Technically Speaking For September 17

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Includes: QQQ, SPY
by: Hale Stewart

Summary

Post recession, consumers were too indebted to increase spending.

After the recession, the financial system was also too indebted to engage in any meaningful lending.

The markets were down, and there's modest bearishness in multiple time frames.

I've always liked Ben Bernanke. Why? I really don't have any idea. It wasn't anything he said, published, or didn't say or didn't publish. I just always thought he was a good guy who was really trying to do the right thing when he led the Fed. The reason I'm thinking about him is these two sentences from a Washinton Post story that explain Bernanke's theory about the "Great Recession" (There are those capitals again) ...

A paper delivered by Bernanke at the conference illustrates the dilemma. Following other economists, Bernanke identifies two main channels through which the financial crisis weakened the “real” economy of jobs and production: first, a buildup of household debt, used to finance homebuying and consumer goods and services; and second, widespread financial speculation by banks, investment banks, hedge funds and the like.

Maybe a picture really is worth a thousand words here:

Banks, insurance companies, and a host of other "financial intermediaries" sit in the middle of the modern economy, taking small amounts of money from consumers in the form of deposits, insurance premiums, and the like, bundling them, and then lending them in larger amount to firms in the form of loans. Financial intermediaries also purchase bonds and other financial instruments issued by businesses. When "financial intermediaries" stop working, the entire economy grounds to a halt. It takes a long time to recover from that. So, what happens on the consumer-side (which is 70% of US economic growth):

As real estate valuations crested in 2006, homeowners had to divert more of their income to repaying their mortgages and home-equity loans. Other consumer spending suffered. By itself, this might have triggered a recession, possibly a severe one.

Exactly right (said in Sam Elliot from Road House voice). This is what I noted a few days ago when I linked to Irving Fisher's Debt Deflation Theory of Great Depressions (there's that link again; maybe you should read it for yourself). This is a big reason why economic growth was so slow after the great recession.

But there was a second issue, also identified by Bernanke. Financial institutions have gotten away from basic banking (taking in deposits, lending them, and then spending an inordinate amount of time on the golf course) and gotten into "proprietary trading" which is a great phrase used to obfuscate what they were really doing: trading for themselves. Hence the "Volcker Rule:"

The rule was originally proposed by American economist and former United States Federal Reserve Chairman Paul Volcker to restrict United States banks from making certain kinds of speculative investments that do not benefit their customers.[2] Volcker argued that such speculative activity played a key role in the financial crisis of 2007–2008. The rule is often referred to as a ban on proprietary trading by commercial banks, whereby deposits are used to trade on the bank's own accounts, although a number of exceptions to this ban were included in the Dodd-Frank law

To describe it very politely, the banks were engaged in riskier and riskier behavior, which eventually led to the series of collapsing dominos at the center of the US economy in 2007-2008. Remember hearing that Bear Stearns was gone? And then Lehman? And then AIG was close to the brink? That was the end result. Fun times. The idea behind the Volcker Rule is simple: separate trading and lending businesses. That way when the trading desk screws-up, the banking section remains untouched, preventing a financial meltdown. Great idea, huh? It also explains why getting rid of the Volcker Rule is one of the stupidest ideas to come along since "We can win a land war in Asia."

While I usually have three bullet points at the beginning of Technically Speaking, I'm only going to have one today. Why? Because I'm also my own editor and I'm cool like that.

Let's take a look at today's table:

The markets were off today, with the QQQs taking the market lower. With the IWMs also down over 1%. All the equity markets were down.

When we last left the market, the central question was this: can they make a meaningful advance -- that is, one with strong bars on solid volume increases?

Although markets are in the middle of a rally, it's not the strongest we've seen. Candles are small; volume is weak; momentum is weak. However, all the EMAs are very positive.

But on the shorter charts, we're seeing some weakness. Let's start with today's chart:

The market moved lower throughout the day. It moved lower at the open, and then kept hitting the 200-minute EMA as resistance moving lower.

On the 2-week chart, prices have broken a trend that started in September 7.

The 30-day chart shows the movement in a bit more detail. What we really have is the beginning of a sideways consolidation pattern.

Right now, there is bearishness in multiple time frames. Don't be surprised to see modest moves lower.

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

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.