Scandal, scandal and more scandal. Take your pick. We haven’t had a week like this in many years. You can read about Benghazi, the IRS or AP all over the Internet. Here, I’m going to tell you how it relates to our work. As you know, the VIX remains at a very depressed level, and market participants are becoming accustomed to the idea of low volatility. There’s a self-fulfilling euphoria going on here, and there are times in stock market history where this kind of thing is allowed to be the norm. Why?
Here’s the long term SPX. Look at the dotted lines; this is the long-term Andrews’s channel. Think about when you watch The Weather Channel, most notably the Jetstream. The mid line separates the path of least resistance. Now we are in the upper portion this is path of least resistance, which happens to be up. In terms of quantum physics, it takes much less energy to move a mass when it’s going with the flow as opposed to fighting its way upstream. Look at the early phase off the 2009 bottom. The action was still in the bear channel pointed down (solid line) but it was fighting its way against the grain. When it came to the end of the bear channel it wrestled with the upper declining line for approximately 11 months. The worst part of it was the 2011 correction which included the debt ceiling debacle and euro crisis. As you can see, it consistently held the 200-month moving average. But it systematically broke free from the bear channel to the upward sloping mid line to its final destination, the upper portion of Andrews, which is the path of least resistance up. That’s why it’s so hard to get the VIX to mean anything right now. Last week was also a key 233-day window from last year’s June low, which was violated
Our final window for this particular sequence is 233 weeks off the November 2008 bottom. Now that we’ve shown you the bigger picture, what does the micro picture look like?
This is how the scandals relate to our work. When we have a VIX circulating in the 12 handle, you would suspect there would be an element of euphoria. There’s not. What we have in these markets is a quiet confidence and quite frankly, it takes a lot to turn a freight train. For the market to top and I mean top, people are going to have to get happy. Think May 2011 when they captured Osama Bin Laden. It was like New Year’s Eve at Times Square. You remember it. The happy scene even extended to 1600 Pennsylvania Avenue where happy crowds of college students and probably a few tourists mixed in spent the evening celebrating Mr. Obama, Hillary Clinton and everything else red, white and blue. You’d have thought the American Olympic hockey team just won Gold in Lake Placid all over again.
The stock market topped the very next day. We had great calculations. That was the day the oil market had the perfect Gann/Fibonacci storm and everything that was going up was suddenly going down and oil, the Greenback and equity market all turned the same day. Why am I bringing this to your attention right now? Because there can be no euphoria when the 24/7 news spin cycle keeps regurgitating one negative story after another. I told clients on Tuesday night (another great reason to subscribe to our STU) we weren’t going to top because there was just too much negativity out there. This is the strange part. How can there be so much negativity with a VIX near 12? I don’t have the answer for that, but what I can tell you is the scandalous character of the news is acting as some sort of crowding-out effect (Economics 101) that doesn’t allow the happiness to shine through. Markets are not going to top with this kind of negativity. If they do, it will be short-lived as we saw in 2011 where the February peak with the Arab spring only produced a pullback that lasted a little over three weeks.
For whatever reason, the latest polling data on the President suggests no change in his approval numbers. What that means is scandals are having no impact on the major trends of the day which is the early stage of the second term of a new administration where numbers should be positive nor is it turning the stock market which is also in the early stages of being in the path of least resistance up.
This can continue because the Greenback is starting to break free from its Fibonacci relationships on a daily chart. Our last near term calculation was near 83.80 and now we are well into the 84 handle. Here’s the bigger picture. It’s finally going to test the downward sloping Andrews channel. As you can see from the bigger chart it’s the same line which has been the graveyard to every major Dollar rally since the financial crisis. Of course, you know this rally started right after they took out Osama Bin Laden. You can also see the 5 year trading range. After the crisis I told you the economy could continue to recover IF the Dollar stayed in this range and we didn’t get a major crisis. We came close with the BP oil spill. Had that oil gone up the east coast and ruined beaches from Florida to Maine we likely would’ve ended up with a scenario like the mid 30’s dust bowl but it didn’t happen. For those of you who don’t know, the dust cloud extended 1800 miles and ended up in New York City. So it’s not farfetched to think about what could’ve been. We were very blessed it didn’t happen.
Next page: The dollar and gold
So at the end of the day the higher Dollar will likely contribute to a further erosion of the precious metals. I’ll leave you with this. For much of the crisis the stock market went in the opposite direction of the US Dollar. In May 2011 the stock market peaked while the Dollar bottomed. Today we are looking at an equity market as well as a US Dollar hitting new relative highs. We haven’t seen that in a long time. If it so happens the Dollar breaks thru while the stock market doesn’t reverse course it would be the first time in a long time the US economy would be creating wealth with an increasing stock market accompanied by a currency that is becoming more valuable. It’s certainly not a given that will happen. The Dollar is looking at stiff overhead resistance.