Index Daily Chart

SPY ETF Technical Trader Analysis

SPY ETF Technical Trader Analysis

 

As can be seen, there are several levels of resistance overhead. Should the 1,420 – 1,430 range give way to higher prices the next logical resistance level would be around 1,440 – 1,450. As far as support is concerned, the S&P 500 bears need to see prices push through the 1,390 area just to get some momentum going. The bears are slowly but surely being killed in a death by a thousand cuts type of action.

The Nasdaq Composite and the Russell 2000 Index are both trading slightly higher on the session as well as all 3 major U.S. domestic indices trade to the upside again today. The Dow Jones Transports (IYT) and the financials (XLF) are both trading higher today which is also a positive for equity bulls.

The Volatility Index (VIX) tested the2012 lows yesterday and today we are seeing a strong advance to the upside, however the intraday advance is well off of the session highs as can be seen below.

Volatility Index Weekly Chart

Volatility Index VIX - Technical Traders Analysis

Volatility Index VIX – Technical Traders Analysis

 

If the S&P 500 Index breaks below the 2012 VIX low the next logical level of support is around the 9 – 10 range that was a major support area back in 2005 through most of 2007. The bears need to defend the current VIX support level to have even a remote chance at reversing price action later this month.

The Dollar Index futures are trying to reverse the selling pressure seen earlier today and in the overnight session and at the moment have totally flipped the switch into positive territory. This price action looks quite strong in light of the recent action and can lead to higher prices if the intraday strength is sustained. The daily chart shown below demonstrates the key descending trendline that the bulls must recapture to put any pressure on the bears.

Dollar Index Futures Daily Chart

DX Dollar Index Trading Technical Analysis

DX Dollar Index Trading Technical Analysis

 

The key support level for the Dollar Index futures at the moment is around the 81 – 82 price range. If prices work below 81, the 200 period moving average will be all that stands in the way of more selling pressure down to the 2012 lows.

Precious metals are both under selling pressure with gold showing some serious intraday volatility. Both gold and silver futures sold off sharply but found major support at key moving averages. As long as prices hold above the key moving averages, a move to the upside cannot be ruled out.

Oil futures have also pulled back from intraday highs as the Dollar flexes its muscles. Oil could pullback all the way to the rising trendline shown below and maintains a bullish bias until the ascending trendline is broken on a weekly close.

Oil Futures Daily Chart

 

CL Oil Futures Trading Technical Analysis

CL Oil Futures Trading Technical Analysis

If price can push above the $95 / barrel price level, a test of the 200 period moving average followed by a possible move as high as $100 / barrel in short order. Oil prices were surging earlier today until the Dollar found major strength and started to reverse the action.

It is important to point out the weakness being seen in the 10 & 30 Year Treasury futures today. In both cases, treasury’s are clearly for sale. If both the 10 & 30 year bonds break down below support levels immediately underneath price  and even stronger waves of selling could set in. I don’t know what this selling truly means or if it means anything, but at the moment the selling pressure cannot be ignored.

Overall, the market in general is pretty quiet. However we have more mixed signals with equities trading higher while the VIX moves north as well. Furthermore, the U.S. Dollar Index futures are positive and the VIX has lost much of the morning gains. The Dollar is surging at the moment and putting pressure on risk assets, if for some reason the Dollar loses its luster things could get quite interesting into the bell. This market is interesting, on bad news this marketplace wants to rally, on good news they want to rally, but bad news is to be ignored.

In closing, this market is dull and dull markets should never be shorted!

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Jw Jones

 

How Many Times Will You Fall for the Same Thing?

Isn’t this exciting!

The pre-markets are up 1% after a long weekend.  That hasn’t happened since – two weeks ago!  Of course last Tuesday, we were jammed up as well and the Tuesday after Christmas, we were jammed up as well but THIS TIME – we’re REALLY feeling it, right?  

The funniest thing is the way they have dozens of idiots saying all sorts of ridiculous things on CNBC and not one of them mentions even the vaguest hit of deja vu in what has been the most consistent pattern of late 2011, early 2012.

On this Dollar chart from Scott Pluschau, you can see the dives that are occasionally taken to goose

 

The funniest thing is the way they have dozens of idiots saying all sorts of ridiculous things on CNBC and not one of them mentions even the vaguest hit of deja vu in what has been the most consistent pattern of late 2011, early 2012.

On this Dollar chart from Scott Pluschau, you can see the dives that are occasionally taken to goose the markets and we have another one this morning with the Dollar down 1%, making the 1% pop in the futures slightly less impressive when taken in context.

This time may be different because, according to Friday’s Legacy Commitments of Traders Report released by the CTFC, Commercial Traders are now net short on the Dollar to the tune of 59,023 to just 6,061 longs – about a 10:1 ratio that is EXTREME to say the least.  Non-Reportable, Non-Commercial Traders (ie. Speculators), on the other hand, are almost 10:1 the other way with 9,765 long contracts and just 1,390 shorts.  Reportable Non-Commercial Traders (Hedge Funds) fill out the rest of the longs with 52,644 long contracts against just 8,057 shorts.

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To some extent, hedge funds are also speculators and usually you would assume their bets are covered but that’s kind of hard to see with a 7:1 long/short ratio.  Keep in mind that Commercial Traders are institutions with business reasons to hedge – they are not going to be flip-flopping their positions so they will NOT be buying Dollars just because they get cheaper.  So, if it all hits the fan and the Funds shift to short – we could get quite a tidal-wave of Dollar selling.

