Monday Market Movement - Head Fake Pattern Takes Hold

 |  Includes: DIA, SPY
by: Philip Davis

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And our Futures are up half a point.

Japan was up half a point too - before diving 2.5% after the close. We are now entering what I call the fakiest stage of the rally - the part where the banksters haven't gotten all of their money out yet but they are racing each other for the exits while telling retail investors and even their own clients to "BUYBUYBUY" whatever crap they are dumping while telling you to "SELLSELLSELL" whatever they want to buy.

"THEY" will manipulate the futures, "THEY" will manipulate commodities, "THEY" will manipulate the media (although it's not really manipulation when you own it, I think they just call that "setting editorial policy" in a Corporate Kleptocracy). "THEY" are the Fed (among others) so it's only natural that we'll hear from 5 different Fed Governors this week starting with Super Dove John Williams, who already spoke in Stockholm this morning (7:20) and said he's worried about DEflation - indicating the Fed may not be loose enough for his liking.

He noted that underlying inflation was at 1 percent, below the Fed's target of 2 percent. Indicating it was one of the factors the Fed should watch when deciding on policy, he said:

"If we see continued low inflation and, more worrisome, a fall in long-term inflation expectations, well below 2 percent, then those would be factors that argue for, all else equal, greater total purchases for our program than otherwise."

LOOK OUT, HE'S GOT A GUN! That's what you should be thinking when you hear something like this. Or maybe FIRE!!! would be more appropriate as every month the Fed prints $85Bn, they devalue the money you have spent your lifetime accumulating by 0.75% (because there's about $12Tn in circulation, up from $7Tn just 5 years ago).

People bitch and moan about taxes while the largest confiscation of wealth in the history of the Universe continues unabated. As I have noted before, the top 1%, even most of the top 10% don't care, because we are the Investor Class and we can play the inflation game. When we were still bullish, way back in April, we had our "5 Trade Ideas that can Make 500% in an Up Market" (and they did), as well as our "5 Inflation Fighters Set to Fly" (and part two) so, from our own greedy top 10% perspective - we say "bring it on Mr. Williams" but, from the point of view of people who care about our fellow Americans, we say "Holy crap, are you freakin' kidding?"

We got Fed up with the bullish nonsense a while ago and last week I urged our Members to consider moving to more cash and we added a few downside hedges in the nick of time on Thursday and this weekend I published "Hedging For Disaster - 3 More Option Plays that Make 300% if the Market Falls" and, if this pre-market nonsense holds, we should get some nice entries on these new trade ideas.

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Tomorrow is a Fedapalooza day led off by Raskin (NASDAQ:HAWK) at 12:30 but followed right up with George (Dove) at 1:30 and then they are burying Fisher (Super Hawk) at 8pm. We'll see the April Beige Book at 2pm on Wednesday and then the ball is handed back to the Doves with Raskin giving it a spin Thursday morning at 8:30 and, finally, Super Hawk Plosser gets a swing on Thursday at noon.

We already got PMI reports from all over the World this morning with the U.S. following at 9am along with ISM at 10. Tomorrow is Europe's PPI and then we get global Services PMI but, also on Wednesday, we get Europe's GDP at 5am along with U.S. Productivity and Factory Orders at 8:30.

The PMIs were not terrible but still in contraction this morning so the "rally" is very, very silly. No reason to think Service PMIs will be worse so the key is the BBook along with Employment numbers Thursday and the Big Kahuna Non-Farm Payroll Report on Friday but, ahead of that, we have Rate Decisions from the BOE and the ECB at 7 and 7:45 on Thursday, followed by Draghi speak. Now, remember Draghi promised us sunshine, lollipops, rainbows and candy drops last month and, so far he has yet to deliver. Watch the markets tumble if he doesn't start printing Thursday morning.

Keep in mind that Japan is printing money at 3x the rate of the Fed for just two months and ALREADY, the strategy has blown up in their faces as the Yen has gone right back to 100 per Dollar this morning (down from 104 at the high) and that 4% bump in the Yen has caused a 12.5% drop in the Nikkei.

Our dollar, meanwhile, has come back 2.5% but, so far, not as dramatic effect on the markets, although commodities have really taken it on the chin as the dollar has risen, with gold falling from $1,600 to $1,400 (12.5%) and oil falling from $97.50 to $92.50 (5%) but that's after bottoming at $86 (down 12%) in April.

We're back to Fiscal Cliff mode, as it's time, once again, for our beloved leaders to get together and compromise on the budget or, once again, the government shuts down and millions lose jobs and asteroids hit the earth, etc., etc.

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Chris Van Hollen, the top democrat on the House Budget Committee, said that reaching a grand bargain would be, in poker terms, as difficult as "drawing to an inside straight. The best opportunity is between now and October," he said, and "even the chance of that is diminishing as the days go by." In their public statements, Obama administration officials say a grand bargain is still a possibility. "The president remains committed to working to see if there's a caucus of common sense willing to reach a bipartisan compromise," said Amy Brundage, a White House spokeswoman.

But in private, they are far more pessimistic. One White House official said there has been "openness from serious-minded Republican senators" toward a "bigger budget deal." Yet, he said, "there doesn't seem to be the real political will to do it."

Things can turn ugly very fast - especially as summer riot season is upon us in Europe, Asia and the Middle East. And, by the way, you SHOULD be concerned because you lost $1,000 in your hedge fund last month. What hedge fund, you ask? The hedge fund we're all forced to participate in - the Federal Reserve's Fixed Income Portfolio, which lost a record $115Bn in May, which is 3.5% of its net value on a very tiny move up in rates and DOUBLE the fund's total capital (don't worry, though, they'll print more - on your behalf). This is where you finally run into limits of what QE can accomplish, when the Fed is no longer able to keep a cap on rates in an inflationary environment and all the 2% 10-year paper they're sitting on loses 10% of its value every time rates move up 1% or the Dollar moves down 10% - caught between a rock and a soft currency place!

Let's be very careful out there!

Disclosure: I am short DIA, IWM, TSLA, NFLX, GOOG, IBM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Positions as indicated but subject to change (fairly bearish mix of long and short positions - see previous posts for other trade ideas). Positions mentioned here have been previously discussed at a paid membership site that teaches stock, options and futures trading, portfolio management skills and advanced income-producing strategies for investors.