He is an excerpt from Monday's advisory. Please reach out to us if you are interested in subscribing. We will continue to do this to give you a taste of how it operates.
General overview: The most influential force of 2013 was the Federal Reserve. They not only impact the U.S. economy and trading markets but the world as well. I would say there has never been an unelected entity that has wielded more clout than we have seen in 2013. That will change in 2014. History has borne out that change happens radically and drastically with a newFederal Reservechief. It has not mattered what their bio reads, the first two years of a new Fed chief has always created volatility on many economic fronts. The plethora of problems confronting this 2014Federal Reserveis unprecedented. Astute, educated, experienced leaders rely on historic situations and seasoned characters for guidelines to make calculated formulated guesses. Well Yellen has no history of theFederal Reservebeing this radical in previous decades to rely on for helpful information. She will be a sightless pilot, flying in darkness, over unmapped territory.
The 2014 year will be the year theFederal Reservewill start to lose power starting with an erosion of creditability. The creditability will disintegrate internationally first as it will finally dawn on China that following U.S. protocol for running a democracy is akin to following Amelia Earhart to successfully circumnavigate the globe. People do not like losing money and U.S. Treasurys were the wrong place to be in 2013. China is still at the denial stage of the beating their Treasurys have experienced price wise. All of us know how far friendships extend when money losses mount. Woe to the U.S., another hostile enemy we have birthed, China!
The course theFederal Reservehas established with their quantitative easing is liberal. I would compare QE to a drinking fountain for our economy that is a fire hose. I predict the housing market will hit overdrive in 2014 and 2015. This means all forms of building will escalate until inflation will be spawned that will be like an amoeba on steroids multiplying. Real Estate prices will increase into rural areas from the metro areas. The government is all about politics and the 'feel good' warm and fuzziness of asset growth through inflated home prices garners votes. 2014 is an election year; don't forget, so the 350 pound, 70-year-old trying to wear a bikini will be politically correct. This means the Congress will be giving grand illusions of beauty through tricks, smoke and mirrors, sleight of hand that would make Houdini appear like a little leaguer.
The stock market will be a source of funds for the real estate boom. Once the stock market turns red for just 2 consecutive quarters, monies will flee to buying a $200,000 house for $1,000,000. Has that song played before? Did we learn? I believe virtually every sector of the U.S. will experience double digit gains in housing prices, perhaps high double digit gains in isolated sectors. The timber industry will be the boom industry of the commodities. The surprise for 2014 will be the car industry; it will experience growing pains and contract muscular dystrophy. TheFederal Reservein late 2013 sold their lastGMholdings much like the giant bald eagle mother pushing its off spring out of the nest to fly on its own. This marks a key change in the metamorphosisthe Fedwill experience in 2014 from accommodating to abandoning.
View on the stock market: Let's examine some very revealing facts regarding stock market prices. I enjoy being a stock market historian as a phrase that inspires me is as follows: The person who does not study and heed history is doomed to repeat it.
My studies have scrutinized the last full 10 years of January 2004 through December 2013. Each year was analyzed for % decline and actual numerical decline. Extremes were seen in this 10 years that dictate study. First, 2013 had the least % correction of any of the 10 years at approximately 7.53 percent thus establishing a minimum comparison to use. The largest % correction was 2008 with a 49.77 percent loss inter year. This establishes a maximum percentage comparison to use which oddly enough represents a 7 fold difference in severity from maximum to minimum extreme, 49 versus 7. The 2008 point of decline exceeded 730 S&P cash points while the 2013 minimum pullback was a paltry 127 points. Dissecting the extremes to arrive at a means places some unique numbers to consider. The average % decline for those 10 years is 17.5 percent with an average S&P point decline of 228 points. An average point decline of 17.5 percent from 2013 highs places S&P prices at approximately 1525. The least correction for the last 10 years at 7.53 percent equates to a point decline of 138 placing S&P prices at approximately 1710. The greatest correction of the last 10 years, 49.77 percent equates to a point decline of 914 placing S&P prices at approximately 930, WOW!
Here are my predictions based on probabilities. A decline to 1710 in the S&P is above a 90% probability. A decline to the 1525 area is greater than a 50% probability. The interesting probability of a probe toward 900 actually is way above the public perception standing at 25%, alarming or at least it should be.
