The reason I had initially stopped writing on SA was that by and large, in normal times, I did not have much to add to be of interest to an audience of some size. At the end of June, things were getting iffy, and I thought I would throw my hat back in the ring. Clearly, the markets were behaving erratically, down big from the May highs, but stocks were being clobbered way beyond the indices. So, my first article called for 1190 as a short term target in a potentially grander scheme of things:
Technically: I don’t see 1250 as a meaningful support. The first Fibonacci retracement at 25% from the July 2010 lows is at 1277; the next one at 38.2% is at 1231. The most likely, should this turn bad, is the 50% retracement at 1190. This also happens to be the 25% retracement from the major March 2009 low.
You did not need to be a rocket surgeon to figure it out. Since then, I wrote a number of articles about S&P 1190. I would not be writing this one if, after one of the most volatile weeks in the past few months, and one of the most volatile days in the past few weeks, we did not close Tuesday at 1192, and yesterday at 1194...
Indeed, the zone 1190-1196 has been tested several times since August 12, which seems to confirm that it is a meaningful pivot point. The question now becomes, which way do we break?
On the upside, there are two main arguments. One, the earnings yield (EY) debate. This has been well documented, including by yours truly. I do think EY will come down because of the E but, at 7% versus the 10-year Treasury bond at 2%, E can come down and stocks can remain cheap.
Barring a Black Swan economy, I do not think we’ll see EY collapse like it did in early 2009. See the right hand side of the chart below (click to enlarge images):
Two, liquidity. Not only do banks hold some $1.7 trillion in excess reserves at the Fed, but the Fed is increasing the monetary base even after the end of QE2:
As usual, this picture goes hand in hand with its twin, the money multiplier:
Here is the frustrating part: The Fed pours, the banks drink, and the people are still thirsty. In Europe it is called sterilization; in the US it is called the death of monetarism. At some point we’ll have to decide whether or not it was prematurely announced.
On the downside, sterilization, economic uncertainty and irresponsible politics murk the headlines. Unfortunately, I cannot quantify this last variable. There is no scale. In the US, S&P downgrades the US, Fitch does not and Moody’s in the middle. Europe is even worse. If you think a president who has a 39% approval rating is bad enough, check Sarkozy’s in the 20s with right wing extremist Marine Le Pen breathing down his neck. Maybe S&P did not pick this up when it was looking at the “political landscape”. I want to shun the idea but, coming from there, I cannot escape this thought: To save their shaky leadership, France, Germany and Italy could well choose to regress to the mean – as opposed to the nice.
Remember, if we are revisiting history here, it was not that long ago that they all went the fascist route. And it was not until the late 60s that Portugal was under Salazar’s rule; and it was not until the mid-70s that Franco ruled Spain; same for the regime of the colonels in Greece… When you take the Panem away, you are left with the Circenses. That’s called fiscal restraint in tough economic times. Ask Marie Antoinette and the guys burning Porsches in Germany.
A little history never hurts. Hopefully, given what is at stake, and with the Bildebergers watching, it won’t repeat itself. After all, there are not many expansion wars left to wage. I know one thing though: Europeans stayed there and we came here. There is a reason it is called the "old continent", or should I say the "old incontinent"? Regardless of the outcome, we took a different path and we are, in a way, in much better shape. Not only economically, but also...how can I say... people wise. After all, Panem is written in our Constitution – it’s called the 14th Amendment. Pundits, don’t liken Dr. Ben to Nero. We do work for our Panem.
Back to the markets: Yesterday, on August 17, at 10:00 EST, the S&P had broken what seemed to many the 1200 resistance. I personally had 1210 in mind, and we hit 1208. This was also when the eurodollar September futures hit its intraday high of 1.4511. It then retraced down to its intraday low of 1.4415 at 11:45. By then, the S&P was down to 1197, a perfect correlation. The euro bounced and stabilized.
Not the S&P. At 13:30, it hit the intraday low of 1184, while the euro was bouncing back at 1.443. The S&P then recovered to its “magical” consolidation range of 1190 or so, in sync with the euro. I was about to call it a day. What happened next perplexed me. At 15:30, the euro futures were at 1.4450, the S&P was at 1192. When the stock market closed, the euro futures were at 1.4430, the S&P at 1194.
Wait, the S&P went up while the euro went down?
I know, this play minute-per-minute may seem futile to many and indeed, it is a nuisance to me - we are talking decimals. I am usually golfing at this time but here is why I care. This could be a pause in a bear market of greater importance. Buying on the cheap may be a mistake, as the cheap gets cheaper.
This also could be a great buying opportunity. Greed is what keeps me going. Something is going to happen, and here is what I know: S&P 1190 is THE pivot point. I estimate the break points at 1215 on the upside, 1175 on the downside. My odds are 2/3rds to the upside.
Now, getting the trend is one thing, getting stocks is another. I won’t expand here, except to say domestic, and leveraged but manageable balance sheets. Please, no international exposure. These are where the doubles come from, barring Armageddon. Of course, high yield bonds and high dividends stocks also make sense. But let me put it to you simply. If stocks are going to crater, even the “safe haven” will. If stocks are going to rebound, go for the baggers. So, are you in the 1270 camp, or in the 1120?
If I were really smart, I would tell you which. Or maybe I would not, actually. I am still waging 1270, mostly because I am infatuated with my magic 1190. All my fingers and toes are crossed, this is where the Black magic of technicals come in. It's called "the invisible hand".