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Is a ‘Head-Fake’ in the Making?

For the most part last week, I sat on the sidelines. My managed accounts were 30% short going into the opening bell on Monday, with the balance in cash. The market conveniently dropped at the open

For the most part last week, I sat on the sidelines. My managed accounts were 30% short going into the opening bell on Monday, with the balance in cash. The market conveniently dropped at the open and with a significant profit in all my holdings, I covered all short positions (actually, I sold my inverse ETFs and sold my put options, as I don’t actually “short”) and moved back to 100% cash.

My technical data, including the time-cycle data and analysis of global economic conditions (especially in Europe) all indicate the market is more likely to move lower than higher over the next couple of months (see S&P 500 time-cycle forecast, below). But, as you will see from the Bull/Bear report below, investor sentiment is definitely looking more positive than in recent weeks. Could this be a solid sign that a hard bottom is now in place… or is this a nefarious September head-fake in the making? I suspect it is the latter.

But (and this is important) you want to be very careful about trying to out-think the data. My opinion (not necessarily supported by the data… more on the data, later) about the market and the drivers in this market for next 90 days can be summarized as follows:

  • The European Union (EU) will try to do anything possible to keep Greece from defaulting. This will put more pressure on the rest of Europe, financially. The significant political and economic cost will likely not keep Greece from some sort of default condition.
  • The US taxpayer, who backstops the uncontrolled and unregulated Federal Reserve’s printing of fiat dollars, now appears to be backstopping European banks! As unbelievable as this is, it is indeed the case. The Fed will, indirectly, disburse US Dollars to European banks “as necessary”. There is no upper limit on this ‘Too-Big-to-Fail’ (part duex) global monetary scheme. The ‘name’ of this scheme is called, “swap lines”. Swap lines are not new, but heretofore they were not so publicly discussed. Isn’t it interesting how the government and/or the Fed use terms like ‘operation twist’, ‘increasing the balance sheet’, ‘swap lines’, ‘discount window’, ‘increasing revenue’, ‘TARP’, ‘credit default swaps’, and on and on and on… instead of bail out, give away, tax, pay-off, bankrupt, not-a-going-concern, wealth redistribution, etc. By the way… Look for the Fed to juice the market with some kind of temporary dump-more-of-your-money-into-the-system action on Wednesday this week. This could give the market yet another crack-cocaine high. So long as we don’t look into those hollowed out, sunken eyes of a needle-ridden QE addict (the stock market), the Fed’s action this week could lead to positive market action.
  • The now seemingly almost defunct Congress, and highly marginalized US President have abdicated their responsibilities to a so-called, “Super Committee” that will decide the fate of the US economy, tax reform, welfare reform, the strength of our military, mom and apple pie. This committee is politically divided 50/50 between Republicans and Democrats. It is unclear how it is divided between politicians and patriots who place country before political gain. I hope this committee can actually do what Congress has failed to do. Count me more than a bit cynical about the final results of this committee. Even if something good comes out of the committee, the results still have to pass both houses of Congress and then be signed into law by a President who is on the ropes politically and obviously more interested in reelection than leading our nation out of the current economic morass. The results from all of this is likely to not be good for the market… but we won’t have to deal with this issue directly until the end of November. Still… it is a definite overhang to the current market.
  • I suppose that as long as the world allows the US to print money out of thin air and as long as the US voter continues to elect representatives who abdicate their fiscal responsibilities, unreasonable risk-taking will occur and bad management will continue to be rewarded with bail-out after bail-out after bail-out. But, a day of reckoning is coming. You can wallpaper over termites and look good for a while, but if the wall is rotten, it will fail sooner or later. And, all the pretty wallpaper made out of US Dollars will not provide the structural support necessary to keep banks and some economies from failing.

Below is a current time-cycle chart of the S&P 500, showing a 60-day forecast.

The above is a very dangerous forecast chart. The red-dotted line indicates that the market will recover nicely, moving back up above the 1300 level. This is very bullish. The purple dotted (lower trending) line is the result of the time-cycle forecast. This indicates where the market would likely move sans any exogenous (once-in-a-lifetime) event.

So… there are two possible conclusions that we should take in reviewing this chart:

  1. The first is, the time-cycle forecast is merely wrong, as it will be 30% of the time, or
  2. There is something (maybe several something’s) that is artificially and temporarily pushing the market higher. If this is the case, then the market is moving higher only on non-structural events that are likely not tied to economically strong underpinnings. And, according to the forecast algorithm, this condition could last until mid-October.

But, take careful observation that this forecast is coupled with a rather dire warning that the market is poised to correct as much as 15% at any time and reverse course, moving lower… as low as 1100 by early November.

As long as a ‘red-flag’ condition of this size exists, I will NOT be putting money to work (long or short) in the broader market. This does not preclude me from taking on other, less risky plays, such as gold, which looks to be moving into a buy condition later this week according to other of my time-cycle forecast charts. As for broad-market plays, the above red triangle is a ‘red-flag’ warning that conditions are ripe for a correction. This puts too much risk on the table to be long or short the S&P 500.

My data are also showing a potential market bottoming action in play. Take a look at what the ‘elves’ are saying, below…

The Elves are Scheming…

The Bull-to-Bear ratio has jumped from 7-to-1 in favor of the Bears to only a slightly Bearish ratio of 1.2-to-1 in favor of the Bears for this week. The Turner CrossOver Oscillator Composite of Signals (black) line now indicates a bottom has occurred. Concern exists for the case of a head-fake before the market moves lower. CAUTION IS ADVISED! The Short Sell (red) line is dramatically moving toward neutral. The Composite (black) line is also moving just as dramatically toward neutral. The S&P 500 (green shaded area) has almost abruptly stopped its descending trend and appears to be bottoming. The only significant negative is the fact that the Composite line has not broken its string of lower highs and lower lows. The “All-Clear” has NOT been sounded.


Have a great week in the market!

Your headed-to-the-Futures-&-Forex-Expo-in-Vegas-this-week portfolio manager,

As the markets put the debt ceiling debacle in the rearview mirror, more than a few issues remain open.