Another week, another week closer to the fiscal cliff. Foolish of me to think we elected adults to solve these problems. We might as well have Gary Bettman as President and Donald Fehr as Speaker of the House. The results are running about the same, aren’t they? Friday’s jobs number was +146,000 with the unemployment number down 0.2 to 7.7%. It just doesn’t “feel” like 7.7%
What I was telling my posse last week was to anticipate a bad reaction even if the number was good. Why? As perverse as this sounds, a good number would mean the politicos would have a steeper hill to climb to get a deal. The initial reaction was good but as is so often the case, it’s how you finish that counts, not how you start. So what went straight up came right back down.
Are you getting concerned they won’t have a deal? I look to how these negotiations develop. Unfortunately, they are done with the highest level of gamesmanship and bluff. I think both sides are bluffing. I also doubt they come to a meaningful deal by the end of the year. They likely figure out some way to kick the can into 2013 when a new Congress can waste a lot more time, just like the National Hockey League.
So was there anything that was really good that came out of last week? In fact there was. On Monday, too late for this post, the SSE from Shanghai put up one of the most interesting calculations I’ve seen on a chart in a long time. As you know, the pattern broke down from a recent triangle and then also ruined a double low. It looked like it could drop more when suddenly on Monday night we had a low of 1957.89 which translates to a square root of 44.24. By itself it doesn’t mean much but consider the all-time high at 6124. What that did was give us a Gann reading of 6122 which is almost a perfect square. The next day prices went slightly lower but it was close enough to consider the best reading we’ve seen out of China in a long, long time. At the end of the day, most important was the chart itself which responded to the readings and came off the lows with an impressive sequence of short covering.
If China bottoms for real we can have an impressive bear market rally which would be good for the risk on trade. Some experts might claim that Shanghai is in a separate universe from us but my observation is sooner or later the price action here is going to be in influenced.
This week is going to be the final Fed meeting of the year. We have some interesting time windows this week in the Greenback as well as the XAU which might affect the overall market. The Dollar is coming to 161 days off a secondary low and the projection was it could be a high but Friday was so wild that we could still see a high or a low this week. This is a market that is all over the map. At first we had leadership in the biotech and drug names. The SOX was lagging but suddenly the money rotated to the SOX. The BKX has done really well lately while housing has backed off. Oil has performed very poorly which is a major concern given all of the geopolitical rhetoric being thrown around. Unless oil turns up really quick I think it’s telling us to be more concerned about demand as opposed to supply. The higher probability is they still kick the can and its likely built into the market already based on the post-Thanksgiving portion of the Santa rally. What I think is going to happen is markets hang around until the end of the year because I have a really hard time visualizing a collapse over Christmas season. My concern is for January no matter what happens in the government. The VIX is way too low for a sustained rally.
That brings me to the next topic, Europe. We don’t often talk Europe here but did you see that it put a new high last week? What that did is negate a portion of the 5 and 10 year anniversary pivots we had in the stock market in October. To me, the fact we could take out the highs in any area of the market tells me a longer term secular bull market is a higher probability than any real bear market. If a real bear was going to materialize, the type of time window we had in October would have been the one to kick it off. That doesn’t change the fact we are far from highs and the VIX is still behaving like we are on cloud 9. But whatever is coming is not likely to be in the same league as 2008. The more the experts think it will be, the more I’m confident it won’t be. From what we hear on a regular basis is that 2013 is to be a recessionary year. Funny, or not so funny is that when economic times were getting rocky for real it was the hedge fund crowd who were anticipating the SEE-OVER trade. We’ve discussed it here, but the SEE-OVER trade was the hedge fund crowd’s projection for a good 3rd and 4th quarter for 2011. They just forgot about the debt ceiling debacle, the Greek tragedy and this little scandal called MF Global. My point is the conventional wisdom is usually wrong and when they see a recession coming it usually doesn’t get that bad. It’s when they don’t see a recession coming that you should worry.
This should be a rough week for the markets. We have the potential for a low in Gold which could equate to a low in equities which would set up the Frosty The Snowman rally into New Year’s.
Finally, here’s a quick look at the NQ. The pivot on the left was that failed attempt to go down a week ago Wednesday when the politicos made nice, nice and said they thought a deal was at hand. We got little follow through and then had a double low which led to the big reversal Friday on the jobs sequence. As you can see, we are in a very vulnerable place on the chart because the failed attempt to go down did not bear fruit. We’ve been struggling to find support ever since. Friday’s failed attempt to go higher is very troublesome. Sure, I expected the market to sell on the jobs data, especially if it was good. But it was a surprise to see it spike up and down.
Right now the bears have a slight upper hand based on Friday’s action however how much can it really be with the banks still looking good?
I never thought I’d say this, but I’m glad there’s a Fed meeting this week. After watching the fight over the fiscal cliff it seems to me the only one on his game is Bernanke. Lots of folks despise what the Fed is doing but you have to consider the hand they’ve been dealt. It would be a lot easier to do that job if Congress and the Executive branch of government got together and did theirs. Say what you will about Bernanke but he’s really the only true student of 1930’s history in a current responsible position and he’s doing his best to hold his end. Perhaps he’ll strike some sense into the other 2 parties who need to get a deal going.