That’s an odd sort of positions for the speculating class to be taking (super-long on the Dollar) considering the possibility of a highly dilutive quantitative event (QE3) in the very near future.   This is why we can’t be gung-ho bearish – tempting though it may be and this is why every little rumor of Europe being “fixed” sends the Dollar flying down – there are no buyers – only nervous long Dollar holders.

As you can see from the chart above, it’s not unreasonable to look at the Global situation and assume the Dollar can get much stronger as it can still gain 50% and not be back to 2002 highs.  Of course, as we know, the 20% run in the Dollar from early 2000 to 2002 is the reason “partying like it’s 1999” has a negative connotation for stock traders and, at 81, a 20% run in the Dollar only gets us back to 97.20 – not “strong” by any measure.

The commodity pushers want the Dollar as low as possible (so they get more of them) and our stocks are also priced in Dollars so our Corporate Masters also like a weak Dollar as it pumps up their balance sheets and makes them look clever as they make more money for selling the same or even less stuff as our own Federal Reserve take inflation denial to new heights with each glowing report on our economy.

Yet you fall for it EVERY TIME – it’s amazing really.  If investors were rats, they would be shipped back from the behavioral laboratory to the rat farm as  “defective” – unable to learn even the simplest of mazes as they head down the wrong path over and over and over again.  It’s not your fault though – this is a pattern that’s been going on for over 100 years as America’s “dirty little secret” has always been currency debasement as a secret tax on it’s working citizens (ie. the bottom 99%):

At what point on this chart would it have made sense to lend the United States money for 30 years at 3% interest?  THAT’s why we had a very bad bond auction last Thursday as Global Lenders have their own problems and, without a strengthening Dollar, they have no reason to risk their relatively sound currencies to fund our continuing deficits.  If not for Europe LOOKING even worse than we do at the moment – the Dollar would be at new all-time lows.  Just take a look at the damage that’s been done to the economy in the Great Recession:

Here we are with many stocks and commodities right back at 2007 levels – as if we haven’t skipped a beat.  Does something seem wrong with this picture?  If so, you are what they used to call “rational” but are now called a “nattering nabob of negatavism” – a term first used by Spiro Agnew (written for him by the great William Safire) to dismiss the various crimes and economic catastrophe of the Nixon Administration and recently brought back by Phil Gramm, who’s economic strategy for John McCain was to tell the American people to “suck it up” and “stop whining” about the Bush economy.

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It’s always good to label your enemies with alliteration – it makes you seem smart and gives them a label that sticks in people’s minds and, as we know from the Smashing Pumpkins:

The world is a vampire, sent to drain
Secret destroyers, hold you up to the flames
And what do I get, for my pain?
Betrayed desires, and a piece of the game

Despite all my rage I am still just a rat in a cage

 

At PSW, we don’t have to run through the maze 5 times before we know what lever to push!  Like last Tuesday and the Tuesday before that and the Tuesday before that, we took the opportunity in early morning Member Chat to short the BS Futures rally and already (8:50), our Egg McMuffins are paid for as we got a nice little sell-off.  We’ll be happy to go bullish – truly we will – when there is ACTUAL EVIDENCE that indicates we should.

So far, we are NOT feeling it this morning with MTB missing by .49 (out of $1.53 expected) and C missing by .10 (out of .48 expected).  CHKP beat by a bit, EDU had a slight miss, AMTD had a slight beat in earnings but missed revenues by a smidge, WFC was in-line, FRC small beat, MMR big beat and FRX had a small beat.  Unfortunately, misses by two big banks trumps so-so results by the rest and should not support $14 on XLF today.

We have plenty more “real” evidence this week to gather with PNFP tonight, SCHW and GS tomorrow morning, FFIV and KMP Wednesday night, BAC, FCS, PGR and UNH Thursday morning followed by ED, PBCT and SWKS that night and Friday we hear from Poppa GE along with SLB adn STI and THAT will give us a pretty good picture of what really went on in Q4.

Unfortunately, that means we continue to play it close to the vest, using our cash to poke at a few opportunities and picking up some good deals (like RCL this morning on the dip) but generally for quick trades until we get a clearer picture of where things stand.

The FT pointed out this weekend that the ongoing Iran crisis is masking internal signs of Brent weakness – something we’re also picking up in the above-mentioned Commitment Report.  Backwardation is changing to contango in the oil contracts and that’s often the sign of a correction coming (we are long SCO already) and, if Iran doesn’t “come through” for the oil bulls and do something very crazy very soon – the serious lack of Global demand for crude combined with the record supplies that are now on-line are capable of leading to a very sharp correction (see “The Oil Hawks are Living in Cloud Cuckoo Land” – also from the FT this weekend).

Our position on oil has been very clear – over $100 we short it.  At $101, we short it.  At $102 (which we had early this morning), we short it.  At $103.50 – we back up the truck and short it.  Why?  BECAUSE OIL IS NOT WORTH $100 A BARREL.  I’m sorry, it’s just not.  Gold is also not worth $1,500 an ounce but that doesn’t mean there aren’t going to be idiots lining up to buy it.

Thank goodness for those idiots – they pay for all our Egg McMuffins!

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Russ Winter - Chaos in the Land of Oz

Russ Winter – Chaos in the Land of Oz, Part 2

In Part 1 of Chaos in the Land of Oz, we established that the Fed is the Wizard and we are living in an economic Land of Oz.

In part 2 we discuss whether there is a pathway back to Kansas.

Elliott: In Part 1 of our interview, we agreed that by not allowing the too-big-to-fail (TBTF) banks to fail, the federal government is continuing its environment of corruption and moral hazard. Case in point – the scheme to force taxpayers to insure Bank of America’s worthless debt via the FDIC.

So, Russ, it will get worse, until TBTF banks get decapitalized?

