Cyprus? Where did that come from? Does anyone even know where Cyprus is? Seriously, this beautiful little island in the Eastern Mediterranean is home to roughly one million people and to see their bailout of 10 billion euros materialized, they’ve been levied anywhere from 6.75-9.9% of their bank accounts.
Are these European officials finally out of their minds? If the market is down, it should be a result of the knee jerk panic which suddenly has made the good folks of Cyprus the scapegoat for all the ills of Europe. With all the money they’ve been throwing around the past couple of years, why would they blink at such a relatively small sum? Why would they risk a worldwide panic?
You followers of the news events, which are nothing more than symptoms of the deeper geometry of the markets, should realize that time is up and the seasonal change factor is finally here. Right on schedule. When that happens, the mood of the crowd naturally changes on a sub-conscious level and these politicians don’t even understand what they are doing or why they are doing it.
Let’s look at this a little deeper. The all-time high in the SPX is 1576. We know that. But what many of you don’t know, unless you are one of my regular clients is that Friday all markets were 1575 calendar days off the Nov. 21, 2008, low that was the beginning of the bottoming process which led to the major bottom in 2009. It doesn’t matter that the SPX didn’t hit 1576 perfectly or that it bottomed in March 2009 instead. Price and time square fired off in the window between Friday and Monday. My old friend Dan Collins and I had this ongoing discussion for several years. At first he was skeptical but after a while the light bulb went on. He’d ask when the next time window was materializing and then we’d wait and see what news event surfaced. It really didn’t matter but we always knew something would happen.
Suddenly, markets are in trouble and we are at risk for some kind of a panic. Why? It’s because nobody expected stupidity on this level. You have to wonder, what else are these EU officials not telling us? It couldn’t be Cyprus; they only have a million people. But it’s reasonable to ask whether this is the tip of some iceberg. Politically, the reward of pulling a stunt like this does not even begin to balance the scales against the risk. But for our work, all we look for is a change in sentiment at these time windows because that’s what turns markets. Markets only turn several times a year, and they do it when time windows expire. When time windows expire, it’s like a football game. The final gun goes off, and that’s it.
This time, the markets are roughly where they need to be. The VIX is certainly where it needs to be, and I’d like to thank those stock market gurus who told us the VIX is no longer relevant. You are in a select group of responsible folks that ought to know better.
The BKX is right there as well with Gann symmetry all its own as it tests its 2010 peak. I can come up with some more symmetry, but what I’ve shared with you is enough for one night. So as trading opened on Sunday, they got hit. The shame here is the euro came really close to a technical breakout but made it all the way down to the bottom of the range. It dropped in 1 hour what it took 21 hours to achieve. If that’s not a panic, I don’t know what is.
Now there is an outside chance this gigantic reaction is an inversion of the major cycles and we are getting a low instead of a high. The problem with that view is it’s just not the higher probability. The VIX is telling us it’s time to go. The market has been begging for a beating for a long time. My favored scenario this year without putting a specific date on it is a mean shake of the trees where lots of nuts and coconuts fall out. The potential for a 1987 style drop is there. WHY? When a market won’t correctly normally, it will overcompensate. Its due for it. WHY?
Last week we had more than a handful of pundits or money managers who said a 4-7% pullback would be just what the doctor ordered. Well, I’m sorry to be the one to pour cold water on this kind of talk, but the last time I looked, the market doesn’t work like Chinese food to go. You don’t order up a 7% correction because that way you get to buy stocks on sale. This is not Wal-Mart. Once experts tell us the VIX is not relevant, once they tell us they’d like stocks to go on sale, we are in trouble. My line of thinking is the people who are saying these things have been around the block for more than a few years and ought to know better. You see, Bob Prechter is right. Individually, we all have the intelligence to rationally come up with a strategy to deal with financial markets. The problem is once we get involved with the herding impulse, something happens to that rational mind where all intelligence goes out the window. It happens to the best of them.
Next page: A look at the chart