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08252012 August 25, 2012

Posted by easterntiger in economic history, economy, financial, gold, markets, oil, silver, stocks.
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Current Positions  (No Changes)

I(Intl) – exit

S(Small Cap) – exit

C(S&P) – exit

F(bonds) – up to 50%

G(money market) – remainder

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Weekly Momentum Indicator (WMI***see 110111 for reference)

Last 4 weeks, thru  8/24

+17.91, +19.66, +13.22, +6.14

(3 wks ago/2 wks ago/1 wk ago/today)

  • Major housing builder Toll Brothers is trading at 5-year, previous housing bubble highs
  • One of the world’s richest men, British investment banker Lord Rothschild, has taken a near-£130m bet against the euro as fears continue to grow that the single currency will break up.
  • In a harbinger of what may be coming our way in the fall of 2012, billionaire financier George Soros has sold all of his equity positions in major financial stocks according to a 13-F report filed with the SEC for the quarter ending June 30, 2012 and  invested over $130 million in gold
  • Through purchasing indexes and demand, the Chinese economy is contracting

With the Fed once again ‘hinting’ at reinforcing ‘easing policies’, it’s clear evidence of an expectation of severe weakness beyond that which is already underway. That’s my description, since it’s obvious that some weakness already exists in some familiar areas, such as housing, hiring, pockets of credit, etc.  Honestly, Fed ‘easing’ applies more to lowering the barriers in banking, daily funds flow, bank-to-bank/country-to-country balance sheets, etc., which impact corporate lending, etc., and not so much to consumer concerns. The central banks act in the interest of large banks, the social safety nets act in the interest of extreme consumer needs, while everyone and everything else in between are on their own.

Reflecting on an expectation of Fed action, and of approaching greater risk, precious metals prices are back to 2 month highs, reflecting the interests of buyers expecting more stimulus from our Fed and the European Central Bank, making gold & silver more attractive. (Soros)  The market players are expecting Bernanke to be pro-active in the midst of the gradual rise in negative economic data, when his track record has proven that he is more likely to be re-active instead.

Current equity prices are flashing one of my ‘indicators’ between an alternating ‘red’ or ‘green’ signal with each of these daily reversals, an indication of struggling against a ceiling that it cannot penetrate, particularly at extremely low volume levels, as low as 40% under 100-day average volumes.  A different indicator of mine shows a peak in the commitment of smart money to further purchases, pointing to much more weakness to come, as opposed to a sign of strength. Several others confirm a high probability of a reversal down in the weeks ahead.  Volatility has just increased from lows matching the lows last seen a few months before 2007’s downward trend in prices, and one year before the 2008 crisis and crash (our list avoided much, if not all of the slow 2007 slide, as well as the more brutal slides downward in 2008, months before the final crash, where others were just waking up to losses).  Almost 80% of market action is in the realm of high frequency trading (HFT), with banks of servers and computer algorithms executing thousands of in-and-out trades all day, every day, hoping to win enough to pay for costs and losses.  Emotional commitment to and expectations of these markets are very low.

Interest rates could be falling again after a 3-week rise from multi-year lows, and should accelerate as stocks pick up momentum downward. Hint – bonds have not come close to ‘selling off’ (falling prices, rising rates) to chase stocks during the entire equity bounce from the lows of the year that were set in May.  This is still another sign of low commitment to equity risk.

Current market activity is similar to that leading into early April, which at that time led to a 4% slide within two weeks and a 10% slide from the same level a few weeks later, into late May/early June lows of  the year.  These price levels are in the area of firm, multi-year resistance, as in, areas where reversals have previously occurred this year and last year.

The Russell 2000 (similar to our S fund) has now been in a 100-point range, between 750 & 850, for 68 of the past 94 weeks. It has spent much of August between 790 & 815, ONE FOURTH of that already narrow range.

Other major markets, such as the S&P500, have performed similarly, in both intermediate and short time frames.

  • For the month of August, the S&P500 has spent a vast majority of the month between 1385 and 1410, about a 1.8% range.
  • The Dow Industrials, up as much as 100 points on the day, is still down 118 points for the week.  There is a high probability of 400 to 600 points further downside risk during the near term, near 12,500, in the next few weeks.
  • The DIA, an exchange traded fund for the Dow, closed Thursday 2 cents away from where it was one month ago today, or, the change at today’s close represents an entire month’s progress.
  • The NASDAQ is within a few points of where it closed last Friday (3076.59 vs. 3069.79).
  • The S&P100 is only 5 points away from the high of 15 days ago
  • Even at the peak for the year, the S&P500 is only 5% higher than last year’s high.

The lights are on, but, there’s nobody home.

In almost all time frames, short, medium and long-term, bear markets are acting ‘in reverse’ of what you would observe with helium filled balloons in a closed room.

(Balloons – rise naturally/fall artificially; Bear markets – rise artificially/fall naturally)

With both the balloons and bear markets, each can only rise to a limit, before hitting their ceilings.  Bear markets need true value AND a larger balance of buyers to sellers in order to continue to rise above their mostly invisible ceilings/price levels. The absence of either value or, the absence of a given volume of buyers, or the absence of both, will curb the influence that demand would create to increase prices.  To the contrary, while the balloons can only be influenced to fall temporarily, by force, the markets, rely on natural forces that reflect generally weak economic conditions, or news, to power a decline.  Of course, bear markets almost never rise simply under their own power, even during ‘counter-rallies’, which are often mistakenly called ‘rallies’.  There are numerous artificial forces at work to keep the market from declining, even when under pressure to do so. Deliberate Federal Reserve stimulation is done through lending of cheap money (at very low interest rates) directly to the investment banks, for very short terms (called Federal Open Market Operations, either temporary or permanent), to directly fuel weak markets.  This is why markets often pause before Fed meetings, or even during summits at Jackson Hole, Wyoming (like next week), hoping for more commitments to further Fed stimulus.

Although this is done to avoid the appearance of conflict, it is one of the main upward market influences.

Another major upward influence comes from those individuals and organizations that create profits on both upward and downward market movements.  Just as selling/exiting of upwardly biased securities creates a downward influence on market price levels, likewise, selling/exiting of downwardly biased securities (mostly derivatives) creates an upward influence on market prices levels; many of these securities are ‘sold’ first, and ‘bought back’ later!!!  This is the primary reason behind many 2%-3% up days in this bearish or negative environment.  A ‘good news’ event on the Chinese or European economy from the overnight news will find many institutions CLOSING NEGATIVELY BIASED POSITIONS in overnight trades, or, just after the market open to limit exposure or protect profits.  This can ‘snowball’ as other traders close their still open positions throughout the day or, into the next day(s).  Unfortunately, the news will report some ‘bargain hunting’, or, erroneously connect some unrelated event as the source of the ‘buying’, when there is actually no connection at all.  Don’t be lulled into thinking that every ‘up’ day is due to good news, or that it reflects buying.  It simply indicates very high levels of pessimism by people not wanting to carry positions into an approaching holiday (taking money off the table), or, prior to some uncertain event that increases risk to the position.

Current markets are dominated by these traders. They are not investors.

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