The zero hour is finally here. One of our major hypotheses for this sequence is a time window in September coupled with a market that is allergic to the dysfunction in Washington. They certainly didn’t bat an eye at the filibuster by Ted Cruz last week, but they are certainly taking the latest vote in the House seriously as the first major showdown of the fall takes center stage. Our take has always been the Tea Party and GOP had to push whatever leverage they had this time around because this is their last and best change to extract something from the President. You’ve seen what they are trying to do. They’ve linked a contraception measure to their bid to keep the government going.
Is this the theater of the absurd? Of course it is. But if you are a poker player and decide to go all in, you ride whatever you have. Just to show you that I’m not taking sides, there’s a bigger problem looming if you can believe it. On Friday, Obama had a conversation with the new supposedly moderate President of Iran and media reports suggest the President is now OK with and acknowledges the Iranians have a nuclear reactor for peaceful use of nuclear energy.
I was stunned and I’m sure the Israelis are as well. Over the weekend I saw this headline materialize: http://www.slate.com/articles/news_and_politics/foreigners/2013/09/neville_chamberlain_was_right_to_cede_czechoslovakia_to_adolf_hitler_seventy.html
This is an article suggesting Neville Chamberlain was right to hand Czechoslovakia over to the Nazis. Now the world has come off its axis.
When you read this article you’ll see the author makes some interesting points. In 1938 Hitler was already too powerful to be stopped by a peacetime British Army. Note to amateur historian, the time to stop Hitler was several years earlier at the Rhineland when even he acknowledged that if the French moved, he would’ve backed off. Not only would he have had to back off, he’d have been finished.
What this author also fails to realize is the German generals were prepared to overthrow Hitler had Chamberlain decided to go to war. Chamberlain couldn’t know it or maybe he could have had British intelligence been on top of its game. But at the end of the day, appeasement is always shameful and will ultimately lead to disaster. The Iranians are very crafty. They’ve even admitted the holocaust happened and condemned it. It’s a departure from the last President. That’s great, but why does my skeptical side think they’ll say anything and everything to get what they want? The lessons from history are you stop evil-minded societies before they get too big and can’t be stopped. From 1933-35 Chancellor Hitler was hailed as a peacemaker too.
In the bigger picture, it’s hard to imagine anything bigger than a government shutdown right now but this Iranian situation takes the cake.
Right now we are in the bottom of the 9th inning with the government shutdown, and still a few weeks away from the debt ceiling. What about the stock market? Let’s look at a couple of NDX charts and it’s instructive to look at tech because it’s been the part of the market that has been outperforming lately. For now I think the Dow already topped.
Doesn’t this look like an ending rising wedge? See the next page for the rest of the story.
Next page: A closer look
Here’s a weekly chart going back to the last debt ceiling debacle in 2011. If the larger wedge that was forming didn’t have a steep enough slope to please you – after all it could have been a symmetrical triangle – the latest move since the June low certainly has the right look. If we start with the first leg off the summer of 2012 low and come up with leg XX, we now have a peak at a distance of 161XX. The capability of a correction from a configuration like this is back to that horizontal line near 2475 which is really close to the 200 week moving average. I know that economists won’t be telling you this because their job is project the next 12 months like the prior 12. But markets have become complacent enough that any of us can look at this pattern and find it hard to believe such a reversal can materialize.
Check your emotions right now. I know I have a hard time believing it. It doesn’t matter what I feel. My job is to interpret my feelings and convert it to market psychology. What this market has done since August is suck in all the skeptics and give the impression it can only go one way and that’s up. Then we had the September time windows coupled with the dysfunction in Washington, which gives us a perfect recipe for a change in direction. So if this correction does materialize over the next month, it will be painful but hard cause the kind of technical damage that would hinder the longer-term effects of the new secular bull market. Those of you who are concerned about the Armageddon trade need not worry. The market has barely reversed; if and when the 200 is seriously challenged, we’ll take it up at that time.
Another wild card coming into the new week is the action in Shanghai, or should I say lack thereof. The crafty Chinese have another four-day holiday and will be closed just at another critical juncture for world markets. I think we’ve been down this road before. The SSE has been down despite the fact Europe has stayed up and you can make a case that China is now leading the world to the downside but we won’t know any more about it until next week, when this crisis in the U.S. either passes or hits the boiling point. If they shut down the government, I can’t see it lasting more than a couple of days. Do you think they can shut down for two weeks?
Finally, let’s look at the U.S. downside leader, the Dow. Technically, this has already confirmed a near term high and bidding for something bigger. That last gap up leading to the Fed meeting has acted as a trap, which put all those people under water. Now we have this new event with its gap down. The problem is the extension going the other way from the last leg to the high should have stalled at the 161 level but you see the gap down on Sunday night, which makes the probable stall point at 14975 which is over a 200-point drop from the close on Friday. That sounds about right and a good place to examine how the next bounce will work.
In terms of social observation, I can’t tell you I’m happy with anything going on right now, but we’ve been anticipating trouble for this time of year for a long time.