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8.26.2015 Financial Intelligence Report Bookmark

Market Top?

Thursday was an ugly market day. Friday was considerably uglier. Then Monday happened.  I’m sure you all know what took place by now. Right after the open the DOW fell 1089 points in a “flash crash”.   What was that all about?

Let’s do a bit of recent history. Since February of this year the market has wiggled “sideways” in a “box” so to speak. We had an S&P top at about 2117 and a bottom at about 2040.  So for months on end we bounced along inside that range, generally running higher for 2,3 or 4 days and then selling back down for 2, 3 or 4 days. Over and over, wash/rinse/repeat.
But in May we punched through 2117 and put in a closing high of 2130. Everyone was getting excited that a new leg up was forming, and the “box’ we were in was finally getting broken out of.  But we didn’t think so. We made statements concerning it that went along the lines of “that felt like a bit of a blow off top”.  We hung there for a couple days flirting with 2130 and then rolled down hill. That 2130 became the market “top” so to speak, and  after dipping to 2075 they ran us back up. But it came up shy. We only got to 2122.

Down we went again. This time to 2044. Then back up we went, but we ran out of gas at 2125.  So we had  what amounts to a “triple top” formed, and it was our opinion that “maybe 2130 was the market top”.  We took the position that we would NOT break above that and form a new leg higher.  In our opinion, the May highs were to stand as a “top” in the whole 6 year run.  Pretty bold stuff.

Why would that be a bold statement? Because the entire run up was built on bogus pretense. The market wasn’t at 18,000 because of strong fundamentals, incredible retail sales, tremendous exporting, etc….it was there for the most horrible of reasons. QE 1, QE 2, the “twist” QE3, trillions in printed money, Stock buy backs, a resurgence in sub-prime auto’s, and on and on.  It was pushed and prodded higher. They changed the way they measure GDP, they allowed banks to mark their assets to “model” instead of mark to market. Everywhere you looked, the data was distorted or twisted to fit the “all is well” meme.

So the “problem” with calling a top was simply “couldn’t they just do more?”  And unfortunately the answer was yes. All it would take to hit new highs again would be for the Fed’s to come up with some new perversion, some new “program” to inject even more money into Wall Street. So I had to amend my view of the “top”. Here it is…

Barring any new lunacy from the Fed’s such as QE 4, 5, 6 etc, Barring any push to shove money out of helicopters, the top is in.  But here’s the catch. Even if they do QE4, and 5, and push money out of helicopters… it won’t last. Yes we might hit a new high for a bit, but it too will fail.  ALL ponzi’s fail folks. This one too.

Our guess is that we are beginning a long grind lower. Of course there will be bounces and counter rallies. But in the here and now, we’ve gotten all the boost out of the previous schemes that we’re going to get. I always use the “junkie” analogy.

When someone first gets hooked on heroin, all it takes is one injection and he’s “high” for hours and hours. But in a few days it takes 2 shots to get the same hours of high. After a month, he’s needing considerably bigger doses to get the same amount of “high”. Well manipulated markets are exactly the same.

When the Fed’s announced QE 1, we soared. Then we started to fade off, as the high was evaporating. So they stuck us with QE 2. Once again the market soared, but not quite as much as it did after QE 1. We just didn’t get the same level of “high” so to speak.  When that faded they did “the twist” and when its affects wore off they did QE 3.  

Now the effects of QE 3 has worn off, but it is much worse than just that. Why? Because each round of QE did much more than just inject money into the system and make stocks run higher. It perverted the entire “demand” structure of the world.  Let me explain….

Let's get this right.  The market is scared to DEATH of a lousy 25 basis point rate hike. Does that show economic strength? Of course not.  China's exports have fallen apart. Does that show strength in the buying capability of nations of Europe and the US? Of course not. Cargo freight rates from Asia to Europe crashed. Does that sound like big demand to you? Of course not.  On and on I could go.

The bottom line is that BECAUSE of the Fed's insane QE programs, we have over produced "things" that really had no fundamental demand.  Think of it like this; if the Fed's hadn't flooded the nations with trillions of dollars, then what would have happened was that people would cut back for a while, imbalances would get evened out, bad companies would go under, strong companies would take over and we'd have emerged stronger, but stronger on a fundamental basis.  But by artificially injecting money into the system, folks continued to apply demand for products, commodities, etc, that they could ONLY buy because of Fed money.  So plants were built to accommodate the fake demand.  All over the world,  ‘projects” were completed to produce for a demand that really wasn’t there without the QE money.

