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Stock Market Strategy: Double, Double Toil and Trouble…

Precious Metals Outlook: Expect weakness as Futures expire and the process of rolling into the next month applies pressure to the price. This behavior occurs at the end of almost every month, so get used to it and don’t allow the action to distract from reality. Note, August is a small month from an open interest standpoint so typical month end weakness may be muted.

Stock Market Strategy: Fear builds as talk of a Head and Shoulder top makes the rounds once again. Adding to the market’s queasy nature is the sudden departure, announced last week, of two key fund managers. “Stanley Druckenmiller Closes Duquesne Capital, Ends 30 Year Career” and “Paolo Pellegrini Follows Druckenmiller Into The Sunset: Paulson Protege To Return All Capital To Investors”. When two high profile and successful professionals call it quits the herd gets restless. In both cases the managers sight market manipulation as cause for frustration and subsequent exit.

I certainly concur with the charge of manipulation and frustration. In fact, the trading behavior this week should offer perfect illumination of the cross currents causing consternation.

The market has been under pressure since reaching the recent peak on August 9th. Of course, after a couple of weeks of selling a cacophony of Bearish sentiment rains down .  And rain it should, as I will concede the myriad of negative economic data coupled with the growing low pressure system building out over the sea of technical data certainly suggests a major storm is brewing. Traditionally, when the sky looks this ominous running for cover would be wise. In fact, those like Druckenmiller and Pellegrini would no doubt set up short sales and wait for the typical Sept.-Oct. market swoon. However….

…Enter Lady Macbeth stage left. Ben Bernanke and his cohorts are determined to disrupt normal market behavior and will engage in liquidity adding procedures during three of the last five trading days of the month. Nic Lenior describes this statistically significant behavior in his piece, “Advice What To Do On POMO Days”.  Question: Is it any surprise all this manipulation, oops I mean, liquidity creation, will occur in front of and during the Fed’s Jackson Hole retreat?

‘Quantitative Easing’: What Does It Really Mean for Investors?

Investors queasy over whether there’s anything that can be done to boost the flagging US economy could get a trillion-dollar answer this week from the Federal Reserve. When officials from the central bank emerge from this week’s Jackson Hole, Wyo., retreat, they will likely disclose the latest in the arsenal of so-called “quantitative easing” measures….

Read More…

So, to wrap up, we have the witches dancing around in Jackson Hole this week doing their very best to disrupt fate. However, whether the caulderon bubbles or not, I suspect history will show that manipulation does not trump reality.  

In the end, it all boils down to timing and patience….

Nic Lenior:

The Fed not only injects liquidity in the system supporting a doomed market with your tax dollars, but it also splashes primary dealers in the process. The gift will keep on giving, as here is the list of the upcoming POMO operations:

  August 19, 2010 August 20, 2010 Outright Treasury Coupon Purchase 8/15/2016 – 8/15/2020  
  August 24, 2010 August 25, 2010 Outright Treasury Coupon Purchase 2/15/2013 – 7/31/2014  
  August 26, 2010 August 27, 2010 Outright Treasury Coupon Purchase 2/15/2021 – 8/15/2040  
  August 30, 2010 August 31, 2010 Outright TIPS Purchase 1/15/2011 – 2/15/2040     
  September 1, 2010 September 2, 2010 Outright Treasury Coupon Purchase 2/15/2012 – 1/31/2013  
  September 7, 2010 September 8, 2010 Outright Treasury Coupon Purchase 8/15/2014 – 7/31/2016  
  September 9, 2010 September 10, 2010 Outright Treasury Coupon Purchase 2/15/2013 – 7/31/2014  
  September 13, 2010 September 14, 2010 Outright Treasury Coupon Purchase 8/15/2016

Disclosure: No pisitions