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Gary Tanashian
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Gary Tanashian is proprietor of NFTRH.com and Biiwii.com. Actionable, hype-free technical, macro economic and sentiment analysis is provided in the premium market report 'Notes From the Rabbit Hole' (http://nftrh.com/nftrh-premium/). Complimentary analysis and commentary is available at the... More
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  • Stock Market: When Bad Is Good & Good Is Bad

    Many people would consider a drop in the S&P 500 to the 1550-1600 area to be a bad thing. But if the bull is real, and if a secular bull market truly has been created out of manipulation of the T bond market (QE's bond buying and ZIRP's 0% rates) then a pullback to test that zone would be normal, would it not? It would feel bad but in reality a successful test of the big breakout would launch the grand new bull. SPX has to drop down to test support sooner or later, doesn't it?

    (click to enlarge)

    Well no, it doesn't because the other side of the coin in the post's title is 'When Good is Bad', meaning that an upside blow off in markets - if that is what is fomenting - would be very bad, as in 'Silver 2011′ bad, for the stock market with a successful test of support unlikely. That is because a manic blow off would be a terminal event.

    A bearish 2014 could theoretically be a clean out and precursor to a secular bull. In short, a near term bear case is what the market needs to put a scare into 'em; a scare the likes of which has not been experienced by today's brave bulls (these were the same people hiding under rocks in 2009 when it was time to get bullish) since the now-massive 5th wave of the cycle out of 2009 got going in 2011.

    Alternatively, a 'do not pass go, do not collect $200′ sort of direct upside acceleration here would send the stock market to a jail of its own making. That would take the form of a blow off and exhaustion, from which it would not come back any time soon.

    Once again we turn to our friends at SlopeCharts for some truthful data points that the one-way perma bulls now touting the great Bernanke recovery can't or won't acknowledge. We use the Dow instead of the usual S&P 500 chart due to its very long term history of data to show just how distorted the US financial markets have become.

    The chart below uses the headline stock index (Dow) that most Americans think of as 'the stock market' and the T Bill yield, that most Americans, outside of the nearly extinct class known as savers (we're not talking about bonds here folks; those are not savings) don't even know exists and if they do, don't give a damned about.

    The Dow feeds off of monetary policy by this, and so many other data sets I could show you. A bulls' answer might be 'yeh but look how low the T Bill yield was in the 1950′s smart ass', to which I'd answer 'as it should have been for the safest monetary vehicle of a net creditor nation that had much of its Treasury backed by gold'. Again, we are talking facts here, not fantasy. If you see me spewing something wrong headed, drop me a civil note about it and we'll discuss it.

    Can we please be truthful dear market participants? I am truthful with you in stating clearly that I find the mechanics behind the stock bull market to be repugnant if not downright immoral (with regard to the promotion of inflation and simultaneous punishment of savers AKA non-asset speculators). That is my bias and it will not change as the system is currently operating. At the same time, I fully understand that we as investors need to obey the market on a functional level. If the function is bullish, so be it. If it's bearish so be it.

    But again please dear Fed sycophants (AKA those financial advisers, asset managers and media directly benefiting from an always bullish stance), you be honest too. The stock market has risen in tandem with a great inflationary operation that has in one form or another been ongoing since Alan Greenspan began drinking and later guzzling at the wellspring left him by Paul Volcker roughly at the peak of the green line (3 month T Bill yield) on the chart above, at about 16%.

    You notice that the last two times the T Bill yield spiked the Dow soon did too; in the opposite direction prompting near-zero and zero Fed Funds policy by Greenspan and Bernanke, respectively, early last decade and in 2008.

    So please perma-bulls, spare us the crap about how Bernanke saved the financial system. This ridiculous statement has shown up in the media, in online forums and across the social networks with regularity, often in response to my articles critical of "The Hero".

    He saved it from what, Greenspan's policy mistakes? Well okay, Bernanke has done the same thing as Greenspan in manipulating credit and building distortions (again, behold the Dow's structure above and its utter dependence upon a ZIRP'ed T Bill rate, which has been scuttling along the floor for well over 5 years now). The chart does not lie, but many perma-bulls do; they lie to themselves if they see something sustainable here.

