You can’t keep a good man down. Markets tried to correct and couldn’t do it. The usual suspects are the bears themselves who flat out gave up again just when they had the bulls on the ropes. The reason given for the tech surge late in the week was a stock buyback for Apple Computer.
Are you kidding me? Are the bears this weak they’ll fold up the tent on such questionable news? AAPL doesn’t even have good enough calculations to call a bottom yet. The net result of such a discussion is the SPX ended up at a new high. What that does is violate the 987 day window from last week that was influencing the turn. Not only that but the SPX had some serious Fibonacci calculations at last week’s prior high.
There’s lots going on here but all you need to pay attention to is the ABC coming off the November low where A and C were close to equality. Now that’s gone. Then on the weekly we had a 161A in roughly the same place with the first leg up off the 2011 low. That’s just about gone. Unless they come in and hit it fairly quickly, they’ve opened the door to the 1564 projection we’ve discussed in this space and now at 1518 that’s not so far away and absolutely not far-fetched by any stretch of the imagination. This pattern still resembles a wedge but wedges can fail. Patterns are not set in stone.
We can get all different kinds of failure. The amazing condition is we have a market that just continues to violate one resistance area after another. It’s almost like the good old days. However, there is one difference. The good feeling we had during the Internet and real estate bubbles are absent here. That means in the long run these markets can go a lot higher. But that has little to do with what you may be doing this week or this month. One of the conditions I’ll really be watching this week is the US Dollar which accelerated this past week. As you’ll recall last week we were talking about the action forming a high probability low.
We have projections that take it to about 80.60 which will also be an area where it meets the descending trend line from a potential triangle. The real question is whether the Greenback is a true trading range from last September or whether it wants to continue going higher. We’ve been in the triangle scenario camp over the past 6 weeks. In our work the triangle scenario eventually breaks to the downside. If that really does materialize it ought to free up enough fuel to get the SPX to its target of a retest to the all-time high.
The big news over the past week is the GDP where the annual rate came in at 1.5% and economic historians like to remind us the economy has not avoided recession with numbers this low since 1948. There’s good and bad in this. First of all, anytime sentiment embraces the dark side, it’s a good thing because the worst case scenario rarely happens when it’s anticipated. We live by the hypothesis that economists are wrong most of the time but this time it was none other than Art Cashin discussing this possibility. We have a lot of respect for Mr. Cashin who has just about the most astute mind of anyone on CNBC. It’s a warning signal, no doubt about it. The last time markets were at highs like this nobody was talking about the possibility of a recession so it’s really strange. So by the time the SPX gets to a top retest we could already be in a recession.
Next page: Why did the bears give up?
So why didn’t we get a real drop last week other than bears giving up? The housing and banking sectors remained strong with banking doing better. Housing is a little sketchy but our hypothesis that nothing bad happens to the market when banking stays good remains true to form. Its tech that got hit and in past pullback when tech gets hit and banking does not the market always turns higher, aborting bearish attempts to take it down.
So why is it the bears always seem to give up? Think about this for a minute. Our grandparents who struggled through the Great Depression were scarred by the event for the rest of their lives. Many of us are scarred by the financial crisis of 2008 although I really wonder about that since Wall Street hasn’t seemed to learn any lessons and no true reform has ever materialized. If we learned our lessons from 08 there would be no whale trade for JPM nor would there have been any scandals with MF Global or PFG Best. People have gone on as if it’s business as usual and any attempts to revamp the system for real have been met by serious opposition. That being said, bears got burned really badly during the European crisis of 2011 when they thought Greece was the next Lehman moment. Since that time they’ve remained gun-shy. That means they’ve exited early on just about every correction since then. I really think they could’ve done a lot more with the September/October pullback but it is the hallmark of a bull market for bears to be happy with smaller profits.
The other hallmark of a bull market is when it climbs a wall of worry. A market going higher despite lousy GDP numbers, megastorms, Obamacare, fiscal cliffs, debt ceiling struggles and threat of defense spending cuts suggests it is a wall of worry. Do you want another thing to worry about? How about the State of the Union speech this week? Last week was relatively peaceful on the political front but tempers could be flaring again as the President challenges Congress to pass at least a short term measure to deal with the defense cuts. The Republicans appear ready to dig in their heels on this one and even the Tea Party has its rebuttal to the President. I can’t remember a time when one political minority was able to exercise such clout. We haven’t seen anything like the Tea Party since I’ve been around and that goes back to the Kennedy era. Really, we probably haven’t seen anything like the Tea Party in over a hundred years. We don’t do politics here but we live in an era where the discussions of the day have an unusually large impact over the short term gyrations of the stock market.
Watch the Greenback, if it fails it’s a high probability outcome for the markets to get to higher projections which include a new all-time high for the Dow and the continued surge in the SPX. Then we could have some roller coaster type action in the middle of the week as traders sort out the accusations that are due to occur from the politicians. But the trend remains your friend until it isn’t.