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A Bull Trap Building?

|Includes: DIA, SPDR S&P 500 Trust ETF (SPY)

That’s the serious question a year after a bear trap was sprung, in-line with our call for the ‘fix to be in’ late in February 2009, looking for rebounds, as even occurred (rather strongly too) during the Great Depression of the 1930’s. (Refer to earlier 2007-2008 articles such as 'Is Bernanke our Napoleon' for foresight on this 'epic debacle', as we labeled it back in May of 2007.)

In essence, armed with historical and hysterical knowledge, we had a Fed stepping on the gas as never before, on top of panic-driven stimulus. It should be noted that the Fed today is doing something quite different, which is why despite equity prices briefly projected to 'grind' higher two weeks ago, the Fed started ‘draining reserves’; a more significant consideration than remarks likely at the upcoming FOMC meeting.

That the stock market ‘grinds’ to higher levels is not a surprise as we approach the Triple Witching Expiration. However we do not want to press upside expectations strenuously; for a couple reasons. One; everyone will be watching closely to see hints of a firmer monetary or 'exit' policy from the Fed, and I suspect they’ll get them.

As to equities, which aren’t so cheap as the Street would have us believe based on ‘real earnings’, on the first drop down the cheerleaders will encourage public buying; noting the shallowness of dips that predated this scenario. That may initially work; but beware beyond. Recognize this market is increasingly due for corrective action; realize that it remains a seasonally strong time of year; while it seems reasonable to say, don’t insist that they play this out to the absolute max (April/May).

Every day we’ve reiterated (on our website) that the S&P indeed WOULD surmount the 1150 area; then have two types of alternatives on a short-term basis. Clearly, due to institutional domination of this market, while it may not be a conspiracy or manipulation, it was able to ‘control’ patterns to ‘grind’ prices higher, in absence of ‘emotionally natured’ traders who aren’t so disciplined to play by ‘house rules’.

Given that a real host of folks using common sense have discarded the buy-and-hold forever approach, due to their experience of being killed twice in the last decade (unless they listened to our warnings both in early 2000 and again forewarning an ‘epic debacle’ was coming starting in early-mid 2007), it made sense to have a market move higher without the public willing to come-in on the buy side. For sure in hindsight we wish we were more aggressive than just calling the high in 2007 and low just over a year ago. Logically this move is now over-owned and overextended.

The number of offerings and deals is supposed to instill confidence. Actually concern is more of note; given details like unemployment worsening in 30 states; and as firms never raising money (KKR as an example) are in the process of doing so. Let’s see, who is smarter after such an advance; the buyers or the sellers?

We could delve into technicals like standard deviation bands converging, or similarities of RSI to what was seen at crucial points; plus others, but that’s not necessary. We could observe the VIX (volatility) as it drives to modern-era lows (often preparatory to reversal action), though here it is unlikely to be the classic pop-and-flop pattern because of the institutional ownership structural behavior.

Generally the financial press is minimizing the stark realities of our time with a single exception, in that (we’ll give credit where due) CNBC finally recognized a developing ‘budgetary crisis’ in one of our major cities; Miami. We warned about Miami more than once in the last several weeks, and without prior knowledge of investigations by the SEC about corruption and mismanagement of municipal securities there (we’d also warned that certain risks were being built in the muni market, though calmed it a bit by noting how much money could be made by those who bought in Orange Co., California, after that debacle). To wit; we’d be careful (to be revisited in the future).

Ironically; though we didn’t require the market to stop just on a dime at ‘double top city’, we will go back ‘on alert’ for a trading-based reversal. We have been suspicious for some time; but allowed for the rally to surmount the 1150 area, especially in the days before Triple Witching. Well, we got that. Now we’ll be more circumspect and commence looking for a complex broadening top of sorts.   

There are sectors we have liked through this, and commodity-related and oil-related areas, as well as some techs, were at the forefront of that preference. From the start of the old move a year ago we liked even the financials and one auto (Ford); but not now. Meaning, holding some is not the same as entering the buy side into strength. I think this is mostly a waiting game and more of an intense battle set to expand.

What has more closely occurred in the last decade or more, were political decisions of a type compelling companies to shift most of their operations overseas. I saw it as a degrading process that in the long-run would be Nationally destructive, as outlined since my consecutive speeches on this, to the American Footwear Assoc. in Boca & Palm Springs 25 years ago; most firms were patriots but had no choice just to stay in business in a Nation where Government was orchestrating destruction of their very survival if they tried to make it in the USA…all that was part of the ‘mutually assured economic destruction’ you never hear about, probably intended to prevent a new world war with unintended consequences that leveled the playing field alright; by decimating middle class America, which is what we warned of… and may require a generation or more to rebuild.

Wealth and innovation build upon themselves; and it must be implemented by leaders we have now if we’re to see it by 2020-2030; the years in which we are preliminarily targeting a new prosperity for the United States as outlined here since 2007 (clearly at the time we forecast that three years ago, and five years ago for real estate, we’d made clear that our call for an ‘epic debacle’ would find an equity low much sooner). The ascension of a corporate or Federal culture over that of our great middle-class culture, is part of what’s wrong. It needs to be rethought. It is essential to regain social balance.  

Domestically what is really dangerous is the oblique risk of another financial shock. In this case not necessarily a hyperinflation the gold bugs drone on about, but simply all the unresolved issues. Whether sovereign or state debt; whether commercial real estate; a double dip against odds proclaimed by those who are convinced we have a rousing recovery, which we don’t yet embrace; or something separate; increasingly overbought markets are pumped-up, not only by controlled rebounds, but by having used virtually all available or conceivable borrowing sources. 

The idea of the U.S. almost being blackmailed by the sources that ‘bailed us out’, is not something to lightly dismiss. Now sure, the U.S. is in the catbird seat because we owe so much and our Dollar (for which we rightly called last years decline, base, and ensuing rally) is and will remain the ‘reserve currency’. Of course many blame us (without intelligent countering by our leaders), and not a serious word about industrial espionage. It is not that we aren’t impressed by what China has accomplished; but let’s get real here.

I have called this a controlled Depression since forecasting the break to occur three years ago; particularly on the ‘never reported’ waivers that allowed commingling of fund transfers across ‘firewalls’ set-up at the major integrated banks. And I denoted it occurred because firms 'net capital' was tied-up in securitized derivatives without an AAA rating (this was readily visible in 2007). We said that after the break, the Fed and Treasury would facilitate systemic stabilization of banks, but not much more.

So I regret to inform you that we were and continue correct. It dovetails in that businesses and even municipalities who concurred 'circled their wagons', harbored their cash, and properly rode-out the storm. But committing here is ludicrous.

Conclusion: stabilization efforts notwithstanding; overall recession and deleveraging conditions will prevail through this year, and into next year as well. Intervening rallies in markets occur, but future ones will be of limited sustainability. If developments unfold that could truly change prospects; we’ll evaluate them over time.         

Three years ago I commenced projecting an 'accident waiting to happen'; affirmed historically after long-duration periods of free money (Gilded Age mentality). Now a market struggles with extended rebounds as this economy tries to restructure.

Though enormous efforts have avoided systemic disaster on the banking front; there is no equivalent rescue of the overall economy besides perception; nor restoration of engines for sustainable growth. People are adjusting to lower expectations; which will never be a favored approach to American life. Actually I don’t see it permanently alternating the future; but we still have major adjustments to work-through. That’s the reason we warn about chasing rallies; not to mention ‘commercial’ adjustments as are ongoing. And as I’ve said; there are fairly visible new storm clouds gathering.

Gene Inger,

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Disclosure: no positions