(Note: “Recapitalize” banks is code for pulling it out of the hide of German (and other) taxpayers and future generations. “Decapitalize” means: do the crime, do the time – take the losses.) 

Russ: Right. Take the investors out, the bondholders, and shrink the sector.  Banking globally should be cut in half. That means the capital backing these institutions needs to go to money heaven. The word for it is “losses.” Right now we have “too big to let lose” because of fear of a bad hair day.

I was very disappointed last week when they started shilling for more bailouts. The bankers resist the restructuring, and the market rallies on that news. The market is hooked on bailouts and socializing losses. That was the basis of the 2009-2011 bull market. That can’t go on forever. All these money managers are chasing stocks because they expect another bailout. It’s nonsense!

Elliott: As an investor, I like to look for value. But it’s so hard to find real value when so much has been gimmicked by the Fed.

Russ: That’s my view entirely.

Ilene: What do you expect the outcome will be?

Russ: I’m highly cynical. We’re like deer in the headlights, but we have to protect ourselves from the pump-and-dumps and avoid the herd mentality of jumping on these bailout rumors. I’d be ready to jump in [to the stock market] if the right outcome occurs – big haircuts for bond holders and decapitalizing the financial sector.

Ilene: But then after Greece, there are other Eurozone countries. Are we going to go through all this again with Italy, and Spain?

Russ: Most likely. All of these countries may have some kind of debt restructuring. They can’t pile the debt on the remaining few healthy countries. Look at the debt-to-GDP of Germany, for example. (Is Germany the Savior of Europe?)  So who is the next patsy for the banksters? Answer: not many are left.

Elliott: Every country on the list has a gross gov’t debt-to-GDP of greater than 60%; most are running at close to 100% or more.

Russ: Well, it’s worse than that (and that’s just the sovereigns). I wrote an article called “The EFSF plan in Europe is no free ride.” The gross debt to GDP of the United States Government has reached 100%. The U.S. doesn’t have any bullets left for this kind of policy. Politicians are talking about cutting Medicare and Medicaid and safety nets, so that they can bail out the banksters.

Ilene: It looks like they’re going to do exactly that, doesn’t it?

Russ: It kind of does. We have Presidente “Hopium”, Wizard Ben, and a bunch of morons running the policy. All we need is a bankster showing up with the dynamite strapped on, and here we go again.

These guys are not familiar with economic history and apparently don’t understand that banks fail; banks have failed for centuries. Sometimes it triggers an economic crisis, but usually things clear up after a while. The market clears, and we get back to business as usual.

Ilene: Do you think they may very well understand this, but it’s not in their interests to act in favor of the country, but rather in favor of themselves?

Russ: Precisely, and they have largely captured government. They finance government too, in a corrupt alliance. Lots of fees underwriting trillions in debts.

Elliott: I think the people in Congress are failing to understand a key tenant of Mises – “economics is human action.” People doing stuff. That’s economics. If a bank blows up, that entity called the bank goes away, but people live on.

Russ: Right, and there’s going to be losers. See, under Presidente Hopium, the philosophy is “you can’t have losers.” That’s why he’s such a bad president. Getting back to Europe, that whole Euro area has an 87% gross debt-to-GDP (in it’s government sector). That’s ironic; the whole euro area is better off than the United States. Yet the crisis is in Europe. We have Belgium with 97%. France, 88%. I don’t think France has any more bullets for this. There’s Germany at 80%. Greece at 152%. Ireland, 114%. Italy, 120%. Once it turns to Italy, France and Germany can’t do anything about that. The ECB has had to intervene four days in a row to cap bonds rates at 6% in the Italian bond market.

Europe is over-banked and over-leveraged, and more bailouts further socializes the losses to the already stressed sovereigns. If the banks aren’t made to take the losses, governments will be throwing whole countries under the bus. Will it be the countries or the banks? Or a unhappy mix? The discussion constantly comes back to bailing out the banks.

Ilene: Yes. Given the backdrop of wizardry and manipulation, how would you invest your money?

Russ: I develop strategies to try to get in the ball game. I was shorting copper because I thought the China bubble would bust. And boy, it just resisted and resisted, even though the evidence for a hard-landing was substantial. Finally copper broke, and I covered. You need to be a speculator, a contrarian around the edges, and pick your openings. It’s a tough environment. I would not want to be running other people’s money right now. So I don’t know that I have a good answer for you.

Ilene: Are you long or short any particular stocks?

Russ: Right now, I’m shorting the “Palace of Versailles” stocks, stocks like Tiffany’s, Ambercrombie-Fitch, Coach, Starbucks, that sell at rich multiples, because supposedly wealthy people are doing well. Well, rich people were losing their asses in the market in the last couple of months. If you look at the polls, rich people are just as negative as poor people now. The Palace of Versailles trade makes little sense when protesters are in front of your houses and the stores you shop at. I try to run counter to the conventional wisdom.

Elliott: I’m a fan of attempting to figure out the realistic fair value for a company, and then, when the stock goes way higher, sell; and if it goes way under, buy.

Russ: That’s not bad. There are some very cheap stocks in the market.

Ilene: Are there any you’d buy now?

Russ: I would wait until the market gets very oversold, when it looks like the direction in Greece is headed towards a serious, deep, restructured default. I’d wait for the sentiment to get more negative and certainly not when the trade is lathered up about the next Merkel-Sarkowky “meeting”. I call it “weekendism”. Then you could probably pick off your Sanofi’s (SNY). There are many cheap European stocks, Total (TOT) perhaps, and Statoil (STO). I think oil, at an equilibrium price, will be around $75. I don’t think it’s going to completely collapse.

