Do you remember the theme I wrote about this time last year? Recall we had just survived the bottom and earth did not fall off its axis. The sun came out every morning and your ATM card still worked at the grocery store. We were 3 months into the recovery and for the first time in a long time, things started looking better.
In fact, things were looking so much better I started speculating we could use some kind of pullback in the stock market. The biggest problem we had at the time was a collapsing Greenback which had gone from about 91 to 80 in 90 days. True to form, my cycles were calling for a trading bounce and we did end up with that sideways pattern for the whole month of June.
But I remember telling you something else at that time. It was an embryonic recovery and the only thing that could derail it was a terrorist attack or a Katrina like event. Thankfully, we never did have another 9/11 type event.
Last night I was watching a documentary on the Great Depression and they were describing the Dust Bowl in great detail. They talked about how four generations of farmers had used up all of the top soil from about 1850-1930. Then they described how a horrible witch’s brew of a generational drought coupled with rare wind conditions blew the dust 10,000 feet into the atmosphere and swept it across the country. It was so bad that a wall of dust blew through the northeast. Places like New York City were covered with darkness and street lights were illuminated at high noon. Did you realize it was that bad?
Then I started thinking about this disaster in the Gulf and I couldn’t help but think history is now repeating itself once again. As you know, ‘this time’ is never exactly the same as ‘last time.’ We also know that from the bottom in 1932 markets rallied for five years; all the way to 1937. Part of the reason is the technical action reaction to the mammoth sell off. But the other part was the great resolve of the American people to fight back against poverty. As distressing as the Dust Bowl era was, it was also a time where the founder of Bank of America financed the construction of the Golden Gate Bridge. At the time, it was considered to be the largest suspension bridge of its kind. It was also a time where the Hoover Dam was built. That was a project where they poured enough concrete to create a sidewalk that covered the circumference of the earth. The Hoover Dam still contributes enough hydroelectric power to still make a profound contribution to Nevada, Arizona and California. You can make a case that if there was no Hoover Dam, there might not have been a Las Vegas as we know it.
These were great accomplishments that symbolized the rebirth of our nation at a time we were on our knees.
With all of that being said, I watch like everyone else what is going on in the Gulf. I wonder if history is really repeating itself. Is this BP disaster going to be our Dust Bowl and is the cleanup going to be our Hoover Dam? Disaster always brings opportunity to overcome but my question is to do we have the resolve to recognize it? Or are we too deep in debt; too disgusted with Washington and Wall Street; too angry to care?
CNBC had a report late last week which stated one can now stay at a Vegas strip hotel for a whole month cheaper than you can rent a house in Sin City. I think you can always judge a society by what they do with their spare time. A couple of years we were reading about ‘staycations’ as gas was hovering at $4 a gallon. We don’t have ‘staycation’ anymore but Vegas is now giving away 5 star buffets at 3 star prices. Clearly, the recovery is not where it needs to be. But they also interviewed Steve Wynn who made an interesting comment that politicians are now bribing the electorate with their own money. We used to be a compassionate society but I’m wondering if we’ve grown weary of enough bailouts for the last 80 years combined. The sentiment now is don’t bail anybody out, we’ve had enough. I can certainly understand that. But if you run the Bubba Gump Shrimp Company down south do you trust a socially responsible company like BP to make you whole? What do you do? Are we against bailing out until we are the ones in need a lifeboat? Are we a nation of 300 million Americans against bailing out until we are the ones on the sinking ship?
Then you have financial regulation. One would think there should be meaningful reform after the excesses of the past decade wrecked the system. According to the latest article in the new Rolling Stone, Matt Taibi states the financial services industry has flooded Capitol Hill with more than 2,000 paid lobbyists to chip away at the impending bill. It’s very simple; if we don’t learn from our excesses and continue to pretend that business can go on as usual we are probably doomed in some way to make the same mistakes again.
What that tells me is that at some point the bottom will be revisited
I have no interest in politics, my concern is purely socionomic. I know that bottoms are formed when the crowd is interested in bailouts. At least part of the society was interested in AIG and TARP. But there was a cross current not to help Lehman and the Detroit automakers. Now the same cross current blows in Europe for their many challenges.
Are institutions too big to fail? Since we seem to be a ward of China, better hope they never get that impression of us.
We have different cross currents right now. We worry about a European collapse. I always thought bull markets climb a wall of worry. We have some of that right now.
I also thought markets bottom when you have a bailout. We had a lot of that in 2009. Of course, we have a growing base of the population that has had it with bailouts. Steve Wynn mentions the Tea Party is a manifestation of fear that our political institutions are no longer capable of handling our problems as a society. We have all these dynamics going on at the same time.
I know one thing is for certain, where there is no compassion; there is no stock market bottom. Where there is no learning from mistakes, there is no bottom. The theme has changed since last year at this time. Last year at this time we were just glad the market was going up. But you may remember me telling you a market that goes up just because the currency goes down is not the ideal way to wealth building. A year later we are starting to reap what we have sown.
In certain ways we are better off but others it seems we are too stubborn for our own good.
But now we have a very shaky low in place. That brings us to the charts. Last week was strange as the charts, which did not set a new low (NDX, SOX AND NQ), did not put in great readings at their secondary bottoms. The ones that set new lows like the SPX and NASDAQ did get decent readings. Luckily, the NQ and SOX had really good readings at Flash Thursday. So now we are getting mixed signals. The one real technical bright spot was Copper. It had very good readings at its recent low but has now rallied up to a turbulence point and in the very least should give us some backing and filling this week. Based on those Copper readings I told my subscribers they could engage in certain commodity plays which did work. As we know the Euro did bounce but only up to that brown ‘less terrible scenario’ mid line where it is undergoing an important test. The US dollar is starting to manifest a trading range at its longer term resistance lines. All of this is a recipe for a trading range type of market at least for this week and possibly longer.
The bigger picture is still uncertain. There will remain a black cloud of uncertainty as long as the Euro stays at the mid line. Until the mid line is secured, there will be a discussion, rightfully so, of a potential streak to parity with the US Dollar. If there is one silver lining here its the fact the more they talk about parity and the less the Euro falls, the more crowded will be the trade and the better technical chance the Euro has of holding on. But the chart is showing this big struggle going on right now.
It’s almost time, next week I’ll be at the Traders Expo in Pasadena doing 2 sessions, one with Dan Collins and Toni Hansen. We are going to have a discussion on technical analysis, talking about some of the finer details of what works for us. Toni is also a pattern recognition expert so you’ll get a different approach. I’m looking forward to hearing what she has to say. Then on June 12 I’ll be doing my own breakout session where I have some interesting charts many of you have never seen.