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7.26.2015 Financial Intelligence Report Bookmark

Bear Hunting

I’ve made mention several times concerning the idea that this fall could bring some real strange market action.
Bear Hunting

I’ve made mention several times concerning the idea that this fall could bring some real strange market action. I’ve mentioned the Shemitah, and the economic cycles, etc. So today I want to go over some reasons that I think we are entering a very interesting time, not only in the market, but in the overall global economy.

Let’s do a bit of a recap so that everyone is on the same page.  On September 13 we’ll see the end cycle of the 7 year Shemitah, an old biblical process in which debts were to be forgiven. The interesting thing about Shemitah years is that very big events have happened during them over the past hundreds of years. Stock market crashes like 2008, The black Monday crash, 9/11, Roe vs Wade legalizing abortion, removal of prayer in schools, you name it and major events have indeed happened on the last days of the Shemitah cycle.  So we’ve got that coming at us in September.

But interestingly enough, just about the same time…anywhere from Sept – October, four major economic cycles will be “converging”.  This hasn’t happened in over 80 years. The first of note is the Kondratieff cycle. Then we also get the Kitchin cycle, the Juglar cycle, and two shorter wave 20/60 year cycles.  So in the space of a couple months, we have all these interesting events coming together and all of them tend to portend some form of economic downturn.

If the economy was humming along just perfectly, and the stock market was an honest measure of price discovery, and the unemployment rate was a real 5%, then these cycles and the accompanying Shemitah, would seem rather misplaced. But we know things to be different, don’t we?

Consider these cycles coming together in an atmosphere such as we have today. Greece is bankrupt. So is France, Italy, Spain, Portugal, and a dozen other European nations. Japan is busted, printing more money than ever seen in history, and yet their economy is on life support. The US is supposedly the best looking horse in the glue factory, yet carries umpteen trillions in debt, creates economic figures out of thin air, and threatens most of the world with military action if they don’t play by our rules.

These cycles are coming together while we’ve seen banks hit with over 45 BILLION dollars in fines for manipulating Libor, Gold, treasury auctions, mortgages, and other outright fraud. They’re coming together despite 6 years of zero interest, 4 QE programs, and trillions spent on stimulus projects.

Are you starting to understand the picture here?  One can laugh off some stodgy old “economic cycle” theory when things are humming along swimmingly. But things aren’t going along swimmingly. Has anyone considered China in this equation??

China is the kung-Fu master of falsehoods when it comes to their economy. They lie about their gold holdings, their GDP, their currency, you name it. But even with all the lies, their economy is in dire shape. They’ve been dumping US Treasuries to prop up the Yuan. Their stock market was crashing so hard and fast, they halted 1000 stocks, and implemented rules outlawing the selling of stocks. They made short selling illegal. They announced the purchase of 19 billion in outright stock buying. All to prop up the illusion that their economy isn’t dying on the vine. Well, it is. Electricity demand is down. Oil consumption is down. Retail sales are down.

Yet this October, we know for a fact that China is desperately trying to get included in the IMF’s SDR basket of reserve currency. I’m pretty sure they’re going to be included. If they do, then we’re going to see currency volatility in a big way, as some major players will sell dollars and buy Yuan, thus spreading out their risk profile. What’s the fall out from all that?

So the entire world is in dire shape and along comes this fall with all these weird “cycles” and events converging at the same time. Hey maybe it means nothing. Maybe this fall comes and goes without as much as a whisper.  But I think the stock market is already telling us that something wicked this way comes….

There’s little question that some of the big players and the “smart money” are looking for the exits. We’ve had like 7 Hindenburg observations over the last two months, we’ve seen classic “distribution” days where they run us up on low volume and pound us lower on huge volume. But there’s more, and it’s starting to raise an eyebrow or two.

I’m seeing all sorts of internals that say things aren’t terribly rosy any more. Last week the NASDAQ hit an all time high. But guess what? More stocks FELL that day than rose. When the advance/decline line starts getting out of whack like that, it often suggests the end of a trend is coming.  Consider this…the last time the NASDAQ hit an all time high but inside the index more stocks fell than rose…we entered a bear market just a week later. That was the year 2000 just before the index lost 50% of its gains.

