We’ve waited weeks for the market to correct. The relentless surge overcame every obstacle big and small. However, a market subjected to universal principles and cycles which beat to a drummer all its own finally reacted to its most important universal window. For my part, I’ve been rooting for the turn to come earlier than the March 21st seasonal change point because I’ve been hoping for an inversion of the cycle so the seasonal change point would create a low instead of a high. That’s what happened last year when the Arab Spring high created a March low at the Japanese tsunami point.
Perhaps it’s a good thing after all because we know how last year turned out. While we had a March low the market see-sawed its way through a rough year. Right now all we know is sentiment has reached euphoria levels while markets have pulled their horns around the time of the Gann Master Timing Window.
What is strange about this high is many sectors still look fine. For instance, the SOX looks okay while the BTK doesn’t look scary. Banking and housing have come off their highs but do not look like major reversals are developing. So where is the problem?
Suddenly it’s with oil stocks. They got hit last week. Talking about energy there was a very interesting psychological turn of events. We discovered the Obama Administration is in favor of fast racking the Keystone pipeline project after all. Did you see Obama's speech on Thursday? The way he put it, the reason they stopped the project last month was because it went through the state of Nebraska where there were environmental issues concerning the water. Obama claimed that Congressional Republicans pushed for an answer and didn’t give him the proper time to review all of the safety issues, so instead they killed it.
As you remember he was roasted by those on the other side of the aisle as well as a good number of Americans in general, including me. Supposedly, the Canada to Gulf project will provide relief to a key bottleneck in the delivery system coming from Canada. The Canadians were upset as well as they threatened to sell all of the oil to China.
However, he came to a different conclusion, we think it’s a step in the right direction for the President to take energy policy very seriously. It could be because he finally took a look at the chart and realized it’s getting in the way of his reelection prospects. Keystone may not pay immediate dividends in terms of relief at the pump, it is job creator and for a President trying to get reelected he can ill afford to turn down projects that create any high-paying jobs. In another energy-related issue, Senator Blumenthal co-sponsored a bill that would direct regulators to invoke emergency powers to slow down energy speculation. They want the Commodity Futures Trading Commission to impose rules to stop excessive speculation.
Their intent is wonderful but so often with the government their intention is separated from economic reality. We are not reviewing this headline because we think it’s good or bad, but the timing of it. First of all, why not try to pass such a bill when oil is down near 32, which is at the bottom? Why not attempt such a law in a declining market like when we had the BP spill in the Gulf? It’s because this is a sentiment-driven action, which similar to bullish magazine covers typically signaling that a high is in.
The Greenback is mostly down lately and while the correlation is only short-lived we are seeing a down equity market along with the Dollar. What this likely means is one or both is in a sideways pattern and it just so happens to be a coincidence. That being said there’s a chance precious metals may have bottomed. Our targets over the past month called for a dip down to the 1575-1600 handle. It came close and on Friday we saw a Gold market that was mostly up with a stock market that wasn’t. In certain sequences we have seen Gold rally at the expense of stocks. This is a new developing condition that needs to be monitored.
But perhaps more telling than anything else is the sideways action in Copper.
Copper topped on February 9 and has had a couple of attempts to drop. At the moment we have a double low which culminated on March 7. This accomplished 2 things. First of all there’s a floor of support on this market and it keeps open the possibility this correction is not what the Elliott people call a sharp but possibly a flat. It could be a triangle but more important if the Copper market is an advance indicator, it could mean that whatever pattern is developing off of our seasonal change point, it could be complex and sideways as opposed to a major drop.
What I didn’t like on Friday was what one floor trader interviewed on CNBC noticed about the drop: The VIX didn’t rise very much. The complacency was duly noted, but this person suggested complacency meant the market would continue to melt up. That’s all fine and nice, but complacency when the market is going up may not be fine but it’s acceptable behavior. Complacency on the drop is a horse of a different color. Complacency on a drop means people don’t realize a turn has taken place and it means the correction is in a young stage. That doesn’t necessarily mean the market is setting up for a big drop.
Corrections come in two styles. We either drop big until fear comes in and it ends relatively fast. That’s the kind of corrections we lived through in 2011. The other correction type is the grinding, complex turn that doesn’t fall very much but can’t advance either. What it does is wastes an inordinate amount of time until the crowd gives up on the possibility a new leg will materialize anytime soon. Once that happens it starts to turn up. It turns up at the start because bears also give up that it’s going to drop and they cover. So markets will either drop quickly until fear takes over or we can grind for weeks or months without fear but without any confidence in a rally either. I’m discussing this here because while it’s still early, the timing for a turn is correct but from I see, these turns don’t look too scary and if Copper is any indication we could be setting up for some really complex markets. Follow us for interesting takes during the week at Twitter at http://twitter.com/jeffgreenblatt.