Forced Economic Austerity ill Timed

By: Captain_Hook

Just listened to Jim Puplava over the weekend and there was no mention of such austerity related concerns amongst his listeners providing feedback, which I will take as a representation of the general investing public’s lack of awareness on the subject. The message I got from his listeners is increasing inflation possibly to the point of hyperinflation is guaranteed because it’s assumed politicians will not allow collapse. Apparently these people don’t read the news much, or perhaps they prefer not to think of their ill-timed investment decisions losing money. Something tells me it’s the later.

The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, June 15th, 2010.

No matter, markets will do what they do best, which is make profits for the least number of participants possible, and based on the current set-up, this appears to still be the case as most individual investors are long stocks and risky bonds again. This is of course a necessary precondition for stock market declines within the scope of the discussion above, where although investors have been desensitized to all the bad news out there they discover once again that fundamentals actually do matter, and that trusting politicians, business leaders, and the financial industry can be hazardous to your financial health.

What’s more, nothing makes this point better than Bernanke’s assurances the US is not heading down the same road to austerity as Europe, which sparked the rally in stocks late last week, when this is exactly what is happening. In fact, what we are witnessing forced austerity (on the Fed and Obama Administration) in the US. And something that will come as an even bigger surprise to the present bureaucracy I’m sure is the shift from stimulus to austerity by the G-20, which should make for interesting discussion at next week’s summit in Toronto, especially if stocks don’t respond to the usual ‘jam job’ normally witnessed just prior to these meetings in an attempt to spur public confidence in their abilities.

The fact of the matter is the public is losing confidence in these characters fast, as can be seen in increasing protests, which might spill over to the stock market soon as well. Up until now many stock market participants have naively remained in their portfolios thinking everything will be ‘just fine’, and that the bureaucracy is a surrogate for their mommy and daddy, a sentiment reinforced by an overzealous but less than ingenuous Obama. It’s safe to say the bloom has come off this thinking and presidency now however, where all it would take to demonstrate the wheels have officially ‘come off’, is marginal withdrawals from already cash strapped mutual funds to trigger some sort of market crash, either a more controlled decline or something like we witnessed on May 6th.

That being said, with so many crash calls on the net at present, and a likely euro rally with all the stupid short, this might be enough to negate the influence of falling and low US index open interest put / call ratios for a while, especially after expiry this Friday. A falling dollar could provide such support to stocks in the initial stages of the decline you see. And if price managers can keep stocks buoyant into the G-20 summit this coming weekend, then it’s possible the S&P 500 (SPX) can make it back up into the reaches of higher Fibonacci retracement metrics, ranging from 1130 to 1150, austerity measures and deficits or not. Now I am not forecasting such a move, as it’s going to take some doing to get the SPX back through the 200-day moving average at 1108, however the dollar is quite overbought and could correct lower for some time, possibly well into the summer.

And if speculators start to take open interest put / call ratios back up because of all the bad news out there, and there is plenty of it these days, then reaching the 1150 Fibonacci retracement on the SPX should be considered a given. We will of course keep you appraised of the situation post expiry this coming Friday. Again, I am not forecasting or betting on such an outcome given both the fundamentals and technicals, however as a good speculator one must be prepared for all possibilities, probable or not. This is of course all speculation on my part naturally, past this however, it’s always possible the euro correction higher is shallow – really shallow – because let’s face it, the banking sector in the eurozone is the worst financial basket case on earth, which translates directly to sovereign issues these days. (See Figure 1)

Figure 1

The table above (compiled by Bloomberg) shows the leverage ratios for European and UK banks and that contrary to what the media (or logic) would have you believe, Greece, and now Spain, who need bailouts pronto because of bank / sovereign runs, are actually the ‘good kids’ on the block in having the lowest leverage ratios, meaning the fun has only begun in this regard. The present bailouts for Greece and Spain are theatre, a distraction, to keep your attention off the enormity of the problems present in senior EU countries. This is of course why no matter how many junior countries are bailed out, when it’s Germany’s turn, which is a given based on the leverage it’s banks are running, both the euro and eurozone will likely breakup. Along these lines, it should be noted this is why Deutsche Mark quotes have now reappeared on Germany's big board.

It’s a wonder then why the financial markets are holding together as well as they are, all things considered. Of course this could change quickly if the right trigger goes off, making concerns such as those discussed above regarding a more robust bounce in stocks just short of paranoid delusion in hindsight. Because although it might not seem like it, one should note stocks have essentially been trading sideways for three weeks now and are no longer oversold, making the completion of what has now morphed into classic head and shoulders pattern(s) on the major indexes quite possible. All we would need to see is a pickup in volume as the SPX sailed through support at 1040 and a trip down to the Point and Figure Chart (see below) measured move at 920 would likely be fait accompli. Up until now the lack of volume was helping price managers support prices at strategic times of the day, like between 3 and 4 pm when they customarily come in for an end of day ‘jam job’, however again, this would backfire on them if the head and shoulders pattern neckline at 1040 on the SPX is violated on heavy volume in classic form. (See Figure 2)

Figure 2

Another important technical observation regarding the SPX comes in the fact it’s attempted to better the 200-day moving average three times now, including yesterday, and failed. One of Gann’s top trading rules was always sell a triple top, and this applies to the right shoulders of such patterns as well. Speaking of patterns, yesterday the CBOE Volatility Index (VIX) might have completed a classic a – b – c corrective sequence in testing Bollinger Band (BB) and Golden Cross related support at the 50-day moving average (MA), making a continuation of the up-trend quite possible, if not probable. And it should be noted all this is occurring within the context of a necessary complacent investing / speculator community that still has far too much faith in our price managing bureaucracy, evidenced by still little followed declining and low index open interest put / call ratios. (See Figure 3)

Figure 3

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Good investing all.

By Captain Hook

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Treasure Chests is a market timing service specializing in value-based position trading in the precious metals and equity markets with an orientation geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested in discovering more about how the strategies described above can enhance your wealth should visit our web site at Treasure Chests

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