One of our hypotheses recently has been the characteristic and behavior of what we’d see in the European charts this month. As you know by now, the European charts had been leading to the upside since last December. In case you forgot, that was the sequence where our friends in Europe didn’t seem very concerned about our fiscal cliff negotiation. Maybe they thought it was all just a big bluff, but at the end of the day they were right. They stayed right until markets peaked in May.
Everyone turned down but we had a major bottom well documented here on June 24 and over the July 4 holiday we found that Europe was no longer leading to the upside anymore. OK, so now we have Europe lagging the United States, and my concern is whether their questionable behavior means they are trying to tell us something prematurely about a new downtrend this fall when we get to time window season.
Of course, it had to be the CAC that set the new high. I had a guy on Twitter last week who lives in France tell me all about the sentiment over there. I was told that as early as two weeks ago the paid pundits in the French media laughed and scoffed at the move that found the CAC suddenly leading to the upside. Now we are looking at the chart to make it to the attractor line as well a test of prior long term resistance. The diagonal line you see is the trend/attractor line.
So here we go, the DAX and FTSE don’t look horrendous but nothing to write home about and we have weak sister laggard suddenly leading to the upside. Quite frankly, I’m more concerned about the FTSE attempting to lead to the downside. In this environment it’s not likely to get very far but the end of summer is only 3 weeks away. It’s not hard to stay in suspended animation in August. I really think the CAC will get to its 2011 high. That’s a good ending point to the rotation.
Then we have the U.S. dollar.
We had a week where the moderate targets I’ve discussed since the beginning of July didn’t hold. See the small 161a line? We’ve already been there and those were my moderate projections which are already achieved.
What that means is we still have lower projections near 80. What that means is we still have upper potential for the stock market. There was an article at the CNBC.com website by Bob Pisani and the point he made was there are almost no true stock bears which worries him. Strategists still seem to be bullish and would like to see a modest pullback and all of them don’t seem to think the market is absurdly priced right now. What traders on the floor are focused on is the very thin volume and Pisani says this past week was the lightest volume week since August 2006. But the bottom line is none of these analysts are thinking we are at a top.
Next page: Is the hypothesis working?
My hypothesis is working. As you know we had some mediocre economic data a couple of weeks back and word was the Fed would not start tapering anytime soon. The stock market loved it and we finally had a day where I actually saw the happy pill. Well, the happy pill doesn’t make a top but it is part of a topping process. The true topping process is the exact opposite of what we saw on June 24. What that means is we get a move where everyone gets euphoric but then we get some kind of a failed attempt to go down. That’s the hook that takes away the last skeptics. Then everyone is in for the bait hook, line and sinker. As you know we are now on a mild losing streak lasting several days. There isn’t much to it. We may even have a day where the headlines are really negative. We may have a day where we get a shake of the trees. But then we get another day where it fails to go down any further.
It could be a day where the Dow is once again down 100-150 but ends up even. Then it creeps higher and before you know it we are back to the highs of the prior week. Bull markets are sneaky like that. But since we’ve already had a mild losing streak after a happy pill, the next sneaky streak to the upside could finally do the trick. This is already the middle of August. We are getting incredibly close to time window season. Did you realize that tonight, as I write this, from the March 6, 2013 bottom we are 1619 calendar days off the bottom? That also means we are 1616 calendar days off the back end of that turn from March 9, 2009? What that means is we hit the ultimate back end of that time window by Wednesday/Thursday. We could experience some reaction to this window and turn back up and then work our way to 233 weeks off the same bottom by the end of the month. It will be that time where the president and Congress get the fiscal debate going full steam. You and I both know the stock market really does not like the fiscal cliff.
Are you interested in handicapping the debate? It’s the president against the House GOP. The initial debate had the right wing establishment suggesting they shut down the government if any funds are directed at Obamacare. That would be unique for financial markets because it would mark the first fight (since the infamous initial black swan 2 years ago) where health care would collide with the stock market. Oddly enough, with the GOP attempting to repeal Obamacare all those times, this marks the first time they actually have some leverage. If you’ve been following it the only people who seem to have the political will to follow through on such a threat is the smallish minority of the Tea Party led by Senator Ted Cruz. It’s questionable that even Cantor, Ryan and Boehner have the political will for that fight as they fear a midterm election route if they follow through and the economy tanks. But they are going to extract something from the president and chances are negotiations go to the bottom of the 9th inning like they always do.
Then we have the geopolitical situation. Do you now that on the eve of the Middle East peace talks the Israelis have approved the building of some 1200 settlements on land subject to the peace negotiations? Why am I bringing this up here? Nobody is talking about it but the wild card now is for a major terrorist attack or even the start of a new war. I doubt the market will like it.
Putting all of this together, our hypothesis for August is working and conditions are taking shape. We haven’t seen the important high yet but as we get closer and closer to the big time windows we can peel the curtain back and see what could go wrong and what could cause these markets to peak.