Since its playoff time in my two favorite winter sports it’s also a good time to remind you that the old sports adage that you should never get too high after a win or too low after a loss. Upon further review of conditions in the market, that seems to fit. Things may not be bad as they seem nor as good as they look.
That’s very contradictory, isn’t it?
Things have been looking mighty sour since the day Manny was suspended for using a banned substance. By the way, that was also the day the bond market really struck out on their auction to sell debt in support of the recovery. Things haven’t been the same since. The U.S. dollar has been almost straight down since that time, most notably every single day last week. That means our all or nothing currency has been down nearly 10% in the past two months and 8% of it in the past month. It’s almost a mini crash. The problem is we go from dealing with one extreme (deflation) to the other (stagflation or worse) in record time. We go from sitting on the cusp of a deflationary depression to a pseudo inflated economy with one rally off the bottom. Excuse me for asking, but aren’t we only supposed to be at threat for inflation after a recovery has had time to heat up?
The only thing around here that’s starting to heat up is my air conditioning bill.
As we come into the new week, we suddenly find ourselves on the cusp of yet another important test of the recovery. This is a recovery so fragile it has a major test every 2 or 3 weeks. The economists like to talk about “green shoots’ sprouting all over the place but we do have a herd of black goats eating away at the tender roots and are threatening to blow away the top soil, leaving the economy in a bowl of dust.
We continue to strike out with the Chinese who may have to be ‘prodded’ with added risk premiums to keep buying our debt. The longer they wait, the lower the price. Here’s to hoping they buy before Manny is reinstated over July 4th weekend. As we’ve seen with the dollar, a month is a long time in technical analysis.
This week we had new phenomena where the dollar and stock markets were going down at the same time. One of two things is going on here. First, we could finally see the decoupling of the inverse relationship with the greenback and stock market. That would likely first lead to a revisiting of that oldie but baddie from the 70’s called: stagflation. With an unemployment rate still at nosebleed levels, this isn’t your typical inflation scenario. But we could get a creeping interest rate/low or no growth rate scenario like we did during the Jimmy Carter era. Or we could be finally setting the table for a South American style dose of hyperinflation.
The CRB chart rose slightly this week and every week until now a rise has been good because it meant the recovery was sprouting those “green shoots.” But this week had a different feel to it. I don’t think commodity prices went up because they were suddenly more in demand. I actually ate less 85% chocolate this week.
That’s the bearish scenario.
The bullish scenario means the only time the dollar and the stock market will go the same way is because one of them is in a sideways pattern and the action is just “pattern coincidental.” When you look at the week, we had five down days in the Dollar but two up days in the market with three mild selling days. The market still has not engaged any real technical damage, but its close. The BKX has traced out an ABC pattern where the C wave is close to a .618*A which is a common relationship in bullish market corrections.
What this means is the banks have absolutely no margin for error. If they break here, we are looking at something larger that is only beginning to develop.
On the other side of the coin we have the metals market that is testing both price and time resistance at the 144 day cycle off the bottom. The XAU and selected mining stocks are threatening to break out and unless we get the mid week reversal, they should carry through into early June, but the damage to the charts will be done. A higher metals market is likely to lead to a lower dollar which may lead to a lower stock market.
The put/call ratio finally rose last week over 1.00 and we haven’t seen fear readings like this throughout the rally phase. Of course, these readings are not comparable to any real selling we saw in 2007 but instead of shrugging it off, but people are concerned. People are also concerned about Treasury auctions that strike out. But while its true the dollar and the stock market have gone the same way the past few days, the selling was not intense and has only come down to support areas that indicate a normal pullback.
Oddly enough, an injection of fear in the market at this point may be larger degree bullish. If this is a 2nd or B wave, sentiment will be ‘here we go again.’ Thus far, it does feel that way even though there isn’t technical damage yet. Watch support levels as well as the time windows in the metals. The 144-47 day window in the metals will be driving the action this week.
June is almost upon us and so is the LA Traders Expo on June 5. I’ve revamped the material for the panel discussion with Dan Collins. Lot’s of people like to trade news events because they think they can get an edge. Obviously, a bad unemployment number should throw markets off a ledge, right? During 2009, how many of you realize the highest monthly unemployment figure came in April, during a rally and the market did not sell off? It’s never been the news event but cycles leading up to the event that drives the results. I’m also going to show you how to overcome the confusion of trading on fundamental data compared to perfect market precision in one selected futures chart. The truth is this applies to EVERY futures chart.
I’m also going to have my own break out session where I’m going to uncover material that takes timing to a whole new level. It’s free, but you need to register.
Register FREE by call 800/970-4355 and be sure to mention priority code 014023 or go here to register online!
