Deal or no deal? That is the question. We knew there was going to be a deal, there had to be a deal. What I’m going to say is what I told my subscribers last week. Herbert Hoover was a rugged individualist who believed he could instill confidence in the economy by cutting spending, raising taxes and balancing the budget. I think you know that approach didn’t even put a finger in the dike. We all know that Roosevelt’s New Deal greatly expanded the role of government. You are entitled to your own opinion about the New Deal but I’m a scoreboard kind of guy. The bottom line is the market bottomed in 1932 and rallied all the way up to 1937. Our economy still had many challenges as the new labor unions created strikes which crippled the auto industry. The truth is stocks did go up and I think most people would be satisfied with that right now.
I also covered another aspect of our history this week. This was Nixon’s war on inflation. He instituted wage and price controls on August 15, 1971 and the public’s initial reaction was 95% in favor. It seemed people were happy the government declared war on ‘price gougers’ and ‘speculators.’ Does that sound familiar? Inflation was hovering near 5% when Nixon enacted his controls which were scheduled to last 90 days. When they were discontinued and discredited nearly 1,000 days later, inflation had more than doubled.
In current news, Honda announced they were delaying a new plant in India until 2010 because of the economic distress. The Bill Heard Group, which had dealerships in seven states, closed their doors this week. This happened even as employees were not paid money they were owed (salary and commission) and cars were stuck in repair bays. Some still might be there even as you read this.
So if you look at the public’s initial reaction to Nixon and the current situation, it is surprising to see the disconnect they have about the Wall Street’s problems staying off Main Street. One of my missions is always to make sure my posse doesn’t get caught up with the crowd.
Finally, if we extrapolate the potential of price controls on the economy, this ban on short selling may have the exact opposite results intended by government officials. If it’s temporary for a couple of weeks, fine. But my friends in Australia have instituted an across the board ban on shorting selling. What non market participants don’t understand is the vital importance short sellers’ play. Short covering is a major prerequisite to any sustainable rally. Short covering leads to short term traders supplying the kind of liquidity required to bring the big money players in that allows trends to materialize.
Is it any wonder that since the President proposed this plan the markets have done absolutely nothing? On the 18th the NASDAQ closed at 2199. On Friday it closed at 2183. Of course, we’ve been on a roller coaster ride but the ban on short selling was supposed eliminate the kind of big down days we had last week.
The problem with tech is simple. The SOX has yet to achieve longer term targets near 280 and may be in an ending diagonal triangle pattern. The BBH has filled a gap on the way up and struggling to hold on. One looks good and one is trying not to look bad. To get tech going in the bullish direction, it needs for the SOX and BBH to be more unified and that might not happen until the SOX bottoms out.
We have some important cycles coming this week. The 55 day cycle (+/-1) comes due on Tuesday off the July 15 low and the 233 day cycle off the 2007 NASDAQ high starts Thursday. Be advised the Mercury retrograde is in full swing until the middle of October.
Why did I spend so much time talking about historical events today? The past sequence is unlike any other this generation has seen. Part of the problem with the public is they are not good students of market history. This is one of those rare times we must learn from history. We should get a pop from the Congressional news but I believe the ban on short selling of any securities is going to end up having an apposite effect on what they really intended. Officials want to see the markets recover. While I think the deal is a good thing because these kinds of activities materialize near important lows, we need bears to be wrong about the timing of their short positions to see any meaningful rally. Bears need to be allowed to place their trades. Hedge funds need a free hand. The other problem is the time windows and the Mercury period. I think we can see wild swings this week again and don’t think we get a clear indication at least until we pull out of these cycles by the end of next week.
Thankfully September is over and we are coming to that seasonal time of year where bottoms can materialize. I’m looking at whipsaws and the news that comes out of it may be initially one of relief but as market participants realize this deal is not the tooth fairy, there will a tough road in front of us.
You can get a free month of my Greenblatt Time Zone and scanning feature by going to the Genesis software page on my website. The Trader’s Forum is coming up in October and I’m here to tell you we we’ve done a comprehensive study of charts back to the Great Depression. What most people don’t realize is how the patterns I work with on a regular basis have repeated over and over throughout market history. Understanding the past can give you an incredible edge in the future. Let’s reference the extensions I’ve shown you in Banking and the US Dollar this year that have led to important turns in those markets.
