My biggest concern that I’ve expressed to you is about the bond market. We started teaching our clients about supply and demand imbalance points several months back. There are characteristics that lead to big moves and unfortunately I happen to have spotted such a condition on the monthly bond chart. There is the potential for a Jetstream of activity that many of us would probably call a waterfall. That doesn’t mean it has to happen but the possibility is there. I’ve characterized the long term chart as one of rally after rally with intermittent steep retracements of each rally. What that meant is that each time we got to an originating pivot; the rally took root but never really went too far without a steep retracement. It could mean a lot of things but what it probably means most of all is that we’ve never really had strong hands holding longer term with the exception of the Fed. They’ve likely propped this market up for years.
Since the demand points aren’t so great, if and when the tide ever turns the potential for an avalanche going in the opposite direction is pretty good simply because there hasn’t been enough buying interest to hold it up. This was a longer view hypothesis of mine. It appears we are ahead of schedule as far as trouble is concerned. I’ve shown you this chart before and we already in trouble.
Here’s my concern. I’ve told you the trouble is likely to be below 120 and in the vicinity of 80-90. We started above 150 and we already in the low 130s. That’s the good news. The bad news is we haven’t even come to problem area. Even Rick Santelli is getting into the act. I believe it was Thursday when he told CNBC viewers the housing recovery can stay on decent ground as long as interest rates remain stable. It’s one thing if they creep up over a long period of time. It’s quite another if the RATE OF CHANGE were to accelerate. I didn’t put it in those words but my implications looking at this chart have been exactly the same. Now look at the weekly chart.
Wouldn’t you agree that’s a beautiful looking bullish flag formation? Not anymore. It’s no wonder my projection for a higher VIX finally materialized. Stock market folks finally got the Beliebers scared out of them. Here’s another hypothesis we’ve discussed here that has worked out. It was January when the VIX was hovering around 12 and the good folks of the media were telling you the VIX wasn’t relative anymore. My take was it didn’t matter what the VIX was doing because back in 2006, the last time it was really complacent, it took about 7 months for the markets to top. My whole take on the VIX is it could cause the equity markets to drift higher but you are never going to get a sustained move with a VIX so low. Look what it took to finally wake people up. They had to get tapped on the shoulder by the Fed, see liquidity dry up in China to the point of banks seizing up and the prospects for an acceleration of interest rates right in our own back yard. Look at this bond chart. It should scare you. When we that waterfall is anyone’s guess. It could be this year; it might not happen for 2 years. But it’s definitely on the radar and it’s absolutely not a remote possibility. I happen to follow people who do historical timing not related to the stock market who are looking very seriously at the year 2015. I’m not going to get into it here because it would take pages and pages of explanation. But let me this. If we look to the 20th century as an analogy, there was a panic in 1907 and a World War 7 years later. Here there was a panic in 2008 and 7 years later takes us to 2015 and I think we can all agree the world isn’t such a friendly place anymore.
I’ve been bullish for a very long time and the market has been up for a very long time. After 1932 the market rallied for 5 years. We’ve now rallied for over 4 years. If we consider the NDX the absolute bottom of this market is November 21, 2008. Let’s just say I’m not so bullish anymore.
This was also a week where we got the payoff from a European market that failed to bounce in either of the prior 2 weeks when US markets did with decent reasons to do it. But here we are at the back end of the June 21st seasonal change point. Could we see a trading low this week? Absolutely we can because the VIX is in new territory and this has become an incredibly oversold market. We also have a condition in the Gold market where the Gann symmetry suggests it’s ripe for a turn. It can happen and we’ll know in the next couple of days. If Gold turns up then we could end up with a low for this time window.
Play along with me and consider we get a trading low in the next couple of days. Does that mean this is a BOTTOM? I would doubt it. If we do get the turn I think what we are dealing with is something more like March 2011 after the Japanese tsunami as opposed to October 2011 which was the real bottom. Some people think we had a washout and looking at some of the statistics, I’m willing to buy into that possibility. But even as we had a washout of sorts, at no time did last week feel like we were going down forever and not coming back. At the 2011 lows we were at the place psychologically where it felt like markets were going down for the count and not coming back. So what I’m looking at is not the beginning of the end, but the end of the beginning. I also happen to be of the opinion we may have the high for the year in the stock market in place.
I’d be very surprised if this week were like last week. Chances are it won’t happen again. Now if I’ve put up an uncharacteristic amount of I told you so, I’m also near the end of editing season for my 2nd edition of Breakthrough Strategies. It’s been years since I put out a book. Nobody gets it right all the time and I certainly get off course but we’ve developed a very good track record over the years and I’m coming out with a book that will open the door and teach you how to do this. The book is due out sometime in September. Just about the time the next major time windows kick in.
At the end of the day, markets are a combination of good pattern recognition, market timing and a serious grasp of market psychology. There’s a lot of bad information out there, mostly from those who get trapped by the popular sentiment of the day. Market sentiment has worked the same way since the days of Dow and will continue to do so long after we are gone. I just want to keep you on the right side.