At the same time, I would be shorting the Treasury market (specifically 2 and 5 year Treasuries). That’s your hedge. Because if interest rates start spiking, especially U.S. Treasury rates, it’s a game changer. It’s going to re-value everything. I don’t think we can have one-quarter percent interest rates indefinitely.

Ilene: Isn’t that what the Fed is doing right now, promising that very low interest rates will continue for the next few years?

Russ: Right, but the first thing I said in this interview is that I consider the Fed to be like the “Wizard of Oz.” It’s power is overrated. I don’t think that the man behind the curtain is who everybody thinks he is.

How could the Fed possibly control a situation where gross government debt to GDP is 100% and climbing rapidly? How can they possibly keep interest rates down? History will show the current situation to be a fluke and a bubble.

Ilene: Do you think the Fed might just keep “printing” more money and buying more Treasuries?

Russ: That’s stealing from real people and real consumers, the average guy in the street. It’s just stealing. Even Dallas Fed Fischer said as much, just benefits speculators.

Ilene: Yes, but they’ve been doing that, why would they stop finding new ways?

Russ: Well, then we’re going to keep having worse and worse economic conditions, more wealth transfers to criminals and kleptocrats and speculators. And 99% of the population will continue to sink, and you will soon see pitchforks.

Ilene: Would allowing Bank of America to transfer derivatives from its Merrill Lynch unit to the retail bank subsidiary with insured deposits, count as another indication that the stealing goes on. It doesn’t get much more blatant than that does it?

Russ: Yes, it’s absolutely outrageous, and to quote George Carlin, “nobody cares.”

Ilene: So Bernanke will continue this strategy of saving the banks, stealing from the taxpayers, until something forces him to stop. What might that be?

Russ: It’s not just Bernanke, it is a whole scheme of bankster officials and apparatchiks. He’s probably going to stop when some major holder of Treasuries finally goes on strike. It’s a prisoner’s dilemma. You got all these entities like China trapped in the system. They’ve lent so much money to the United States that they’re now trapped. Finally somebody at the margin will jump ship. That’s how Ponzi schemes unravel. Someone eventually says, “Holy crap, let me out of here.”

I’m surprised the government’s been able drag things out this long, except throwing trillions down the rat lines has some effect. It’s probably because of the myth of the Wizard of Oz, that the Fed can control the economy, stock prices, and bond yields. People keep speculating on what the Fed will do, and sometimes it works and sometimes it doesn’t. But the Fed’s running out of string. When things get bad enough, other countries will help their own people over helping Bernanke. In Europe, Germany will use it’s last resources for German banks, not Italian and French.

Elliott: Bernanke is giving press conferences now, which is unprecedented. They’ve taken this entity that was remote and mysterious before, and they’re putting it in the limelight. This does not strike me as a reassuring move, this strikes me as desperation.

Russ: Well, the other thing is that these booms and bubbles go bust, and it pisses people off. I noticed that CNBC did a poll asking their viewers what they thought of the Fed, and 70% of viewers were negative.

Elliott: Gee, I can’t imagine why.

Russ: The Fed (and Troika in Europe) is not very popular. But many traders are still caught up in this Wizard of Oz mentality. It seems like the hot money at the margin drives stock prices day to day. I have to admit, I thought it would end a while ago. Meanwhile, the government debt just keeps spiraling and spiraling, and many people are holding “Old Maid” cards. If there’s a debt trap in the United States, would you want to be holding a bunch of 10-year Treasuries yielding 2%? Sometimes I wonder if the mom and pa investor, let alone their money managers know about prices inversing to yield.

I grew up in the business in the 70’s and 80’s. I was a broker, and can remember quoting people: “Well, I could get you a 10-year treasury for 12%.” And they’d say “no, no, I don’t want that, what do you got in a one or two year?” And I’d say, “I could get you 16%.” They’d take that.

You could have done well locking in the 10-year at 12%. But now it’s the opposite. It doesn’t make sense. Any rational person looking at that would know it’s a bad investment decision. The only reason someone would make that kind of investing decision is that they think the Fed has their back. And they thought the Fed had their back on the emerging market trade they had going nine months ago. They lost 30% on that. They thought the Fed had their back on commodities, now they’re losing money on that, and they’re going to lose money on this one.

This is fun, you guys are letting me rant here. The Austrian school instinctively looks at trouble every time the government gets heavily involved in something. What the government needs to do is to be a policeman. It’s a damn shame Eliot Spitzer got in trouble. Those are the kind of guys who are necessary today, people who will ride herd over these guys, sheriffs in the wild west so to speak.

Elliott: If you’re going to go after the big boys, you’ve got to be squeaky clean. You gotta be like a hermit, practically, a monk.

Russ: Yeah, they’ll get rid of you one way or another. I like to use the analogy of the old Soviet Union, the Soviet Union used what’s called “negative selection.” You go through any organization, and get rid of anybody that’s a critical thinker, anybody that asks questions, anybody that has a moral compass, anybody that’s highly intelligent, you get rid of them. Then you end up with these organizations that are littered with sycophants. That’s what happened.

Elliott: Right, a galloping mob of mediocrities, to do whatever their bosses say, without question.

Russ: That’s the system. Plus all the politicians are bought. That the crux of Occupy Wall Street.

Elliott: The comfort that I take is the certain knowledge of “that which cannot continue, does not continue.”

Ilene: Why do you think it can’t continue?

Elliott: Because eventually when parasites get too much in control, they kill the host.

Ilene: But they may survive and jump to some other host.

