Let’s Play Hide and Go Keep……The Great Big Shrinking Ball of Global Equity Looking For Safe Houses
May 23rd, 2010 by Leonard
Let’s Play Hide and Go Keep…..The Great Big Shrinking Ball of Global Equity Looking for Safe Houses.
The EU Takes on Speculators in a Smack Down
Chancellor Angela Merkel of Germany (a pro-deregulationist) openly declared war on short selling speculators who have been nicknamed “the Wolfpack”.
This theme has been picked up by various other prominent officials within the European Union as disingenuous flag waving, in defense of the Euro currency, ripples through the upper echelon of wealth, while not impressing the working classes.
Turning night into day one wonders who the real wolves are. Selling short the markets is no more unpatriotic than the systemic fraud that bubbled the markets up in the first place. It really hasn’t much to do with patriotism at all. It’s more personal than that. It’s a class war and the corrupted institutions and individuals of the world whether public or private are trying to salvage as much of the fraudulent monies garnered from the bubbles as possible.
Unfortunately ethical institutions and individuals suffer as well.
The Shifting of Funds…. Nasdaq and the 30 Year Bonds
So we see this constant shifting of funds. The Nasdaq is frequently used as a safe house when the markets are rallying. Technology is safer than financials. When the markets turn down, the Nasdaq is hit hard by the pump and dumpsters and the money finds a safe house in US Bonds.
But that’s a scary place to keep money too. If there is anything we have a lot of it is a burdensome amount of debt. There is a never ending supply of debt to be issued in the form of Bonds and T-notes. We have been watching the development of a giant Head and Shoulders top. The pattern needs to be completed by late June or early July at the latest. Bonds would need to be nearer to 112-00 rather than at 124-00 where they are now.
The push of equity into buying the bond market now is temporary as a safe house, but it is threatening to invalidate the potentially bearish pattern. We will continue to monitor the pattern for completion. It will be easy to see how it develops. Only a global debt collapse or a magical economic boon over the next 2 months might cause a sharp decline in prices.
What About the Nasdaq as Related to the S&P?
Generally speaking, the Nasdaq as an index has outpaced the S&P throughout the entire rally from March of 2009. While it is true that technology can lead the way in price regarding the overall index, it is also true that the S&P needs to lead the market in terms of value and that has not happened. There is no broad based market rally in place because the financials are still gutted, and burdened with debt, with non performing bank loans, foreclosures, and new financial regulations trimming away the easy money the banks were raking in with fees.
We have seen the destruction in the markets in year 2000-2001 when the Nasdaq rally got too far out of line with the broad based core of the S&P 500 blue chips.
The chart below illustrates a weekly value spread from 2007 through current times. It represents the value between one contract of E-mini S&P vs one contract of E-mini Nasdaq.
Notice that in Oct of 2007, the Nasdaq stock continued rallying to new highs (top pane) while the S&P stock basically quit (middle pane). That was the end of the road for the bulls. In 2008 we saw valiant attempts by the Nasdaq to lead the way back up, but in each case, the S&P began making newer lows. That crashed the market.
You cannot have a major sustainable rally in the broad based market without value leadership in the blue chips. It is the center of the market. The Nasdaq just becomes a pump and dump playground for fast money traders.
Again in 2010 we see a very flat value spread (in the bottom pane), while the players pumped the Nasdaq up leaving the S&P in the dust. That resulted in a flash crash, much of it being in the Nasdaq.
Pandora’s Boxes are Active
In my April 22 Blog THE MARKET AND PANDORA’S BOXES I drew the chart below, continuing to project lower prices in the S&P.
This is the chart from Apr 22, 2010
The market has fallen about 10% into the weekly 50 bar moving average. I am still projecting a 25% decline into the low 900s however that doesn’t have to be in a straight line down move.
Is a Bounce Coming or are Technicians Only Dreaming?
This last Friday, the hourly chart formed what looks like a H&S bottom pattern as an Island. In other words on Thursday May 20 the market gapped down on the opening and over the 2 days traders created this potentially bullish pattern. By itself it is a technical pattern. It can gather legs if we hear some bullish fundamental news before Monday’s opening bell. One piece of news that could kick start a rally would be any currency intervention by the G20 and the ECB to bolster the Euro.
If we get nothing like that, and the pattern fails, then those who have vested in it will liquidate quickly, and the great big shrinking ball of equity will be chased out of the markets to find a new home as more of Pandora’s Boxes continue to roil the markets.
The Monthly 50 Bar Moving Average
The Monthly 50 bar MA has been a stop reverse pivot point for the ES consistently over 35 years. The reversals have not all been serious in terms of reversals but the market does seem to acknowledge the existence of this long term monthly moving average.
On the chart below you will see that reversal and you will see typical Fibonacci retracements points marking levels of support should the market make its way downwards over time. Again a decline is not necessarily a straight down move from where the market is postured right now.
Deflationists Still Rule
Deflation is pervasive. It is pointless to entertain a CPI, or worse, a core CPI as a measure of inflation. That’s jobblewocky talk from the Fed. Prices of just about everything will continue to fall or base at lower levels including commodities, stocks and real estate. Budgets will continue to get trimmed along with job losses.
That downward spiral will come to an end when the positive forces of re-construction, re-regulation, and reversion to the mean meet intrinsic value. Intrinsic value in this case would be the value of anything minus debt, minus leverage and minus the write offs that are still being kept out of sight, but not out of mind.
In the meantime, Hide and go Keep is the only defensive game in town. Under the mattress anyone? Watch out for “the Wolfpacks and Bond Vigilantes”
UPCOMING TRAINING
A new 8 week Training for Traders Summer class will begin in early June.
For information regarding this class please inquire at info@trainingfortraders.com
or leave a voicemail at 760 841 1522
Calls will be returned promptly
Leonard Novy
This information is for educational purposes only. Trading with this information is done at your own risk. All concepts and writings including the Novy Training/Trading Method NTM© are proprietary and the sole ownership of Leonard A. Novy and may not be reproduced for profits without expressed written permission. Copyright1995-2010
www.trainingfortraders.com