Thursday, October 14, 2010

Rubber Band Rule Pretty Effective

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Yesterday I noted the market was approaching levels above the 13 day moving average where it typically corrected from during this rally.  There was still a bit of room to the upside (about 0.3%-0.7%) but the rubber band was being pulled quite strongly - effectively this is a simplistic way to speak of 'mean reversion'.   For now the pattern continues.... buying comes in on the pullbacks to the 13 day, and then the market rallies and gets 2-3% above the 13 day, and that is where selling and/or consolidation occurs.  It is nothing if not mechanically (silicon) consistent.

One time this will be wrong.  The pattern is the pattern... until it is not.  Then you get havoc, and finally the bulls will get trapped.  Of course you never know which time will be the change.  I thought it would have happened by now, but we are not operating under normal quasi-free market rules (rarely have we the past 3 years but now its a level of extreme beyond compare).  So historical rule books are not working as well in 2008-2010.



As of now, S&P 1158 is the 13 day and it should move up tomorrow a few points.  At some point QE is priced into the market, and I also have thought it would have happened by now, incorrectly.  So each time we have an event like Bernanke talking tomorrow morning, we have to see if the market shrugs it off.  There *have* been some divergences the past 24 hours - yesterday I noted the bond market (longer duration) reversing, and today even as the dollar is bludgeoned yet again we are not getting the "buy anything that moves" trade.  Are those warnings signs or irrelevant?  Obviously in 2 weeks it will be easier to tell you.

I can print a litany of warning signs ... 93% of stocks in S&P 500 over 50 day moving average, rampant speculation in (pardon my french) s*** stocks, lack of leadership from former generals (the cloud computing stocks), and now rumors planted by banksters that Yahoo is going to be bought out (congrats to the CEO for $37M pay day for accomplishing no value add for shareholders by the way), or the latest buyout rumor: EMC Computer which is a fine $40B+ company.  Surely Oracle will be happy to spit out $50B+ to buy it...  after all, it's only money and we're printing more every second.  But lots of those signs have been around for a while, and QE has overwhelmed everything.   We need to see an event such as the speech tomorrow in which the market does not bid up risk assets on news EVERYONE already knows to mark any serious selling point... combined with a break of this 13 day MA (in my opinion).  When the QE2 meme loses its potency, we finally have a change.

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As an aside, let me keep repeating - so it is not lost in the day to day - this will end badly.  Frankly almost every 'solution' of the past 3 years brings with it terrible consequences - because we refuse to take our medicine.  We just don't know when "it" happens... all we are doing is repeating the same policies that got us NASDAQ 99 and real estate 2005, and commodities 2007.  We are just making the bets bigger and more dangerous, and kicking the can of yarn (which each time it rolls, it grows).  I've written many times when we look back in a decade Bernanke will be viewed in the same harsh light as Greenspan... even though "the market" worshiped Greenspan when he was doing those things, just as "the market" worships Bernanke.  Look at these PE firms borrowing money to reward themselves as if its 2006 again, look at the hedgies bidding up risk assets with free money, look at the banks cost of capital near zilch (and they still can't get out of their own way).  Everyone is getting 'rich' off the risk assets (woo hoo) - why would "the market" not love central bankers like this?   Why am I talking like this?  I should be celebrating like a good ole Wall Streeter!  But as a common American - you should be anywhere from disgusted to fearful of what these people are doing.  Just as Greenspan refused to allow a real (cleansing) recession under his watch, and instead created a pressure valve that once blown brought down the entire U.S. financial system - Bernanke is painting the exact same portrait.   But like good Romans, we are supposed to enjoy the orgy while it happens and let tomorrow worry about itself - Cramerican style.  Just don't lose sight of the long run - the consequences of this 'recovery' are gong to be debilitating.   My only shock is as we repeat the same Fed induced bubbles now on 5-8 year cycles, no one questions those who bring us these issues repeatedly - instead we give them even more power.  Quite amazing really.

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