We avoided the fiscal cliff and a potential stock market black swan in the process. We don’t believe that news events lead the markets, but in this case the bigger problem was a lack of conviction by the bears that would have taken us over the cliff. If you doubt that, just look at the action throughout December. There were lots of twists and turns that started with Pelosi, Boehner, McConnell and Reid playing the perfect bridge partners that kicked off the rally in the first place. But our Gann calculations were right there as the Nasdaq bottomed at 386 points in 38 days.
That calculation holds to this day. Now we are challenging and establishing new highs, which in the longer term is bullish simply because markets had a major opportunity to go back into a bear as a result of the five- and 10-year anniversaries we’ve discussed so many times. Following Europe’s lead the Russell has taken out the September high. The SPX is very close. So even if and when we do correct, the fact we’ve taken out the highs in even one index greatly shifts the odds that any pullback will be an intermediate term correction at the worst instead of a new bear market. I know the doomsayers won’t like that but most of them have no clue about longer term market cycles. Gann has not led us down the wrong path these past 4 years.
I’ll give the politicos credit for one thing. They may not have understood how difficult the road was but they ended up at the destination anyway. Sure it’s disappointing they didn’t get it done by Christmas given Sandy and Newtown but at the end of the day the only thing people will remember is they got it done. But in my role as social observer, I am very disappointed they used Sandy relief money as a tool of revenge in these negotiations. It’s been reported that Boehner and Cantor feuded over the deal and Boehner pulled the Sandy vote because it was supported by Cantor. Now Cantor supported the Sandy bailout money but would let the country go over the cliff. Tell me where that makes any sense? Paul Ryan supported Boehner on the fiscal cliff but voted against the Sandy bailout money this week. What these people fail to realize is this is not a game and there are real people in serious need of help through no fault of their own as a result of the storm. This is not the America I remember.
This was a very contentious negotiation and in the process I think the country has gone over a spiritual cliff of sorts. While this is not a column on spirituality the history of austerity is not good. Everywhere spending cuts and austerity has been tried it has failed and much of the time leads to a war. While we are on the subject of contentious negotiations this column has closely paralleled the fiscal cliff with the NHL negotiations. As some of you know, the NHL made labor peace for at least the next 8 years. It is a sad commentary that every single negotiation these days can only be resolved when one side or the other has their backs completely pinned to the wall. I wrote here for weeks and weeks they’d solve the fiscal cliff. I was hoping for a resolution by Christmas and that might have been a little naïve on my part but they get these things done in overtime. Why? Because that’s just what they do.
The takeaway to all of this is there is a level of mistrust and disagreement that runs across all levels of society and given the recent violence at Newtown is reaching dangerous proportions. With these negotiations behind us the next 2 will be the next debt ceiling fight and the battle over gun control. Given what we’ve just observed don’t expect any of this to go down easily.
The market is a product of longer term Gann calculations where the bears don’t even know why they don’t have conviction and fall victim to a process they don’t really understand. Oh, each one of these turns is scary but brinksmanship, lies, false deadlines and ultimatums are an unfortunate part of this process. Just ask Gary Bettman.
So we move on and get back to the normal market psychology which has the VIX at very dangerous levels. I’m waiting for someone in the media to tell us the VIX doesn’t matter anymore. Once I hear that I know the high will be close. I go back to my original premise from a month ago where I told you we’d have a Santa rally but if the VIX stayed low it was January 1 was concerned about.
Next page: Assessing the Greenback
Last week the Greenback exploded higher and in terms of the technical picture was able to take out a blind spot just above the prior low from 12/12/12 at the Fed window which got no traction. When there’s a low what you need to establish is whether the bears cover because if they don’t, if you don’t see good bullish spike candles the low is likely to fail. But as you see from this chart the next challenge to that sequence was on December 28 which failed. This time bulls pushed through to the next level which ought to be very tough resistance. I’d look for backing and filling this week which should be helpful to the stock market which may enable equity markets to get even more euphoric. Once the laughing gas hits it’s hard to let it go. Always remember that hope dies slowly but fear drops like a rock. Right now we are in the hope phase. At this point I’m not sure what we are hoping for but it hasn’t died yet.
Okay, last week I said there was the opportunity for one politician to become a hero. I’ve taken shots at the GOP but oddly enough I don’t think this deal gets done if it weren’t for Mitch McConnell who for whatever reason was instrumental in setting the example and developing the momentum. He was instrumental in getting GOP Senators on board and if you remember the final strokes of this deal came about when the House GOP failed to include a new amendment that would have sent the deal back to the Senate.
So here we are challenging the high in the SPX. Even in the best of conditions double tops are tough to beat so I think somewhere along the line we get some backing and filling. Look for a really important test of the SPX high to be the theme of the week.