Russ: Well, yeah, they’ll find something to steal. This is the debate we’re having. Do you really want to be bullish on a system like that? Even if the parasites have a little more staying power? Do you want to trade on that? Do you want to jump on board like the last two days of another rumor, because it seems like the parasites are going to win again?

The only thing that will rally the market is another bailout rumor. Nobody asks who’s going to pay for it. A couple weekends ago, Standard and Poor said, “if you do this kind of program, we’re going to downgrade the countries of Europe.” They just stated it! Nobody reported that as news. Everybody reports the bailout. Not the consequences. Just the bailout. That’s the trade.

Elliott: You had just mentioned the point when the big players start jumping off the fringes, because they just can’t play any longer. Could it be that the ratings agencies might be the first ones to jump?

Russ: Ultimately they end up having to do their job. They can see that we’re in a debt trap. I notice that Standard and Poor’s managing director got fired, or moved on. That’s an example of negative selection at work.

Ilene: But now they seem to be calling it like they seeing, and getting ample criticism for that…

Russ: They’re actually calling it late. And everybody’s mad at them because they’re finally taking action. The U.S. went on full offensive, pulled a big public relations campaign, put out false data, reacting to the downgrade. Instead of just fessing up, the U.S. attacked Standard and Poor. Presidente Hopium didn’t do it himself, he had his hacks do it, like Geithner.

Ilene: What else do you think, Russ?

Russ: I think the weather has to be considered, I think that’s increasingly entering into the equation. When you have two of the hottest summers in a row, in a century, that screws things up. I’m becoming a little bit more of an environmentalist now. Big pieces of ice breaking off in the arctic melt. Those are things people don’t really seem to care about, until all of a sudden you get a category 6 hurricane. But then it’s too late. I think there’s risk. It’s not something that happens next week, but don’t be surprised if all of a sudden something weird happens next year and it wipes out crops, creates instability. That’s just part of the whole global “slash and burn” mentality. That’s where government has to step in. So I’m not an Austrian when it comes to environmental protection. We need a big kid on the block to limit the negative effects of “free market” economics run amuk. That’s missing. We had Bush, gutting the protections, and then Hopium enabling more looting. Another factor worth mentioning is that there are huge wealth gaps, measured by the GINI coefficient.

Elliott: Oh, I know, it’s distressingly high now.

Russ: It amazes me, I wonder when are the riots coming? We have the “Occupy Wall Street” movement, it’s getting some press now. I’ve been predicting more social unrest. Finally we have negative demographics, people who need their money. They’re getting zero income on savings, and many people are retiring. There’s a headwind against capital formation. People will be taking their money out of savings to live because they’re getting zero returns. That could happen rapidly and be a big drain on pension funds. That’s all part of my picture.

Elliott: Rounds of quantitative easing (QE1 and 2) have pumped additional capital into the economy, but it hasn’t really been moving. Once that capital starts getting some velocity, will we start seeing inflation pick up?

Russ: Maybe, but so far, it’s just caused maladjustments. One of the things that happened last spring is that producers began over producing, for example, creating extra fertilizer and extra potash, etc. to sell to farmers, because the farmers were worried about the inflation and were double ordering. That creates a boom. The next year, they didn’t need the product. That’s a maladjustment. That’s prevalent. The analysts the claimed the company from which the double orders were placed was having a fantastic quarter, but the double ordering, the hoarding, was unsustainable. (See Inflation causing economic boom, then bust)

There’s very little good analysis available. Why? Negative selection. If the sycophants and the negative selection guys are running the show and controlling the money – and they are – they’ll gun this stuff any way they want. That’s another danger.

Ilene: Will Dorothy find her way back to Kansas?

Russ: As L. Frank Baum once said, “Everything has to come to an end, sometime.”

Elliott and Ilene write and edit Phil’s Stock World’s weekly newsletter, Stock World Weekly, take a Free Trial Here.

Chaos in the land of Oz

Russ Winter Take on the Markets and the Economy Part I – Chaos in the Land of Oz

 

Ilene: Hi Russ. So, tell us about life in the world of finance.

Russ: Right now, I’m very much focused on a phrase I call “The Wizard of Oz.” The Wizard of Oz is the Federal Reserve, the governments, the U.S. Treasury, and the “Troika.” You need to understand these organizations to invest today. You need to hire old apparatchiks from the old Soviet Union, because the basis of the 2009-2011 bull market is massive government intervention.

For instance, the spending of the U.S. Treasury, the U.S. government, right now is 25% of GDP. The norm is 18%. So that means 7% of GDP can be attributed to the government propping up this economy. You have huge transfer payments used for paying off banksters and keeping the system going. A lot of the transfers go to the wealthy “kleptocrats.” That’s one of the reasons we had a 400% increase in the price of Tiffany’s, while Wal-Mart is on it’s butt. Is it any mystery that protests against Wall Street and kleptocrats are on the rise?

So that’s the effect. You really have to be an old apparatchik Russian guy; those guys would do really well in an environment like this.

Chaos in the land of Oz

Elliott: I remember back in the 70s, there were people who were “Kremlinologists” and “Kremlin watchers” and so it seems now that in order to be an investor you have to be a “Fedologist.”

Russ: Yeah, it’s ridiculous. Everybody is extremely focused on the Fed, every utterance, every rumor, every shill that they run. And they end up being pump-and-dumps a lot of times.

Elliott: There’s Jon Hilsentrath with the Wall Street Journal, Bernanke’s favorite “sounding board.”

Russ: Absolutely, and Steve Liesman. He’s a shill, and you can actually quote me on that. They run the rumors, the pump-and-dumps, that they need to operate. The problem for investors, small investors especially, is that if you’re too tied in to what they’re saying, you end up being victimized by the gaming. For instance, CNBC is a good source for figuring out what the current pump-and-dump schemes are.

