As a young child in elementary school I thought history only happened in the past because current news events didn’t seem to measure up to events of old. Realize we were only 20 years removed from World War II. Of course that wasn’t true because of the civil rights movement, the death of the Kennedy brothers and Martin Luther King, not to mention the Vietnam War. Nowadays things are different as we live witness to an age of instant history. Last week was one of those times as the events of Thursday could impact Americans for generations to come.
You can certainly read about the SCOTUS decision and draw your conclusions. I’ll limit my commentary to how I think it will affect financial markets. It was a also a week where the EU summit yielded a surprising bullish result. The net outcome appears to be that Europe will set up a mechanism where money can flow directly to the banks that need them, thus bypassing the need to shore up a nation’s balance sheet in order to get it done. This makes bailouts politically palatable but the key question is how fast and effective the politicos will be able to act if there is a real crisis.
The net result here is the market responded well to one outcome and not so well to the other. Let’s face it, Thursday was sour and while most people (market participants, legal scholars and the President) were surprised at the decision, the stock market didn’t like it too much. However, what I think is going to happen is the market has other things to worry about other than Obamacare but will be keeping an eye on things at least once a month when we get sour news on Unemployment Jobs Friday. I think the market is also going to be rooting for Romney from this point out. The market is a perverse mechanism that pays no heed to preexisting conditions or tax law. It knows one thing, is this law good for the future of the economy? If people feel more confident about the future, they’ll buy stocks. If not, they will sell. Sorry to break it to you that way, that’s what people will do. I don’t think the mass mind that is the market believes Obamacare is good for the future of the country. But since Chief Justice Roberts left the American people with one more ‘out’ (to use a poker analogy) to get rid of Obamacare it will continue to focus on other problems, namely Europe. I think Europe will continue to gyrate in each direction from one week to the next so I doubt anything is really new.
The week ended strong given non committed bears covered yet again, squandering not only a huge candle on June 21, which was the seasonal change point but also the chance to take total control of the market. In my work, it’s still going to be hard for the bulls to take control of this market either simply because of the positioning of the VIX which ended the week at 17.08, way too low to sustain a major move north.
Before we get into how this stacks up, I have to bring the Housing Index to your attention. Did you notice it made a new relative high last week? It’s beyond amazing. We’ve been talking about how it would have been the achievement of the year if it would test that brown line again. Once it tested the line the next test would be if it didn’t collapse. Remember our discussion at the start of the first quarter? Well here we are in the middle of the year and not only did we touch the line and not collapse, it has broken through! This is a chart that has had every opportunity to collapse but did not. If there was ever an excuse to sell off, the housing index had one. What does this mean? Housing is setting new highs over three years into the move. It’s well above the 200-week moving average. It tells me that in an economy that was destroyed by a housing crisis; we now have housing leading to the upside. This gives us a higher probability young secular bull market. Of course, most people, even people who talk P/E ratios which are not at the customary standard of old bear market bottoms think we are still in a secular bear market. What I’ve noticed over the years is it takes people years to recognize a bull and I don’t think people recognized the bull market in Gold for at least five years.
Working in our favor is the Gann symmetry at the bottom in 2008/09, which we’ve discussed dozens of times. But forget the calculations; the behavior of bears is suggesting we remain in an intermediate level bear phase in an embryonic bull market. But that’s even in doubt as housing continues to set new highs.
But that’s one sector and here’s where we are at. I don’t see how this move sustains with a VIX at 17. Let’s do some intelligent hypothesizing. What if the major averages continue higher from here to create a double top? Does that mean we have to endure another correction like the one we just had? The worst fear levels hit with a VIX at 27 and you know how it felt. It wasn’t as bad as last year but still bombarded if not hounded by the prospects of a European Lehman moment. But if the market tops and sells again it will play into the hands of the opposition party trying to take the White House. I believe the market needs an ultimate bottom about 60 days out for the incumbent to win. So the other scenario is we remain in a grinding type of market we’ve anticipated since April with still more twists and turns to come. It also plays into the hands of the challenger who because of the SCOTUS ruling almost has the wind at his back. The only way Romney loses for certain from where we sit now is if the market goes up and stays up.
But this remains a market ruled by smart and non-committed bears and the major hurdle to overcome is a lack of real buying. The first real test came on the Copper chart which tested the October lows when that group of non-committed bears gave up. What you can see is a market where bears control the high end of the range but seem to have little appetite for pushing it beyond the low end. In a week from now it will be 360 days off its 2011 high, we’ll see if that means anything.
For this week, trading should be light given the holiday and we could see swings both ways.