When I heard the news Larry Summers was withdrawing his name from consideration for Fed chairman, I almost did a jump for joy. He’s solid but just not the right man for the job. There are just too many fingerprints concerning the deregulation of the banking industry coupled with not enough oversight for the derivatives industry under his watch as Secretary of the Treasury under President Clinton. Apparently the early returns on Sunday night suggest the market agrees.
This news comes in a week where Goldman Sachs was voted in to the Dow 30.
It was just a couple of months ago the key player in the Goldman scandal of institutional clients getting sold down the river was settled in civil court where fall guy Fabrice Tourre was found liable of numerous counts of fraud. According to a Huffington Post story from Aug. 2, 2013, Mr. Tourre was involved with a toxic mortgage scheme known as Abacus, which Goldman created at the request of hedge fund manager John Paulson, so he could bet against it as part of his strategy for making $15 billion on the crisis. You may recall in the past couple of years Mr. Paulson lost $736 million in the second quarter on the gold market. On Oct. 9, 2011, a Reuters story reported Mr. Paulson’s hedge fund was down 47% at that point in time and it could have been for 2011 up to that time.
The jury found that Mr. Tourre misled investors from the start, tricking them into thinking it had not been built for failure from the start. Goldman was not on trial in this case but settled for $550 million in 2010 without admitting wrongdoing. Surely Mr. Tourre wasn’t the only one working these deals at Goldman. If you do your own due diligence you’ll find numerous stories over the years by Matt Taibbi. Why would we have to learn about all the junk going on at Wall Street from a reporter at Rolling Stone magazine?
Larry Summers was a great servant to his government. He’s just too much of a reminder of the financial crisis. We need to move on, and my vote is for Janet Yellen, who would likely continue the policies of her mentor Ben Bernanke. I know people don’t like some of Ben’s policies and I’ve defended him to the hilt during his tenure, but with the state of Congress and the president, his hands have been tied. So if you are upset with Bernanke, it’s likely misguided frustration that should be directed at the do-nothing Congress.
In any event, our projections were for higher prices given the tightening coil in the NQ (CME:NQU13) last week. See this pattern? My clients and I watched it like a hawk last week, which spanned Tuesday through Friday. On Friday morning, it made an attempt to go down but once it became a failed attempt to go down it had nowhere to go but up. We won’t know until Monday whether this is a sustainable gap, but my job is to determine the direction out of coil. My next major resistance area I’m watching is 3819 in the Nasdaq.
The next thing I’m watching here is the SSE. The SSE has hit the key inflection point and it will be very interesting to see how it reacts here to the combination of the attractor line and the 161a off the low. IF it wants to top, this is good place for it. As you also know we’ve been watching Europe very carefully. Last week it surged beyond the key inflection point that could’ve led to a major breakdown and even a 3rd of a 3rd wave down. Funny thing about a bull market; you get bearish setups that come to the cusp of massive breakdowns that never seem to materialize.
Since we saw the NQ gap to the upside I barely got done putting this chart together and it already violated to the downside. The US Dollar (NYBOT:DXZ13) gapped down on Sunday night, violating a very key point on the chart as 161 a became acceleration as opposed to a turning point. What does all of this mean? I spent the entire month of August talking about the unlikely prospect of a peak before Labor Day. There were skeptics and we had a couple of shakes of the trees. What that did was likely eliminate the last of those skeptics. A happy market which bent but didn’t break certainly did the job of making people believe in the prospects of a one way market. Remember, a top doesn’t materialize because the people are happy; a top forms when happy people are convinced it’s going up forever. As we hit the seasonal change point and the Fed meeting it’s starting to become apparent we have a market that can only go one way and that’s up. What might really top this market out? Here’s food for thought. The psychology has been a rally based on the Fed voting no tapering. Personally, I don’t think they are going to taper this week.
Wouldn’t it be ironic if the market topped on just the good news people think would elongate the rally? Think about it. We heard for months if not years the market would stage a huge rally if and when the day ever came that Osama Bin Laden would be captured. Well, OBL was captured on a Sunday and the market topped the very next day. Of course there were some extenuating circumstances, such as we had a perfect storm in the oil market that day which we’ve chronicled here countless times. But how many times has the market done the exact the opposite of the prevailing common wisdom? If we take the no vote for American involvement in Syria we started this euphoria train and now people are happy that Summers won’t be Fed chief all we really need is a no vote on tapering right now. What that would lead to is splash of cold water when the GOP starts threatening to shut down the government if they don’t get their way with the budget debate.
Here we are, as I write this column its five years to the day of the Lehman collapse. We are rallying mightily into the seasonal change point at the end of the week. If markets are going to turn, the highest probability is they do so at the seasonal change point. There’s still lots of trading hours to go before the Fed news comes out and even more to the end of the week and the change of season. Lots of things can happen between now and then.