Scarecrow: I haven’t got a brain… only straw.
Dorothy: How can you talk if you haven’t got a brain?
Scarecrow: I don’t know… But some people without brains do an awful lot of talking… don’t they?

CNBC spent the last six, nine months pumping up emerging markets and commodities, and look what’s happened to the investors who followed that? Emerging markets are now down on the order of 30%. There’s a good sized commodity correction going on. It doesn’t pay to buy these guys hook, line and sinker. It’s dangerous. As a result of pumping up a massive Treasury bubble, the system has been able to maintain this 7% extra spending. But neither the Bubble nor the spending can be sustained.

Government borrowing is highly dependent on the Fed. It’s not a real market, it’s rigged. The Fed is far too much of a presence, and now we have an enormous unsustainable debt. And everybody’s trading around what the Fed says, what they’re gonna do, how they will interfere with the market.

Another aspect of this treasury bubble is that the government is going to be subjected to credit downgrades. Same thing that happened in Europe. Look at European yields, two, three years ago, look at the yields of Portugal, Ireland and Greece. The yields were two and three percent. Now they’re double digits. Nobody can convince me that the US is immune to that. These are debt traps. You get into a situation where you can’t borrow any more at these low interest rates. Once the interest rates start spiking, they’ll lose control of the situation. It’s a major game-changer.

And so I think investors and speculators need to put this into their thinking, tattoo it on their foreheads: the potential exists for the United States government to completely lose control of these ultra-low interest rates. The low interest rates don’t really do any good. They punish savers. It’s not good policy anyway, and when you get into a debt trap and credit downgrades, it spirals out of control. I think that’s on the horizon.

The key to helping Europe is to shrink the banking sector. The banking sector is too large in all these countries. It’s a parasite. The large banks provide no social good. But these interests, the interests of “banksters,” have captured governments. The banksters control the governments and loot them endlessly. That’s what these bailouts are about.

The old-style, regional small banks aren’t the problem. The problem is we have a “too big to fail” system, and they just run these dynamite strapped routines, and they own the government.

So if you look at the discussion going on in Europe, it centers around the idea of debt forgiveness, maybe starting with Greece, writing off debt. But the banksters won’t go along with that. That’s the political battle going on in Greece.

Elliott: It sounds like the immovable object running into the irresistible force.

Russ: They control these governments. Even though there are popular movements, which may eventually vote these guys out, at the present time, we’ll send Turbo Timmy Geithner over to Europe and he’ll just run the same programs. He’s totally corrupt, dangerous, and he’ll pressure these guys to save the banking sector. That’s a “dynamite straps” theory. They’ll show up and say, “If you don’t bail us out and save us, we’ll blow up the world.”

Ellott: Right, they were saying that back in ’08, how if we didn’t do the bailouts, we’d end up with martial law.

Russ: So here we are, three years later repeating the pattern. Now we have sovereign debt problems that are out of control.  There has to be a major restructuring of debt in Europe, probably not just Greece, but also the other peripheral countries.  Sure there has to be some austerity and some reform, but make the banksters take losses. If we don’t see some major banks shutting down in this next six months, look out. We’re heading a lot lower. Countries that do it right, laying the pain at the banksters’ doorsteps, will start healing. There will be some pain, but there’s pain already, and eventually they’ll recover.

Ilene: So you see some hope that countries will restructure their debts and force the banks to take losses? It seems the 2008-09 meltdown and subsequent events showed that the law doesn’t apply to these special bankster people. They got bailouts, loans from the Fed, outrageous sums of money for “bonuses”, and only a token few were prosecuted. I wonder on what basis the Federal government and Fed had the legal authority to plunge the country so deeply into debt – to be extracted from taxpayers – for the purpose of bailing out private too-big-to-fail entities?  If the situation was so dire that the world would end if the banks failed, the government should have taken them over, not saved them.  So back to the question, what gives you hope that anything has changed?

Russ: I don’t think it’s going to be done politically. There are popular movements, people who hit the streets. The German perspective is probably the best. The country has a triple-A rating. The German people don’t want to be dragged down into a tar pit, bailing out all these countries around Europe. If they stand up to these guys then there’s hope, but I don’t invest on hope. (See Russ’s “Is Germany the Great Savior of Europe?”)

I hate these kind of rallies, where they float a rumor that there’s going to be another bailout and these “boys in the sandbox” get out and drive stocks up 6%. You’ll notice that these rallies don’t last because it’s not sound economics.

Elliott: One of the things I’m trying to figure out is the Dollar. It ran in a channel between 73 and 76 for the last six months, and then in the last three weeks it broke out in a big way, and now it’s trading in the 78 to 79 range.

Russ: A lot of that is probably technical. Many of these carry trades that have gone on around the world are all in dollars, you remember the cost of borrowing in dollars is nothing, if you do it right. So if you’re a speculator you’re borrowing dollars and jumping into emerging markets, or gold or commodities, or whatever, and then once those trades come undone, it’s a technical factor that causes the dollar to rally.

Elliott: Do you see the Dollar breaking back down to the 73-76 range or below?

Russ: I don’t know. The Dollar could go up, if this carry trade continues to unwind. I have a feeling right now that, for people out there in trouble, they keep running these rumors, to try to help them out.

Ilene: Do you mean the Banksters are running rumors to drive the Dollar down and the stock market up?

Russ: Yes, the people who run the trades, finance the trades, benefit from the fees and commissions, who skim the fractions off the trade, the pump and dumpsters, it all ties together. If you invest or speculate, you better understand the big picture.