Then we have to mention “DOW” theory. That simply states that you can’t keep having all new highs in the DOW if the transport sector isn’t marching along with it. Well, the transports have been puking for months, even as the DOW continued to try and climb to new highs. So we’ve got a lousy “breadth” reading, we’ve got a lousy advance/decline reading and we’ve got the transports sucking wind to be kind.

Next up we’ve got earnings. Yeah if you’re one of the narrow slot tech companies that everyone drools over, you’re doing okay. But if you’re part of the bigger wider economy, your life isn’t so rosy. AMZN used a billion accounting gimmicks to post their first profit in 20 years and everyone jumped in like it was an IPO stock. But what about CAT?  What about IBM? What about 3M?  What about the hundreds of companies that had their earnings expectations lowered and still couldn’t hit the revenue estimates?  

Is it possible that the market isn’t going to wait until the fall to figure out if it is going to put in a major correction and instead is already starting the process?  I think it’s possible folks. I think there’s so much uncertainty about this fall that the market might decide to roll down hill here for a while and take some of the profits it has amassed.  It has tried to break out over the “all time high” level several times now and failed.  It might just give up on the idea for a while, and decide to take a rest.

I know that’s dangerous talk. Every time the market has looked like it is ready to roll over for good, the powers that be rush in and jam us right back up. It’s their way of producing the illusion that all is well, just like China is doing with their market. The only difference is that China admits to manipulating its market and in the US they don’t. But trust me, they do it on a daily basis. But even the best run ponzi comes to an end ((Ask Bernie Madoff)  and TPTB might be willing to let the market correct here, so they can rush in and rescue it later in the year if things get really out of control this fall.

In other words, I’m not at all convinced that a bear market is upon us. I am however beginning to think that the long lost correction we haven’t seen in years could be right around the corner.

NOTE> I’m including “The Market” section of the letter right into this commentary…

How are we to know if indeed it is correction time or not? There’s no sign they hang out at the NYSE that says “ that’s it folks, take your profits and go home”. No, all we have are dots, and we connect them to make a picture. Then we add in some chart reading and take our best guess.

This week the Fed’s are meeting again to discuss economic policy. This is on Tuesday and Wednesday, and we’ll get the results of that meeting Wed. afternoon. No one is expecting them to say anything about hiking rates, however there’s been a couple twists to the story. This past week, a supposedly confidential FOMC members not leaked out, and it suggests that the Fed would like to see two rate hikes this year, starting in Q3. So if that is correct we can add ANOTHER twist to the meme that ‘this fall could get nuts”.

If the fed’s are hawkish this Wednesday, it will help put pressure on a market that’s already tossing off signs of a correction looming. So what are the road signs?  

The S&P is considerably more “important” of an indicator than the DOW because it is so much bigger. So we want to focus more on the S&P than the tourist stop. This is a snippet of what I posted to my Insiders Club members at about 10:50 am Friday morning…

By 10:45...DOW off 60, S&P off 7.
Yes they might rescue the day later on. But from where I'm sitting, it looks to me like 2083 could be the next stopping level for the S&P.

Sure enough the S&P fell from 2101 all the way down to 2080. ( in fact we had some DIA put options in play that did very well)   So here’s what the roadmap says to us… if the area between 2076 and 2079 fails, the next stop lower would be the 2063 level which is the 200  day moving average. If that fails, then the last and most important stop is the low set July 8 at 2046. ( closing low)

If the market loses 2046 on a closing basis, all bets are off and we could easily see a big fat correction

What about upside? We’d need to see them get us back over 2102 on a closing basis, to make me think they’ve shaken off the prowling bear, and we’re going back to the highs.

It’s an interesting time in market land folks, so hang onto your hat, I think the next six months are going to bring a “whole lotta” fireworks.

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