August 18, 2014

Never Short a Dull Market and Other Notable Quotes

“The criterion of truth is that it works even if nobody is prepared to acknowledge It.” – Ludwig Von Mises

deceptionAfter hearing from several trading buddies on Monday as to why the bull was still running rampant I decided to attempt to get into some of the details as to why the world believes the United States equity and treasury markets remain a safe haven for investment.  The truth is that the economy and the stock market remain on a collision course, but when many weigh out the odds against the litany of statements being made regarding the health and stability for continued growth within the US economy being greater than Europe, Japan and yes even China the money continues to get funneled into the US markets.  Coupled with the fact that the global reserve currency remains the US dollar, which continues to get pumped into the global monetary and payment systems the stark reality becomes a bit clearer in who is out there looking to buy into the US equity and treasury markets.  The United States remains the global aid provider whether that is through military intervention or support, economic aid or payment for trade in oil, gold or several other commodities.  This is likely to remain the case until geopolitical stability is achieved particularly within the major oil and gas producers of the world.

geopolitical“The men who are to protect the community against violent aggression easily turn into the most dangerous aggressors.  They transgress their mandate.  The main political problem is how to prevent the police power from becoming tyrannical.” – Ludwig Von Mises, The Ultimate Foundation of Economic Science © 1962

There are numerous political hot spots within the US as well as around the globe, which have risen to the top of the market’s “worry list”.  Current reality though is far from the truth and this is where I believe many are “ahead of the curve”.  I have previously discussed how the status quo is changing.  This is not being acknowledged by the masses as they continue to rely and trust those elected officials to protect the economy from its violent aggressors.  Do they in reality transgress their mandate – you bet they do.  The current political regime, (both Democrat and Republican) is under pressure to change.  The status quo is swinging in favor of change and that will continue to be evidenced through a “regime” change.  Out with the old and in with the new.  It takes time however, as those with monetary power will not surrender it willingly.  Eventually, though the truth is revealed and those ‘abusers’ of power will be ridden out of town on a rail.  The mistake would be to believe that it wouldn’t happen.

“Inflationism cannot last; if not radically stopped in time, it must lead inexorably to a complete breakdown.” – Ludwig Von Mises (1881 – 1973)

Is it really far fetched to believe that the US government uses it’s newly created money to ‘paper’ over economic emergencies?  It is being argued today that it has worked.  I argue that it has only postponed the inevitable – a larger financial crisis.  It is fact that each round of money creation or “inflating” needs to be larger or greater than the last in order to stave off problems.  It is fact that this process cannot continue in perpetuity as it ultimately undermines and destroys the purchasing power of the US dollar.

bondpitBack at the ranch – Monday’s Technical Picture for the broader indexes.

It would seem that traders had the weekend to determine a plan of action for Monday’s trade.  What began on Friday as a knee jerk reaction to the reported military action taken by the Ukrainian military against the Russian convoy of humanitarian aid sent the broader indexes sliding lower, the treasury markets racing towards the stratosphere and precious metals jumping back toward unchanged on the day.  The outcome of this scenario ended up being one of folly and misinterpreted news.  Nonetheless, the markets led by the NDX raced back as shorts scrambled to cover and weak longs moved to get long again.  The weekend proved to add little in the way of negative news on the geopolitical front or at least more negative than what is already known.

Volumes were light on Monday, which leave a more negative note as to the rallies continuing.  Thin volume rallies or declines are usually not indicative of a break out in either direction.  However, that hasn’t stopped the buyers yet and that could remain the case so long as the perception of safety lies within the US markets.

Last week I gave the following levels that would negate any remaining downside pictures for the near term and suggest that the markets had completed their respective corrections and were again underway with the next leg(s) up.  Those levels were 3964 for the NDX, which was cleanly and significantly broken on Friday and again on Monday.  In the DJIA that level was 16,815, which was broken on Monday albeit not by a significant amount but any additional follow through overnight or on Tuesday should seal the completion point for the correction and set the stage for an attempt at new highs.  The SPX cleared 1971, but not by much and it appears apparent that this level will be taken out with new highs then back on the horizon for the near term.  The RUT remains the lone hold out on whether or not a run for new highs is within the realm of possibilities.  Thus far the RUT continues to be the laggard, although Monday it was strength within the biotech sector(s) that pushed this index up over 1%.  In fact it was continues strength within the biotech sector(s) that pushed most of the broader indexes higher last week and again on Monday.

biotechThe IBB (Nasdaq Biotechnology Index Fund) gained over 1% on Monday after putting in solid gains all last week.  This index as well as many of its components has reached extreme overbought readings on a daily and weekly basis.  The monthly chart pushed to new highs on Monday and is not likely to turn lower before doing the same on the daily and weekly charts.   This suggests a move above $272 is on the way.

The NDX has pushed to new 14-year highs on Monday reaching 4022.50.  The market remains within extreme overbought readings on a weekly and monthly basis.  With the daily chart slipping quickly into oversold at the end of July as the market dropped into support at 3825.  Next resistance for the NDX is just above at 4055 – 4110.  If that level is broken with follow through it would likely clear the path for a retest of the 2000 highs at 4816.  Inflated bubble or not it has not had any drag on this index getting pumped for the last 3 weeks.

The SPX cleared 1971 by a “hair” on Monday and although the structure remains questionable as to whether new highs are on the radar sooner rather than later as in after another leg down is complete.  The index has pushed back into extreme overbought readings via the daily and monthly chart with the weekly finishing Monday’s trade just below overbought.  For those that follow Market Profile – the near term picture has been left as follows for the ES.  A break above 1969 with follow through being support at 1969 would be a “breakout buy point” with prices then pushing again towards 1991.  A break below 1969, with the market than being held below that level on any retests would be considered a ‘short’ and increase the potential for another leg down before the rally picks up again.

keyinsandTrading the number remains key to being able to reduce and separate the “noise” from opportunity.  This takes knowing and executing a well-defined strategy and allows you to see opportunities amongst the “chaos” and by trusting the mechanics of your strategy, be able to take advantage of them.

Opportunity continues to knock on our doors.  While it doesn’t come without risk, risk can be defined and more manageable. Volatility and broad moves are exactly what a day trader desires and being able to respond without questioning is a luxury many are unaware of.

Steer the course and don’t compare yourself to everyone else.  You are not they and they are not you.  Remember to trust and believe what makes you unique at this moment in time and in this situation and allow others to choose for themselves.  Don’t be swallowed up by the chaos and false emotions swirling around.  Remember it’s just a number.