Category: Trading Articles
- 28 January 2016
In a few software application languages there is the concept of recursion, having the application call itself in order to repeatedly do whatever it is the application does. It's a useful technique but like anything it can lead to problems - the most obvious being that resources can be exhausted.
The Federal Reserve and other Central Bankers are practicing their own form of recursion - repeatedly calling upon the printing presses as they quantitatively ease over and over and over again. Like software development, they have the potential to exhaust their resources as well although not physically but figuratively. In their world there is no need to balance the books unlike you and me. They can literally print until the cows come home. But unlike the programmer who can use certain tools to monitor memory and other resources so as to not blow things up, central bankers can't know where their resource limit is because that limit is theoretical - it's only in the minds of those willing to accept the funny money that they create. When will they think that money really is worthless and bolt? That risk is real and at some point will be realized if the QE lunacy continues for too long.
The fact of the matter is that, in this roulette game of stealing growth from your neighboring currencies, it’s easy to pretend there is value in devaluing your currency. For a while you get the artificial boost that it provides but soon after another player steps up and does the same and the advantage is taken away. Let’s not fool ourselves, it really is a facade to begin with.
The sin of the central banker’s ways was to ever start this recursive game to begin with. To somehow think that you can solve a debt problem with more debt has to be one of the silliest notions ever fostered upon humanity and someone has to pay for it in the end. To believe that if you drop money from helicopters you will somehow create demand is lunacy. The only demand created was the false demand of the helicopter drop itself and unless one recursively keeps dropping, then the fun and games are over.
That's the painted corner the Fed is in. Over the past two days they deliberated just how to break, or shall we say, fake the news. Their dilemma in this most recent meeting wasn’t to decide on whether to continue rate hikes nor to take back the hike they made a month previous. Their decision was all about how to sooth the markets. Mental social engineering. Like it or not, the markets run the Fed – not the other way around.
Economics is behavioral science; a soft science if you will, not a hard one. When we the public finally recognize that a central planning committee (the Fed) is no better equipped to tell us where interest rates should be than any Economics 101 major, then we will all be better for it. The only role a central banking committee should have is that of a backstop lender of last resort and there are far better mechanisms to achieve that than some centralized bureaucracy who, like every bureaucracy, is always seeking to expand their fiefdom. Let the market set interest rates. Isn’t that what a free market does best?
This article was originally published on MarektWatch on Jan 28, 2016 11:20 a.m. ET
Category: Trading Articles
- 12 January 2016
The market’s death by a thousand cuts continues
In late September of 2015 when the market was testing the lows of August once more and the worries were heightened, I outlined a longer range scenario that is slowly coming to fruition. You might remember that article which described the market as dying a death by a thousand cuts. The expectations were for a rally in October and November followed by more pain. Well, December didn't turn out that pretty and the start of this year feels like the markets surgeon general has replaced the scalpel with a saw. So the question now is, "Is this it? Has the bull market finally found its end?"
If you look at most of the world's equity markets, many are already suffering bear markets. This was pointed out back in early August in the Silent Crash article. Since then, it has progressively gotten worse. Just take a look at these numbers that were pulled as of last Friday - the first week of the New Year. Over the past year and a half, the losses suffered in many equity markets were huge. This has also been true for commodities as you know and, on the flip side, there was a significant rise in the dollar and to a lesser degree, US treasuries.
Note two things in the above chart. In each case all the huge losses were preceded by breaks of multiple swing points on multiple time frames - the same structure I have pointed out repeatedly over the years in these articles that is a necessary but not sufficient condition for a large fall or, in the case of the dollar, a large rise. It's no coincidence.
Secondly, note that the Russell 2000 is now almost 20% in the red as well from its highs and if you look at a chart of the Russell, it is on the cusp of changing its long term trend from bullish to sideways - something that seldom occurs and almost always carries significance.
If the Russell does eventually break on this time frame, that would occur in conjunction with breaks on the intermediate term time frame and make it highly likely that the trend lower will continue for at least 2 to 3 months.
Yes, we are deeply mired in the thousand cuts scenario.
Again, as of Friday, the escalation downward was intense to start the year with the past two weeks alone showing huge losses in those markets that had remained "safe" and "strong".
Despite these losses, all of these markets are still in higher quadrants of their excessively large appreciation moves that took place over the past half-decade. They are, after all, the "safe" markets. They are liquid, mature and more stable and in a world of low returns, a place to hibernate it seems. Of course the ocean waters in the eye of a storm look calm as well.
Tops though, take time to form. This potential top (and remember, it's always an assumption until after the fact) has been forming for the better part of a year now. It began to take shape with the October squall of 2014, was revisited in August of this past year and now continues to build out the structure. What will tell us that it more of a certainty?
Fortunately in the neoclassical model, we can look to leading indicators. Since stocks lead sectors and sectors lead markets we can get a good read on what is likely to occur in the markets by observing the sectors. The caution and escape rope offered to readers in early August - before the market melt took place - was based on these principals. It was clear then that turbulence was likely in the offing just as it is clear now that we are getting much closer to something more severe on the long term time frames. If you want to check off the next set of signals, watch the industrial and financial sectors on the long term time frame along with the Russell 2000. If those monthly charts transition, then the odds that the rest of the market follows become extreme. As of yesterday, all three were within a a couple percent at most.
Finally, if you would like to subscribe to our periodical newsletter where we occasionally update the current situation, you can opt in by clicking here.
Originally published on MarketWatch on Jan 12, 2016 11:25 a.m. ET
Category: Trading Articles
- 18 December 2015
Was 2015 a year of consolidation, or worse, distribution?
Now that the Federal Reserve has finally raised interest rates, what can we look forward to for the remainder of 2015 and on into 2016? Will a year of "stuck in neutral" turn out to be a consolidation phase - a period where the market rests up before lurching higher - or will it instead eventually be seen as distribution - a period where the so called smart money ends up having sold the bulk of their inventory to the dumb money? The answer to that question means a great deal about what you or I might do in 2016 and the answer is intimately tied to how future economic data is likely to be viewed.