There’s also a lot of shorts in the market. People are classically over-trading the market. People have to, there’s no return on their money, so they’re in there playing something. You gotta play something, you gotta be short something, or you gotta be long something, or you gotta be doing a carry trade. That’s because the banking sector is too large. It dominates our economy. The real economy has shrunken while these monkeys play these games.

The most bullish thing that could happen is for this system to come to a final end. Until that happens, I would not be a long term investor. Really, you can only gamble with the rest of these guys, and with a clear understanding of what is transpiring. To turn long-term bullish, we need to see these banking systems shrink, and a lot of debt get forgiven.

I could go on and on about moral hazard and the apparatchik Soviet Union Russian type behavior it engenders.  Ultimately it comes back to shrinking the banking sector, making them take the hit, starting to forgive the debt – restructuring the debt, and resetting the plate for the whole economy. That means wiping out banksters, taking their equity, closing down their banks, taking their bondholders and wiping them out. That absorbs a lot of the debt out there and properly places it. To take that debt and put it on the back of Germany and France now is insane.

Now, the other aspect that’s going on is that China has been a huge story. China is a disaster waiting to happen. I noted that on September 12 there was a story out of Shanghai where seven of these large operators, businesses, manufacturers just shut down the same day, leaving huge amounts of debt unpaid. Most of these guys fled the country. Now there are more and more of these stories involving hundreds if not thousands of firms. They haven’t paid their workers. It’s a slash and burn economy. There’s totally inefficient development, waste, building unoccupied cities – vanity projects. Yet when you step back and look at China, 35% of their sewage is untreated. So they do everything out of order, everything is “big splash,” something that could collect a fee or loot and steal, and put it in the ratlines rather than really solving the problem. I think that’s very much what’s happening in China.

Elliott: You know, it’s kind of unfortunate to use the phrase “35% untreated sewage” and “big splash” in the same sentence.

Russ: (laughs) You got that right.  It’s a very, very unstable system. We have a boom/bust economy. When you print money the way they have, you distort the economy, you get strange things happening. You get a boom, and then all of a sudden, nine months later, you have a bust. It is not based upon proper development. It amazes me how this slash-and-burn mentality has taken hold. One of the stories you’ll hear right now in the market is “buy big-cap multinationals. Cheap stocks.” They sell at really low PE’s, especially relative to treasuries. Well, you know, there’s actually some truth to that, until you actually start digging down into the groups that constitute these multinationals. And I saw a great quote. I want to pass this on, from the CEO of Sanofi-Aventis (SNY). Sanofi is a major French drug company.  His name is Christopher A. Viehbacher and he says “I am a bit envious of companies whose products have been accused of contributing to health problems. I’d like to have the same P/E as the people who make soda pop and potato chips.” Then the article goes on to say that the soft drink sector now has an average P/E ratio of 16, according to Thomson Reuters, and Sanofi is 7.5. I think that illustrates what’s going on. Companies are rewarded for irresponsible activity in our global economy.

Elliott: Well, there’s definitely been a trend over the last 30 years. 30 years ago, corporations were expected to have a duty to the community, to their employees, as well as their investors. And now it’s like the investors are completely paramount and everybody else isn’t even on the radar.

Russ: It’s just a mentality out there that you can get away with giving people diabetes, and get rewarded with a high P/E ratio and a great growth story, while a company like Sanofi (SNY) struggles to come up with a medicine to heal these people. Then the government comes in and controls drug prices, and tries to dictate to them. Yet they let these other guys run amok.

Why is it that Pepsi’s at 16 times earnings, why is McDonald’s at 16 times earnings, why are these drug companies selling for nothing? It’s because the system is set up all wrong. Can it be reformed? I don’t know. I think you just have to be very cynical about what you do. Try to invest as much with angels as much as you can. Don’t try to stoop down to behaviors that everybody else is involved in, even though its very popular. As an investor, I’d look at a Sanofi over a Pepsi or a McDonalds. It’s investing with angels.

Ilene: What other companies, besides Sanofi, do you like?

Russ: I have a theme called the third Industrial Revolution that relates to energy transformation away from fossil fuels (especially oil). I was doing some buying below SPY 1100 (but not now) in names like FWLT, COP, SHAW, GTAT, ASYS. I also like some other drug companies like AMGN and LLY.  If I see names – I have a watch list – selling for under 5 times enterprise value to EBITDA in what I call “doing God’s work” sector (the non-criminals), I take a look. I am shorting luxury retailers like TIF, WFM and ANF, and also XRT via selling naked calls (the premiums are high) at the upper end of the range. I am also short 2 and 5 year Treasury futures.

Elliott: In other words, try to find the people who are creating true value, real wealth and doing it without destroying everything around them.

Russ: Yeah, exactly.

Elliott: Well, we have to start thinking about what this economy is supposed to be doing again. Does the economy exist to serve the human race, or does the human race exist to serve the economy?

Russ: Or does the economy exist to serve a group of kleptocrats and crooks?

Elliott: Remember Dave Chappell and his interviews with Rick James, when Rick would say “Cocaine is a hell of a drug”? Dave would ask Rick about his bizarre behavior, the insane things that went on, and Rick would reply with “cocaine is a hell of a drug.” I find myself thinking if you were to interview some of these people and they were to be as honest as Rick James, when you start asking them why were you doing this, the answer would be “money is a hell of a drug.”

Ilene: In addition to money-lust, I think a quest for power goes along with it too.

Russ: Well, the system has been set up for the kleptocrats and crooks. There’s no prosecution. Nobody has gone to jail for the 2008 scandals, unless it’s just blatant, like Bernie Madoff.  My big criticism of Presidente Hopium is that no one’s gone to jail. He didn’t have to deal with Republicans on this. He could have beefed up the Department of Justice and hired prosecutors. Why has he not laid a glove on these people? It’s not an excuse he can lay at the foot of the Republicans, it’s too late for that.

