OUT ON A LIMB The Great But Not So Great Dis-Connect

October 29th, 2013 by Leonard

Out On a Limb



The spread charts below depict the many degrees of separation between the Economy  and the investment class. The NASDAQ tech stocks are leading the S&P higher by price. That part is normal. What is abnormal is that they are also leading the S&P stock by value.


At $50 a point for the E-Mini S&P and $20 a point for the E-Mini NASDAQ it is clear that a 10 point move in the NQ is equal to $200 whereas only a 4 point move in the S&P also equals $200. Over time in normal economies the S&P moves 7 points on average for every 10 Points of NQ. The S&P is a much bigger index than the NASDAQ 200 and it is also very broad based representing the top 500 Blue Chip stocks, in other words the meat and potatoes of the economy.


The NASDAQ has often been called the pump and dump arena where the hot stocks that represent widgets and gizmos of technological wonder tend to find hyperbolic trends pushed by the announcement of a new creation or upgrade to an existing electronic device. Social media has been included in this arena as well.


That’s all well and good but in order for the economy to do better it has to integrate these advanced tools into the workplace to create jobs.


We’ve seen these kinds of separations before in the late 1990s when “investors” blew up the tech market only to drop it more than 80% in value while the S&P dropped much less. This was a correction to an untenable condition where the NASDAQ moved way too far ahead of the S&P and that means way too far ahead of the economy.


We are in a different situation now with an economy trying to rebound from a major deflationary move to the downside (2008) driven by systemic fraud, loosely policed regulations and greed.


But once again investors have piled in on NASDAQ leaving the S&P trailing behind as the economy is burdened by a global recession, the restructuring of several Major Industries, a lack of fiscal stimulus and political heel dragging as regressives are forced to come into the 21st century kicking and screaming. It’s called change. And for some change creates fear and their fear causes anger and their anger leads them down irrational paths.



In the first chart below we see a close up of the ES/NQ value spread that I call the economy. You can see that since the end of July 2013 that the spread has been trending down while the markets have been trending up.


For the sake of the exercise I am calling the spread the representation of the value of the economy. A legitimate bull market would have the S&P leading the way in value and the economy would be trading at a much higher reading.  The S&P is currently very discounted to the NQ


Notice that the economy has recently broken out of a coiled triangle to the upside. and moved above the 50 day Moving Average. It needs to stay above that 50 bar MA in order to maintain any value gains.

Click on chart to enlarge and then click again for clarity

ES-NQ Daily close up 10-29-13


Let’s go to the next chart that broadens out the picture


Click on chart to enlarge and then click again for clarity

ES-NQ Daily Mid View 10-29-13

Here we have the charts going back to the early summer months of 2011 when the combination of the Greek Debt Crises combined with the Tea Party threat of default on the US Debt Ceiling knocked the tar out of the economy. It took about 14 months for the economy to recover.


And then the economy zoomed into 2013 until once again the obstructionists Tea Partiers embraced sequestration, shut down the government and attempted to default on US debt over the following months. The economy took a hit as seen on the chart.


Interest rates had gone up earlier in the year as the economy improved but Bernanke and the Fed quashed any notions of tapering their buying programs as a direct affront to the Tea Party threatening default again. The message was clear ……… Big money billionaires supporting irrational ideological agendas do not have an infinite amount of money to print and spend. The FED will do what it needs to do to protect the economy.



So the Fed continues buying assets to support the markets waiting patiently for fiscal stimulus with or with out Tea Party members of Congress. The Fed took tapering off the table about a  week before the debt ceiling crises deadline. The Tea Party took a political hit and moderates in the GOP are beginning to turn against that program as public sentiment goes negative on it.


Traders do not like nasty political headline markets.

Click on chart to enlarge

The Sun and the Wind Aesops Fable


This last chart shows the spread in it’s long term picture. It is in this chart that we see just how flat the economy has been over the last 4 years.

Click on chart to enlarge and then click again for clarity

ES-NQ Daily Long Term View 10-29-13

With the markets making new highs we should see this spread up near 380.


It seems that when the wet blanket of obstructionism is peeled back, the markets and the economy do better. It is a trend the public is beginning to notice. The economy must catch up to the markets or the markets must come down to meet the economy. Perhaps a little of both will occur.


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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. Copyright 1995-2013
www.trainingfortraders.comClick on chart to enlarge and then click again for clarity

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