Compared to the past month, a relatively quiet week. Or was it?
The fiscal cliff is over and the debt ceiling has yet to heat up. The markets were higher as the Russell hit a new high again and the SPX is right there within 2 points of its high. This was a week the President sought to replace Geithner and Hillary Clinton. There will be longstanding implications to the new nominations.
All I can tell you about Jack Lew is he’s the President’s point man when it comes to the budget. He’s an expert on the numbers. I don’t know if this is good or bad because Republicans are probably not going to like him given the contentiousness of the negotiations that ended and are to come. The President also nominated the former GOP Senator Chuck Hagel which isn’t exactly sitting well with Republicans due to statements he made about Israel and Iran. Without any further information the GOP is likely to pick their fight which means Hagel can get a pass while they join the battle against Lew. The contentiousness we discussed in recent weeks can make Lew a casualty given the next fight to come.
While we are on the subject of contentiousness, we put to bed the NHL lockout, finally. Is it amazing the fiscal cliff and lockout ended both in the exact same way? These negotiations were so contentious and time consuming it boggles the mind. This bunch had to make a deal or the players would have had to disclaim being a union, a process whereby negotiations would be impossible because the players union would cease to exist, thus throwing the decision into the courts and destroying the last hope for a hockey season. As it is, they’ll play a minimum season which begins next Saturday and we can all observe how fans welcome them back. The next negotiation is the debt ceiling debacle of which Rand Paul already fired the first shot by proposing a law that would make a default unlawful.
Basically it would be a law that would balance the budget by requiring the government to cut spending by 30%. Give Mr. Paul credit for recognizing that allowing the government to default would not be an option. Anyone could figure that out, we don’t need legislators for that. As you’ll see such a law would throw hundreds of thousands of people out of work overnight and toss the US into a deep recession, probably just as bad as what we experienced in 2008. I look at this stuff and I wonder if anyone besides Helicopter Ben actually studied the economic history of the 2nd half of the 1930s. In case you don’t know, Great Depression II in 1937 materialized as a result of Roosevelt giving in to the budget hawks in the 36 election and took his foot off the stimulus pedal prematurely and the labor unions getting so powerful their strikes disrupted factories around the country. However, we’ve already incurred obligations from folks like China who still own Treasuries and those come due whether you or I work. This is the big flaw with the sequester in defense cuts and why it would be so disastrous if that were to ever happen. So the reality of the situation is the ideas of the extreme right would actually throw the country into very condition they seek to prevent.
Why is this so important to our work? Because we haven’t seen the end of the bear roller coaster. The market looks fine right now. In fact it looks wonderful, too wonderful and if you are looking for a reason for them to drop which I am all you need to do is wait on the next Battle Royale which can start to manifest at almost any time. When is the government supposed to run out of money? Depending on who you listen to it might even be February 1st so we might even already be in a season where the rumor, innuendo mill starts affecting bears. Certainly the VIX is in a very dangerous place and just be sure you are not the last man in.
Let’s talk about China which has just manifested one of the most incredible Gann legs I’ve ever seen. There was some good economic news this week as exports grew 14.1% in December and was better than the 2.9% reading in November and attributed to year end orders. My take on Thursday night was the potential for the market to top out on good news. On Friday the chart was down 2%. There was much anticipation for the continuation of the rally given the good news and sometimes that does happen as surprises tend to be to the upside in a bull market. However, in a bear market we could see markets peak out on good news. A wonderful bounce the past 6 weeks, we didn’t think it was a new bull market. But that doesn’t necessarily mean this entire leg is over.
With the turn in China I’m concerned for pullback in Europe which looks strong in the longer term but perhaps near term extended. That should be a major theme this week.
It appears the gun debate is only beginning. Larry Ward, Gun Appreciation Day founder went on CNN to suggest had African Americans been able to possess firearms slavery could’ve been prevented. This is the kind of insane mindset that takes over in a mania. Mr. Ward was defending the Gun Appreciation Day rally scheduled for the 19th, 2 days before MLK Day. What Mr. Ward conveniently forgets is slaves were property shipped here from Africa who had little choice in the matter, let alone be able to go to the local Wal-Mart to pick up an AK-47 on the way home with a 6 pack of brewskies. And according to Think Progress’ Aviva Shen, there were many armed uprisings by slaves as early as 1526 which almost always failed. The most famous was a rebellion by Nat Turner and resulted in 160 deaths, 100 of those being slaves. The justice system was on the side of the slave owners and the state executed 56 blacks accused of being involved while mobs beat to death an additional 200 in revenge.
For our social observation of the week, the Montpelier, Ohio school board has approved armed janitors to stop school shootings. Now we can have the person entrusted to clean over flowing toilets somehow get to the gun case in time to stop the next Rambo from shooting up some other school. Somehow, I never figured ED NORTON from the Honeymooners being the backstop for our little kids. The least they could do is get Ralph Kramden. Somehow I never did see the episode the day Norton forgot to take his depression meds and was confronted by the school bully so he decided to take out the school all by himself.
It’s just more evidence of a mania for guns that rivals anything we’ve seen the past 15 years with stocks and real estate.
So let’s get to the action and take a look at this Chinese turn. The factor is 3.767 which rounds to 3.77 which is interesting to say the least. Its 20 trading days, 31 calendar days so on first observation not seeing anything else and basing it on past pivot calculations it appears this is NOT the end of the rally and returning to the pit remains the lower probability.
But it had to end sometime and with a parabolic move up the turn was more likely to be violent than not. We’ll look for 2100-2150 to provide some support. In other words, let it test the triangle from the north side and we’ll really see what we have. How dangerous is the VIX? You tell me, this is the monthly chart with the daily. If it wants it can get a little more insane. The lowest point is December 2006 and markets didn’t start peaking until July the following year. If they want to get euphoric, we can really get out of control this year however I don’t think we have the proper environment for it. It can go on a while longer like this but a turn is most likely to ripen once bears figure out they can short the negotiations that are due to start up soon with the debt ceiling.
Next page: Matter of when, not if?
So at the end of the day, the SPX is challenging the peak and could spend all week on either side of the line. The Greenback is testing all prior support going back to September and is locked in a big trading range. The stock market appears to want to go higher but should hit some unanticipated turbulence this week due what I’ve just shown you in China and a potential floor for the Dollar. The long term equity situation remains bullish but the near term is getting extended. There are excuses for bears that are not committed to the long term to start coming in. Its almost not a matter of if but when.