Now that the last "official" QE is long done, you see the results. China has too many clothing companies. Too many manufacturing facilities. Too much everything to supply demand that was only there because of ever increasing QE money. Take that away and there's no demand. No jobs.

So now we have a situation where the imbalances are bigger than ever in history. We’ve created the production capability for trillions of dollars of “fake” demand. So now plants are going idle, shipping rates are crashing, the transports are entering bear market territory, commodities are in big supply and no demand.


So not only do we need a new injection of funny money just to hold us at this current level,  we’d need ever larger injections to create the demand necessary to employ all the production we’ve created.  

We “drew” from the future. We used the fake demand from stimulus to create demand that shouldn’t have been there without years of organic growth.  So the “bottom line” is that absent more free money, we cannot go higher. But worse, the economy itself will continue to fade.

Could the Fed’s really launch yet another perverted monetary policy program? Sure. You have to remember our theory about their propaganda program.  

Since they did the “taper” where they tapered the QE program month after month… no one believed they’d taper to zero. Well that’s not true. I thought they would and said so. My theory was that they’d taper because the banks themselves were willing to buy the treasuries to use as collateral for junk loans. So the Fed’s could talk a big game about improving economics and look like heroes.

My guess was that they’d say all is great, all is wonderful, and all the while be looking for an “event” that they could blame our ills on. You can almost hear them saying “Everything was going along so well, our economy was expanding, jobs were plentiful and then “boom” THIS happened”.  What is this? Anything. War in Ukraine/Russia. War in Iran. A major bank failure. Or possibly…the Chinese devaluing their currency!

Could the Chinese devalue be the “event” that the Fed’s have been hoping for to use to blame our crashing market/lousy economy? It could. We’ll see. In the meantime I’ll stick to my guns and say that without some new program from our criminal bankers, the “top” has been set in our market. Yes we’ll bounce, yes we’ll have tremendous up days. But all in all, I believe that the 2130 S&P closing high of May, will hold as the top until they pull another desperation move, and even if they do…it might not make us a new high.

That’s my 2 cents!

The Market…

I talked all about the market in the commentary above. So this will be short. Monday, was butt ugly, Tuesday they tried to bounce it but late day selling reversed us into another big red close.  

Today they once again started out strong, and then around the noon hour things started getting little soft. We were fading. Someof that of course was going to be “margin calls”  from anyone that jumped all over the “dip” back on Friday.

Our system is a “trade + 3” style settlement on stocks. So while you can buy a stock today and it shows in your account, the true “movement” of the stock from the last holder of it to you, completes on the 3rd day. So today and probably tomorrow there was risk of “forced” selling.  But instead of a ton of sell orders swamping the last minute desk, the buy the dippers came out in force. We went out with a gain of 600+ points.

So today was the “bounce” we thought we were going to get yesterday but lost in the last hour. What happens now? Well, it’s been pretty easy to call for a bounce, we’re down about 2000 points in a week. But after the bounce? That’s a tougher call.

My guess is that we add to today’s bounce. I think that because we closed out the DOW a few points lower than yesterday’s high; it will give them a bit of a pause, but they spent a lot of ammo today and I’d be hard pressed to think they’ll let it go.

What about China? Yes they’re going to do more bizarre things to try and save their market, no doubt. But I think that we’ve now “factored” them in. So we should see a nice counter trend bounce that lasts for a while. But make no mistake we have a TON of overhead resistance in front of us. In other words we’re not going to gain 600 points every day.

In the final moments of the day, we took on some GILD and NXPI for a long side trade. Notice the word trade….that’s all it will be. This isn’t “set it and forget it” time here. Hopefully nothing awkward will hit overnight and tomorrow we can get a nice strong open with some follow through.

Just understand that after this bounce is over, and it will end at some point, I do think we come back down and even go lower. Crazy? Maybe, but without some new stimulus out of the Fed’s I just don’t see us making any new highs. So take this ride for what it gives you and then be “nimble” enough to get out when it rolls back over.

Have a great day and I’ll see all of you on Sunday!

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