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NFTRH 1 Year Ago - Just a Rally

|Includes: DIA, QQQ, SPDR S&P 500 Trust ETF (SPY), USO, VXX
Okay, let's address the elephant in the room right off; I became bearish (on a risk vs. reward basis) much too soon on the current bear market rally in the broad stock market. But I will also note that in early March of 2009, there were just a few sturdy contrarians willing to be bullish. I distinctly remember calling bullish in copper and oil while being harangued by scholarly deflationists (right here on SeekingAlpha).

Anyway, what have you done for me lately overly caution blogger? Well, I like to think I have provided you with a sane viewpoint on an unhealthy sentiment structure and view of what this really is; a massive rally within a bear market if not in nominal stock prices, then in REAL stock prices as measured in a monetary anchor called gold.

Anyway, from NFTRH24 dated 3/15/09:

Just a Rally

Today’s stock market segment is so named so that we can get that distinction out of the way right off the bat. It is just a rally and the only real question is, what will be its nature? The media, led by the wonderful Jon Stewart, are perp walking Cramer and CNBC as the authorities perp mega crook Bernie Madoff. This is good as general public sentiment is one of anger and disgust. It can’t get any worse than this in the short term can it? It can, but there is a strong possibility that it won’t in the near term. If that is the case, the markets have a chance to continue upward, using all that ill will as fuel.

But as I say, it is likely just a rally for three main reasons. 1) In a bear market, the benefit of the doubt is not on the side of the stock market. There is a lot of work to do for a real bottom and the only thing that can undo the damage since last summer is time, and lots of it. 2) I have noted absolutely no change in the standard financial advisor party line; the old joke that goes ‘you haven’t lost your money until you sell… the market always comes back’ is still prevalent. Until there is genuine doubt about this and until people repudiate the conventional financial advice herd, the bear is in force. That is because this is no normal bear, now is it? Something has ended and something new is beginning after all, in a macro sense. 3) Policy. Lots of really bad policy is being panicked into the system in the form of new debt linked to markers created out of thin air, and I would argue that even if one accepts that inflation policy is the only viable option (I believe it may be in the age of ever expanding, already exponential moral hazard), a lot of the areas on the receiving end of the new money do not look like the most productive ends for such policy. Either the deflation will continue swallowing this new debt or policy will achieve its goals and a new round of intense inflation – inflation that would erode real stock market performance over time just as it did in the most recent inflation episode (stocks have of course have been crashing in ‘real’ terms when viewed through the Dow-Gold ratio since secular changes burst onto the scene in 2000).

So, all that said on to the status of the current rally.

[SPX 60 min. chart omitted]

As noted on the chart, I believe that stock market success will go hand in hand with policy makers’ ability (or lack thereof) to devalue the dollar on a world stage where most of the actors have the same idea. It is no coincidence that the USD’s decline below important support is mirroring the stock market’s impressive rise of the last few days. The 60 minute chart shows the SPX bullishly diverged as the dollar was topping, and has risen strongly above the formerly resistive EMA 60. The distance above this moving average and the toppy MACD argue that the market can consolidate at any moment. A decline to and hold of the EMA 60 would be a healthy starting point to thoughts of another leg higher. This is a 60 minute chart remember, this could happen quickly.

The next chart is the SPX daily. Here we see more significant resistance residing just above 800 in the area of the SMA 50. The daily is not over bought so I would not expect any short term pullback to be overly vicious. Unless of course this is not even a legitimate short to intermediate term rally, in which case we prepare for the next leg down. Odds favor continued rally however, because odds favor a dollar correction and commodity rally. In short, odds favor a rise of the ‘hope’ trade or ‘infrastructure’ trade or ‘make-work’ trade… whatever you want to call it.

[SPX daily chart omitted]

The VIX speaks for itself. The breakout from the wedge and the short term uptrend line have aborted. A breakdown of the VIX would be near term bullish. Note the support.

[VIX chart omitted]

Following is a chart of the BKX-SPX ratio. Given that the banks and financials – first abusers of the American trust – have led the entire mess downward since October, and given that the most higher powered welfare dollars have been pumped into their coffers, the banks would do well to break the downtrend in terms of the broad market.

The ratio has been in an agonizing and volatile down-sloped trading range for most of 2009, but MACD shows bullish divergence every step of the way. This will need to resolve into some form of market leadership for the broad rally to be taken seriously.

[BKX-SPX chart omitted]