Ilene: Where are we headed?

Russ: There are people realizing this is not a sustainable system, but they’ve gotten so trapped into it.  I don’t think they can do more than “at the margin” type things. Geithner might go because Obama might decide that to get re-elected, he’ll need more of a populist agenda, so he’ll get rid of Geithner. They’ll just replace him with another crony capitalist.  I don’t think the outcome is good. In Europe, I’m kind of interested to see if maybe they do some debt forgiveness there, for instance in Greece.

Elliott: Well, we’ve heard a lot about the possibility of “debt contagion” in Europe, if Greece were to default. I think what they’re really afraid of is the idea of a debt forgiveness contagion spreading.

Russ: Well, that’s what’s required.

Elliott: Because once one guy gets forgiven over a giant debt, the next guy standing next to him goes “hey, wait, how come he got his debt forgiven, and I still have to carry this giant burden? Screw that! I want to get forgiven too!”

Russ: Right, well, these countries are trapped, they’re in debt traps, and who loaned them the money? Typically this debt is held by the banking system.

But an indebted country has a moral obligation to default on that loan if paying it would mean starving its people. Extreme austerity is a trap. Defaulting is not that big of a deal. They did it in the 1980’s with the Brady bonds. They did it in Brazil, in Argentina. Those countries got re-established, and here we are 20 years later. It’s not the end of the world. Banks have been going out of business for centuries. Look at the United States, the British were constantly loaning money for railroad construction, canal construction, there were booms and busts. They lost money. And they’d come back two years later and do it all over again. So the idea that because some big banks go under its the end of the world is bullshit. It’s not how banking and economic history has worked.

Elliott and Ilene write and edit Phil’s Stock World’s weekly newsletter, Stock World Weekly, take a Free Trial Here.

Is the S&P 500 on the Verge of a Rally

Only 5 short months ago the S&P 500 was trading at the 2011 highs around the 1,370 price level on the S&P 500 Index. Since then, the price action has devastated investors and traders alike. As of the close on Monday, the S&P 500 had worked over 270 handles lower in 5 months. The price action since September 27th has been a bloodbath.

It is true that the S&P 500 could be carving out a double bottom on the daily chart, but I am of the opinion that there may be more work to do to the downside. We are oversold on the daily and weekly price charts, but I have yet to see the kind of panic level selling that typically precedes a price reversal. The chart below illustrates the number of stocks that are currently trading above the key 50 period moving average:

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While most market participants are concerned about a trap door that causes prices to cascade lower, I am concerned that at some point news will come out that could rip the bears’ faces off. The majority of retail investors are running for cover. The sentiment levels are decidedly bearish and the last thing most traders are looking for is a rally. The contrarian trader in me cannot deny that a rally would do a lot of damage in the near future, but Mr. Market needs to suck in a few more bears in order to do the most harm.

One sound bite out of Europe could alter the price action almost instantly in favor of the bulls. The ECB could suddenly cut interest rates or announce that Eurobonds are going to be made available. Either two headlines or a combination of both headlines would most likely drive prices significantly higher.

After the nasty downside probe today, there are layers of buy stops above current price levels. If price worked high enough, the stops would be triggered and an all out rally could play out. Anything coming out of the Eurozone that appears to be either stimulative or that appears to push an ultimatum out on the time spectrum will be viewed as positive.

Often news and price action play out together at key support/resistance levels and it would make sense that some form of announcement will be made when the S&P 500 price is sitting right at a long term support level. As can be seen from the weekly chart of the S&P 500 Index ($SPX) below, the 1,008 – 1,050 price level is of critical importance.

The primary support levels I am watching on the S&P 500 if it continues lower are the 1,080 price level which should act as short term support. If that level breaks the 1,050 area will become a major support level that bulls will likely defend fervently. Additional long term support will come in around 1,008. I would be shocked to see the S&P 500 push through both the 1,050 and the 1,008 price level on the first attempt, but stranger things have happened.

If price works down to the 1,008 – 1,050 support zone it would not be shocking to see a strong reversal higher. With the recent carnage we have seen in the S&P 500, I find it hard to believe that we could see another 10 – 15% more downside before a reversal plays out. The 1,008 – 1,050 price zone seems ripe for a test, but one other scenario would be a test of the 1,080 support zone that fails intraday and by the close is regained. The chart below illustrates the two most probable scenarios:

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Financial markets do not offer a sure thing, however it is without question that bulls will aggressively defend the 1,008 – 1,050 price level on the S&P 500. If that level fails, the price action is going to get far worse and an all out crash could be underway. For now, I am of the opinion we are within 7% – 8% of an intermediate term bottom which could produce a strong multi-month rally into the holiday season.

As always anything could happen, but traders need to keep their eye on both sides of the price action. A rally would do a lot of damage to the bears as well as the under-invested retail traders and investors. Ultimately the price action is in the hands of Mr. Market, but it is a well known fact that Mr. Market likes to trap traders and inflict pain on as many market participants as possible. A forthcoming rally  would offer yet another opportunity for a lot of traders to eat another slice of humble pie.

Subscribers of OTS have pocketed more than 150% return in the past two months. If you’d like to stay ahead of the market using My Low Risk Option Strategies and Trades check out OTS at http://www.optionstradingsignals.com/specials/index.php and take advantage of our free occasional trade ideas or a 66% coupon to sign up for daily market analysis, videos and Option Trades each week.

This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the OptionsTradingSignals.com website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.