Enough number crunching, let's look at the internals. My Cook Cumulative Tick indicator has the greatest divergence ever from where the current prices are trading. The second greatest divergence happened in early 2008 which preceded the 49.77 percent decline. Should the bulls worry? Yes! Secondly, we have gone 7 full months without a 30 S&P point decline day. This is an indicator I post in my daily ritual with horror, literally. The longer the intervals of the 30 point decline, the greater the point declines are. The summer of 1987 was devoid of a 30 point down day for months. When the October crash came we saw a 1 day drop that exceeded 20 percent. A 20 percent down day from the current levels places a one day loss of 360 S&P points. That makes a 30 point one day decline look like a flea having hiccups compared to a whale having a huge vomit.
My first prediction is that we will see a one day drop of at least 100 S&P points sometime in 2014. The 2008 debacle had a one week decline of over 250 S&P points in early October, so the history reality as recently as 6 years ago shows carnage does occur. I would also point out the April 2000 carnage rivals 1987 and 2008 on many comparisons with a greater than a 100 point down day and a greater overall decline than 1987 and 2008. Oh, by the way, the year 2000 decline represented a change in Fed policy away from accommodation. Ponder that!
My second prediction is that we will see a minus tick exceeding -2000. A comparative perspective would be that 2008 never had a -2000 tick but 1987 did. When you experience that type of environment it is sheer panic, a CRASH with all capital letters. The greatest divergence of all time between the CCT and stock prices places the deteriorating tick into an avalanche potential which is why I think we will see -2000. If you have a weak heart, it will stop.
Bond Review: The QE stimulus in 2013 resulted in the U.S. Treasurys being among the worst performing markets. China holds large positions in U.S. Treasurys which is a political nightmare for the United States. Normally when a market goes into disfavor it languishes there for many years. Gold, for example, spent decades in a heap of debris, despised by investors and disdained by traders. The highs we saw in bond prices in 2013 will be the highs for decades. Interest rates could surprise to the upside, IF theFederal Reservecontinues its position of inflating inflation. The oldFederal Reserveof decades ago fought inflation; thisFederal Reservethinks it is favorable. OK! If 50 mph is safe, 100 mph is safer, and 150 mph is safest. It does not work that way or has all the economic laws been repealed?
My first prediction is that the long bond prices will trade below the prices we saw before QE was introduced. Horrific losses on the Federal Reserve's balance sheet, the cover-up will start to be smelled like a rotting corpse out of sight under a tarp.
My second prediction is that Janet Yellen will experience atmospheres so uncomfortable that she will become more hawkish than ever expected. A year that the politically motivatedFederal Reservewill be in a tough cave afraid to peek out, 'Do not stifle this economy' will be Congress' election year mandate while inflation is wildly beyond her safest 150 mph speed. That gray hair will be blowing in the breeze as the car is maxed out speeding with no brakes. The intelligent will witness her quandary, the general public will not understand and Congress will not care once November passes.
2014 will be unique. A dry wood pile awaiting a match to flame uncontrollably. The fire will consume the stock bulls while the real estate bulls will have a party and roast marshmallows. The U. S. Treasuries will become more widely referred to as the Chinese treasuries as our Federal Reserve is mired in a huge balance sheet of red ink as China becomes more irate.
All in all the volatility in stocks will increase greatly. A year where traders will return to the S&P as the Federal Reserve reduces its influence and lose credibility. 2014 will be remembered as the year common sense returns to stock market prices while real estate flourishes.
Traders will be rewarded! Be ready to thrive!
The early Monday morning saw the S&P without a friend. However the erosion was contained and a rescue push was orchestrated to offset price deterioration. The market had a very heavy look to it but as of yet has not fallen with the heaviness that it portrays. The bonds have been able to probe above132 even though they have had to weather some storm sellers. The upside has had a ceiling that would be penetrated if we could close above 132 1/2. I was impressed with every bear raid was met with some buying presence. We approached the 1684 price area Tuesday, but did not probe into an area that should be a magnet for prices. Therefore this rally should provide an indication of the true magnitude of the strength of the manipulators. The fact that we journeyed above 1700 and then saw the true weight of the market overtake the bulls and provide more than a 5 point pullback demonstrates that no true buying is present. The bonds were able to move through 132 1/2 convincingly. This was the most persistent rally that we have seen in the last several weeks. The extent of this rally is yet to be determined but now it has become more than a dead cat bounce.
On Wednesday, the S&P actually had a pendulum swing, although the pendulum was unable to make a higher high it was able to make a lower low. There also was a manipulation period that pushed prices 10 points upward. The main focus for your diary is that all rallies by the S&P failed. We probed the 1684 price area twice, so there are sellers on every rally. This is a sign of a heavy tape. The bonds had some buying friends. They were able to sustain the rallies and build upon them which led to higher highs. We actually have rallied to points not seen in many trading days. This market is showing signs of stability and strength. Is this the Federal Reserves’ last hoorah to save face?
