In spite of everything I wanted to come with some good news this week and searched far and wide for the best news I can find. We have a gem in housing which hasn’t kept pace with oil or technology to the downside. But neither has banking. Long time readers of this column will remember it was January 2010 when tech had a stinging pullback but banks didn’t participate. That’s really when we started the "nothing bad happens to the market if banking isn’t leading to the downside" mantra. Banks stayed flat and the market made a new high in April of that year. Banks are back up to the polarity/breakdown point. Almost.
The point is there is a reason why banks aren’t awful and I don’t care what the reason is but bears can’t reach their profit potential overall if the banks aren’t leading down. Normally I’d tell you this is a great thing but it always seems to get back to that VIX and the impending time window in October.
We do not want to see a VIX at 10 or anywhere near that when the first week of October rolls around. But we can’t ignore that banks are doing much better over the past 6 weeks than oil or technology.
Has China found a low? The Gann reading is 612dg which is good. Its 92 td off the high and very close to the low. While the internal Fibonacci relationships don’t work well with the entire leg, they do work within the structure of the secondary leg off the high from back in May. SO if this is a 5 wave sequence it’s possible that the 3rd wave down just completed. Certainly sentiment has turned chilly in regards to China over the past few months. Nobody believes the soft landing fairy tale anymore. This leg has done the damage.
I worked at it and found you something good but that’s the extent of it. I’ve been quoted last week on this website about the PFGBEST scandal. I have to tell you how distraught I was. They have raped and pillaged this industry to the bone and quite honestly, unless this event serves as a wakeup call, people are not going to want to put their money with the ‘house’ if the ‘house’ can’t be trusted. Now that I’ve calmed down a bit, I received a comforting letter from Rosenthal Collins that stated they’ve been very transparent about their investments of the segregated customer money since MF Global and keep those funds in relatively safe investment like money market accounts and others with low risk. So let’s not allow the actions of the few spoil it for the many who are honest, upright and hardworking citizens. This magazine has also suggested they come up with some form of insurance like FDIC. If there is always a silver lining in a tragedy is that it will spur action for reform. This time they have to do it. Let’s hope there are better days ahead.
This is a strange market. We have scandal of a kind that is such bad news it should spell the end of the correction for this year. Those of you who are Elliott Wave aficionados know that Prechter spoke for years that the bear couldn’t end until such time that people lost their insatiable hunger for the financial game, stocks in particular. Given the Internet bubble and ensuing real estate bubble which spilled in stocks last decade I always wondered how that would happen. Then a guy like Bernie Madoff came along and ended the party. Well, he didn’t totally do it but went a long way into turning people away from stocks permanently. Perhaps Corzine and now this scandal might have done the deed.
But the problem is the VIX is way too low for a major move to be sustained. On Friday the VIX broke into the 16 handle again and I have to tell you it’s a major problem. Why are we bouncing? Let’s boil this down to the ridiculous. The Greenback hit important resistance which is the June 1 high and backed off. So here’s how this works. The charts in Europe are better looking since June 21st than they are in the US. China is very sensitive to the movement in Europe. The US risk on trade is also sensitive to the movement in China but it takes on average 3-5 trading days to see an impact. So if this chart of the week sticks, China could have a trading bounce which will end up causing the Dollar to delay its move to 86. That will help oil, gold and the rest of the risk on commodity trade.
Next page: Enter the VIX...
However, it always comes back to the same thing. The VIX. The only bit of planetary interference we will discuss in this particular space is the Mercury retrograde condition because it’s well documented and has just begun. For those of you who are uninitiated, Mercury is the planet of communications and if you have issues with the computer go easy on yourself. In terms of financial markets the characteristic most characterized by this 3 week period is volatility. Prices normally will undershoot or overshoot targets. But the biggest problem is miscommunication in any way imaginable. Mercury turned retrograde on Sunday but I think we’ve already had the premature effects. What I mean by that is the news is mostly bad, scandalous in fact. However it is not reflected in what people are willing to pay for an option as represented by the VIX. Something is not quite right folks. I’ve already shared with you the fact the time windows in October and at risk of being a broken record if we rally into October with a low VIX and reverse I will turn exceptionally bearish.
Euro bears get bearish because they believe the rumor mongers and short a decent market and are forced to cover. Here at Lucas Wave we allow the time windows to dictate how bullish or bearish we get. Since the 21 year cycle low on November 21, 2008 the markets have been good (given the bottoming process into March 09). But if we top in October you can argue it would be a 10 year cycle high. So we are 3 months away from this major inflection.
For now, I suspect we’ll see some wild swings soon enough. Since March our anticipation for a winding and grinding market has come to pass. Right now the bulls have a slight upper hand and mostly because of the decent action in Europe and banking/housing. The week will start this way but I would be surprise to see the bulls and bears get locked in a fierce battle where neither gets the upper hand in the near term.