    So we bring it back around to the first part of the post's title, 'when bad is good'. Lately, it is looking more like an upside acceleration is coming into play for markets that have been hooked up to a non-stop ZIRP spigot for over a half a decade. If that happens, it will be terminal because manic blow offs always are. Further, there would be no corn left over at Policy Central to feed (support) the bloated pig.

    So prudent investors might hope that 'bad' comes about soon, and that it proves to be 'good' by holding the big picture breakout support. Most wouldn't hope for that, however. They'd get lost in the euphoria and in their own hubris just like they got lost in their own fear and agony in 2008.

    So to conclude and speaking for myself, I am going to play whatever this market is. But I did not write this post as an exercise. I am going to use its general thesis as a guide and work hard each and every week to fill in the details for NFTRH subscribers in the US market and indeed, a world full of assets and markets in motion right now. Bull or bear, bad or good, and… the other way around. ;-)

    Biiwii.com | Notes From the Rabbit Hole Premium | Free eLetter | Twitter

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: No positions mentioned, net long the market at this time.

    May 23 3:10 PM | Link | Comment!
  • Giving Bears Pause

    We have talked about what is negative for the US stock market. From the signal in the banks vs. S&P 500 to a young uptrend in long-term T bonds vs. the S&P 500. Here is the 2011-2014 market leading BKX-SPX in breakdown mode.

    (click to enlarge)

    Throw in a bearish divergence in the Equity Put/Call ratio, an elevated Gold-Silver ratio right at resistance and Junk bond vs. Treasury/Investment Grade and the signs of a bearish market are not only there, they have manifested in some pretty good downside in the growth and momentum areas.

    But aside from the Dow and Tranny already noted, there are other things that bears should pay attention to, starting as we often do with the Semiconductor index.

    The monthly chart shows the absolutely cut and dry situation in the SOX. It broke out to 10 year highs as it led the February market rebound and remains there today.

    (click to enlarge)

    The daily chart dials in the view. Sox will eventually either break up and out above the red line or it will fail the big picture breakout line (support) at 560.

    (click to enlarge)

    This is just an epic juncture in the SOX and potentially the market, since the Semi's were NFTRH's 'canary' to a coming and not so surprising bull phase back in early 2013. The SOX, as long as it remains above 560, is a concern to bears to go along with the Dow and Tranny. Here are some others…

    1. The media is so on the job with respect to a significant correction or bear market that if one materializes it surely will not have arrived with no one expecting it.
    2. The US economy, as I have been writing since the Semi's began chirping so long ago, is strong enough. Tune out the analysis that imagines otherwise until real deceleration begins. We have declining confidence in the Homies and a fluctuating consumer, but overall the thing has been stable to this point.
    3. The Federal Reserve, while talking out of all sides of its mouth, continues its immoral policy of holding its Fed Funds rate near ZERO in an apparent effort to abolish the very idea of saving as any sort of functional way to manage finances. Everybody into the risk pool!
    4. Have we had a market blow off yet? It has not looked that way to me. The bull can peter out and roll over or it can end in a burst of greed and speculation, compliments of a job well done by the Fed.
    5. Neither gold nor USD have begun to reclaim the risk 'OFF' bid yet. Further, Treasury bonds, the TIP-TLT ratio, gold and especially silver have not yet sniffed out an inflation problem, giving the Fed in essence a license to do whatever the hell it wants (in staving off deflation AKA a convenient Straw Man to justify policy?). What it appears to want is continued appreciation of the 'right' assets, notably the stock market, which Yellen herself admitted is helping fuel a 'wealth effect' for the populace.

    To summarize, we have been tending a bear case during a mostly bearish 2014 for most of the market right along with much of the mainstream media. That alone makes me uncomfortable if I am a bear. This is not about John Hussman's data points after all, it is about the Fed. One day Hussman will come front and center. Our data points have not all come in yet to state that today is that day.

    Until the Gold-Silver ratio breaks above resistance, until the SOX breaks down from support and until the Dow and SPX finally join the bearish activity, the prospect of a bullish continuation (hello Jeremy Grantham) does indeed remain open. Case in point, in the time it took to write this post MarketWatch put this up on page 1. Clicking the graphic will yield the article…

    mw.headline

    I just report 'em as I see 'em, and as of 6:51 US Eastern Time on May 20, the SOX is still in breakout territory and the market has not yet decided on the near term direction.