I will keep mentioning this to keep it at the forefront of your considerations. We must close below 1684 to start a down leg. Each day we probe into support areas but the close is important and imperative to set up a technical breakdown. We are into the tightening range that is basically less than 15 points and this is even more narrow than a typical box formation is. Tightness begets radical moves.
The bonds went exactly to the highs of earlier in the week. It is also noteworthy that the volume on the move to today's 133 '23 did not exhibit energy. This means that the true buyers are not in the bonds and we maybe printing out a top for the time being. The S&P lows at 1680.00 is very suspicious. A true market would not stop an a round number for an all day low unless a powerful computer is set up to stave off other bear raids. There is no technical reason nor tick reason that 1680 marked a low Friday.
Markets have a tendency to be influenced in different degrees. A person who has a sprained ankle is much more susceptible to an additional sprain situation than a completely healthy ankle. Similarly, the chronic or perhaps terminal health of the bond markets has raised rates. This is a contagion that will eventually spread to stocks. The stock market is vulnerable and will be affected by the degree of anxiety that influences will create. The Syrian crisis has reached prominence in a very short time frame. This is similar to another ankle sprain to an already stretched ligament weakened appendage. There is chronic pain with the Federal Reserve chief uncertainty that can become permanent injury to the ankle the longer the pain is present.
President Obama has an almost no-win situation with this Syrian crisis. His quick announcement that military action was the absolute course of action, has left him no exit door. Congress is not his puppet and this is evident. A fracking in our Federal government process sends a resounding scare not just in our country but throughout the world. Has the U.S. been called on their bluff? Intimidation has been the status of the U.S. military might for decades. Has this intimidation factor now the called bluff?
Russia has the U.S. in a compromised position. It is not the U.S. versus Syria. It is the U.S. creating uncertainty to allies and adversaries alike. The stock market will not like this cloud. The Federal Reserve is trying to pump the stock market but that institution has uncertainty within its ranks as candidates jockey for aligning with or being the new Fed chief. My greatest concern is that the Syria crisis will take the focus that is needed in the Fed chief selection thus diminishing the emphasis on criteria and judgment on this important appointment.
Reality takes time to become ingrained in a stock market. The heaviness of factors that appear to magnify concerns and thus uncertainty tend to turn a sprain into permanent disability. Our stock market refuses to use crutches thus irritating and escalating pain. A wheel chair is next as the ageing process of this bull market becomes clearly evident.
The bonds sprained the stock market. The Syrian crisis may put our market in a wheelchair with Russia pushing the conveyance. Putin would like a cliff for that wheelchair.
The slow methodical rally last Monday pushed through resistance areas like a bulldozer in low gear. Not a typical type of action for a bullish move but rather a typical manipulative action of massive computers. The bonds were actually in a divergence as they were in the plus column as well as stocks. They did not allow a pullback to get us a good entrance for a long position. They were technically oversold in the short term with the 128 '12 area being a major support. Each and every day I correlate the S&P with tick throughout the day. Tuesday the S&P price action was up while the tick did not share its enthusiasm. Basically the internals have turned very negative once again the same as the price action was at the 1700 level before the correction. The fact that Obama has conceded that Putin has more influence than he regarding Syria is noteworthy for the long term. This situation demonstrates the lessening power of the United States throughout the world. I think 9-11-13 is a sad day once again for America.
This market appears much like a 40 year old baseball player without steroids. His swing is slower, his power is less, and his foot speed has diminished. That describes Thursday's action where the rallies were slower with less power as this market does not have the youthful zest that it once had. It just didn't have the juice! I am sure the Federal Reserve has been injecting steroids in this market for a considerable length of time and perhaps it is time they are busted.
The 30 year bond auction is now completed so we should see a different environment for several days following. Technically we journeyed above 130 but have not hit the key resistance at 131 as of yet. The short term is oversold so keep in mind that any better than expected news could create a 2 to 3 point rally that could have staying power.
Note in your diary that the volatility is contracting into an abnormal tight environment. This is always a precursor to a major day and movement. The manipulators have tried to tighten down volatility but that always escapes containment. Therefore soon we will see some wide swing days as the tick will expand also. An environment as tight as the current one is never healthy for the movement that immediately follows since the energy builds and needs to be released. Look out and be very careful.