Long as you keep 'em way off balance
How can they spot you got no talents?
Razzle dazzle 'em
And they'll never catch wise!
When you're in trouble, go into your dance
Though you are stiffer than a girder
They let ya get away with a murder
Razzle dazzle 'em
That's the song that was playing through my head this morning as I composed an early Alert to our Members warning not to take the pre-market run-up seriously (already faded by 8am) because it was simply another misguided move up based on TERRIBLE data out of China that, in turn, sparks more rumors of QE/Stimulus. AGAIN!
As the great and powerful Bush the Second used to say: "Fool me once, shame on shame on you. Fool me you can't get fooled again." Apparently he was not talking to market participants who seem to be fooled by the same exact nonsense every day – it's like playing peek-a-boo with an infant, who is amazed every time you reappear from behind your own hands….
Not to get into it all over again but TODAY it's the usual China PMI falling off a cliff that got people excited that there must be QE coming from the PBOC at some point before the Chinese markets lose 50% of their value in 2 years (down 42% now). The problem with this "enthusiasm" is there is the assumption that the Chinese markets were ever worth 60% more than they are now and were not, in fact, a ridiculous and unsustainable bubble already propped up with misguided stimulus that simply can't be replicated in a Global downturn.
To bring it closer to home, this is like expecting the Fed to get the price of a 1,000 square foot New York City condo back to $2M because that's what it was at the height of the market ($2,000 a foot) and therefore we're not going to sit here and continue to pay $1,200 a foot for a condo and $97 for a barrel of oil when we KNOW they could be priced 60% higher. Isn't it the Fed's mandate to maintain price stability? Well – where are our high prices? STABILIZE THEM!!!
As I mentioned Tuesday, our favorite inflation hedge is currently silver – with the AGQ spread from the morning post. As you can see from Dave Fry's SLV chart – we hit the nail on the head and this morning we have another huge pop in silver, to $30.50 and that's going to put the Oct $38/45 bull call spread 100% in the money after just 48 hours and should do wonders for our $3.10 entry, which was already up to $4 yesterday putting the net .50 credit spread up to .60 (we offset with short BTU puts, now $3.40) for a 120% gain, netting $1.10 back with the original .50 credit. Today we should be over 150% (.75 for the spread) and what do we do with a 150% gain in two days? CASH IT OUT!!! We'll find a fresh horse to jump on – no need to beat this one to death….
Of course, if you are real long-term investor and REALLY want to own BTU for net $16.40 (now $23.80), then it's fine to keep the short puts open – it's really those quick profits on AGQ we shouldn't ignore because, once again – there's no actual stimulus – just rumors of stimulus and Asia was up because the MSM pushed the Fed minutes as proving the case for QE and that helped them ignore their own lousy data and then the strong Asia finish and rumors of China easing gave Europe a strong open even though their own PMI data also sucks.
As I mentioned, the markets were all up early this morning and I was forced to send out an early "Don't Panic" Alert to our Members, reminding them that it's the same old song and dance as we've been getting all month at these levels. Our Dollar-adjusted breakouts remain Dow 13,464, S&P 1,428, Nasdaq 3,060, NYSE 8,160 and Russell 816 and, so far, we haven't held 3 of 5 for a single day.
That adjustment was for Dollar 82.50. This morning the Dollar is below 81.50 and that's another 1.2% lower which means, on our Big Chart, that each of the goal lines should be moved up 2.5% and that puts the Nasdaq and the Russell right on the Must Hold lines and in danger of FAILING while the Dow moves to a full 5% BELOW FAILURE if it goes any lower.
So, rather than wondering if the markets will break up based on levels that were drawn on charts when the Dollar was 2.5% stronger – we should be worried that we are actually close to failing 3 of our 5 Must Hold levels and that, of course, is an extremely bearish (and reliable) market signal.
Doug Short makes an excellent point in our Chart School regarding expectations and the economic cycle with lots of good charts but this one is particularly telling as you can clearly see the striking similarity between where we are now in the Quarterly Composite Indicator vs. the similarly stimulated 2002-2008 market that also ended in a complete and utter market failure. Lance Roberts, of StreetTalkLive sums it up nicely, saying:
While the “optimistic” outlook is always more enjoyable to listen to – the problem is that the current “no recession” view is primarily predicated on current quarter growth rates looked at in isolation. These data points are then extrapolated into continuous future economic expansion. For example, in the 2013 CBO Budget(Excel file) the average economic growth rate used is 5.28% which is substantially higher than the 2% growth rate currently projected by the Federal Reserve. More importantly, neither the Fed, or the CBO, have forecasted a recession in future years. All assumptions are based on the expectations that somehow recessions have been repealed. This is hardly the case.
With the economy currently growing at 1.5% annually it is difficult for the mainstream media and analysts to comprehend that a recession could be just a few months away. However, in second quarter of 2007, with the economy growing at 2.92%, it was unfathomable that the economy would be in recession just two quarters later. However, a study of the trends of the underlying data clearly showed an economy slowing… What is important for investors is an understanding that, despite claims to the contrary, a recession will occur in the future. It is simply a function of time.
Today we have our Global PMI data pouring in and the US posted 51.9 – just above contraction and not enough to make up for the very clear an prolonged contraction in Europe and China. We'll have some housing data at 10 as well as the often-baffling Bloomberg Consumer Comfort Index, which is down 37% since April but still up 22% from last September so I will be surprised if we hold -45 today (that's right, we're at NEGATIVE 45 – BUYBUYBUY!!!).
Maybe if we're lucky, the news will be so terrible that it will start another QE rumor!