    Biiwii.com | Notes From the Rabbit Hole | Free eLetter | Twitter

    May 20 8:34 AM | Link | Comment!
  • 'Macro Pivot' Makes Progress

    Some bigger picture stuff, compliments of NFTRH 291′s opening segment:

    alice

    By now you know that NFTRH manages macro cycles and does not lather you up with every inflammatory event or short-term market move along the way. We talk about those things sure, but we do not get excited and certainly do not base ongoing analysis on these events because this report is not for day traders, it is for people trying to be in tune with bigger picture cycles.

    NFTRH's first day of operation was September 28, 2008. That was just before an epic crash across asset markets. So the first cycle we were tasked to manage was not a bearish one, but a bullish one since it was painfully obvious what the current backdrop was at the time. And manage a bull cycle we did, coming out of Q4 2008.

    From the 2008 bottom, the precious metals moved first and best. They were followed in early 2009 by commodities and eventually stock markets. This was all according to our inflationary/reflationary plan and in line with the pervasive over bearish sentiment of the time. But it takes time - months and years - for plans to become obviously in force.

    On the current cycle the precious metals have moved first and worst and along with commodities have led what is expected to end or at least rudely interrupt the bullish stuff in 2014. Perceptions for the US stock market are 180° from March of 2009 (even accounting for the perma-bear stuff in the mainstream media) and the foundation looks like it is cracking beneath the intact headliners Dow, S&P 500 and Transports indexes.

    I do not write this report in any mode other than to try to be right on these big macro swings. While I am obviously a big time bear with respect to modern policy making and its damaging effects over the cycles, I am a better bullish investor than bearish one and I swear to you that in regard to the Q4 2008 to Q1 2009 period, aside from NFTRH I cannot recall anyone else who was bullish outside of my departed friend Jonathan Auerbach, Robert Prechter, John Hussman (each of whom [ed: Prechter & Hussman] flipped temporarily from a previously [bearish] stance) and a well known fund manager (GMO's Jeremy Grantham I think it was). Of course there were others, but these are the people I can recall, who were bullish then.

    Back then I actually felt contempt or even hatred coming my way when stating a bullish case in certain venues, much as I do today when stating a bearish one.

    Speaking of Mr. Grantham, while Googling him to confirm the spelling of his name I came across a May 1 Barrons article he wrote [actually a copy, less charts and graphics, of Grantham's portion of GMO's most recent quarterly letter] . It would be worth your time to read it. He currently leans (50+% probability) toward a continuing bull market "for at least a year or two" and a potential target on the S&P 500 of 2250 (our seemingly ridiculous big picture upside measurement is and has been 2192).

    I find it interesting that he mentions John Hussman at length and treats him and his bearish data points with respect, unlike the lampooning Hussman gets from many seedy corners of the bull casino. We should all have ultimate respect for rational people with differing views; more so even than those who share our views.

    "But back to value and Hussman. Not surprisingly, GMO very much agrees with the spirit of this data, but our preferred measure for our 7-Year Forecast has the market slightly less overvalued at 65%. (Although, interestingly, at 2,250 - our 2-sigma target - it would be about 100% overpriced.) Our estimate allows for a very modest improvement in trend line profitability and an even more modest allowance for a slightly higher P/E as a response to probable lower equilibrium interest rates. Still our estimate of overpricing is pretty close to his.

    Hussman's work suggests that whenever this large collection of troublesome predictions line up like they have recently there has been a very serious and fairly immediate market decline. While I have no quarrel with the eventual outcome and recognize that possibly the bear market's time may have come, particularly in light of recent market declines (April 13, 2014), I still think it's less likely than my suggestion of a substantial and quite lengthy last hurrah."

    So Grantham, a respectable and sound value manager, leans against NFTRH's theme of a Macro Pivot to end the bull market in 2014. And do you know what? I am going to respect that more so than analysis like Hussman's (which became bearish again far too soon in my opinion) that agrees 2014 will bring on the bear.

    The expected disturbances in 2014 could indeed be an interruption as opposed to an ending. However, there are enough data points and cracks beneath the market's surface to keep the 'Macro Pivot' to a new cycle alive and well. In the event that 2014 is only an interruption, said interruption should be severe enough to have warranted a fully defensive posture for a period of months, anyway. We can always evaluate a revived bullish stance at a later time.

    Biiwii.com

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: No stocks were mentioned.

    May 19 10:00 AM | Link | Comment!
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