Monday, July 15, 2013

Markets defy bubble predictions, but for how long?

By Jeff Greenblatt

The story of the week is the Fed. What else is new? I had a discussion with a person I consider to have a good stock market mind this past week who is not so fond of Bernanke. He was upset about the Fed minutes. He went on a rant in his various forums. I’m discussing this because his sentiment represents the sentiment of many.

My question to him was, “What would YOU do?”

He thinks Bernanke is nuts. OK, fine. Complaining is one thing. I pressed. What did he think Bernanke should do? I explained that Bernanke’s hands are tied. My take on all this is stimulus would have ended a long time ago if Congress and the president would have been able to work together. But it was a full year before the election, right at the height of the debt ceiling crisis when the president tried to push through a jobs bill that was blocked by House Republicans and nothing in terms of fiscal policy has worked since.

I know O’Reilly isn’t the last word on anything, and you should know I’m not a Fox junkie. I barely watch it. But I believe he had on Stossel, and they were talking about Obama already effectively being a lame duck president. In one sense, it kind of feels that way, doesn’t it? Expectations have never been lower. Congressional approval has never been worse. I think people are expecting more out of the New York Mets than the dysfunction in Washington, D.C.

Getting back on point, I explained I support Bernanke because of the dysfunction in D.C., and I think he has to overcompensate for it. Well, he didn’t like any of it. Fine, what he should he do? I was expecting some kind of profound answer, maybe that was my problem.

I finally got an answer. He said, “Move to Bora Bora.”

Here’s the thing, there are lot of people denigrating, criticizing and performing all kinds of character assassinations on the good Chairman Bernanke. But not a single one of these people has a reasonable solution of what really should be done. All they can do is complain. But I’m tired of listening to the complaining. Tell us what you’d like the chairman to do. At the end of the day, we finally came to agreement because we both believe the bond market is in trouble and is going to be in trouble. I just don’t think you can cut the patient off cold turkey or even believe the patient is ready to be weaned off meds.

Markets liked the news this week, even as several Fed members are in favor of tapering as soon as before the end of this year. It’s not going to happen. Not when you have nearly one-third of the jobs created last week coming from waiters and bartenders. C’mon, what’s the risk for a restaurant? These individuals work on tips anyway, so it’s a no-lose proposition.

So now the good chairman said the market misunderstood, they misread Fed intentions. Whatever the case, they continue to look for reasons to buy. The overall reason is the great bottoming process we had three weeks ago. You can have a bottom just about anywhere if it displays the correct characteristics of a bottom. What people fail to realize is that in a bull market bottoms come quickly and by the time they realize it, the market is already at new highs. This particular market is at a few important inflection points heading into the new week. First of all, its 261 weeks off the peak of the oil bubble in 2008.

So if you are rightly concerned about oil starting to break through, this could be one of the most important sequences of the entire year. If oil responds, you can have a high in the next few days. If not, then ignoring the cycle means something larger is going on and what that really means is your monthly fill up your tank bill is going to be larger. We are already at the point of challenging that great 2011 high, which will still be 903dg on the Gann square of 9 but unfortunately it won’t be at 609 trading days up the way it was last time.

What you are looking at here is one of the all-time great pivots. It’s in my new book which is due out in about eight weeks. The 2011 top is a perfect storm cluster of Gann and Fibonacci. If it gets that far, it’s the next real test for the oil market. But if it does get that far you can count on astronomically high gas prices in places like New York and California, which begs the next question. How much can this economy really absorb?

The epicenter of this weekly time window in oil was already met on Thursday as it was the 161-day trading window in the stock market off the November low and in some places they call Nov. 16 “16.11.” So we were 161 off 16.11. Is the stock market going to respond to this window? Once again if it does not, that means something bigger is going on. You don’t need me to tell you what that is. What I will say is if we ignore this window the next really interesting window is now only six weeks away.

Folks, we are about to be 161 months off the top of the NASDAQ bubble. So look at these two charts. Each has an interesting golden spiral relationship to an important top. Why is the end of August so important? It’s because this rally off the 2009 bottom is going to be 233 weeks at the same time at the end of August. It doesn’t guarantee a turn but makes one a high probability. In the past year, I’ve come to you with other time window concerns. Last year I was hoping for a September low as opposed to a high because we hit the 5/10 year anniversary off 02/07. We got my high to within a week but the market threw us a curve ball. Such an important pivot only gave us an intermediate-level correction. That correction, which ended in November off those important anniversary dates, proved the bull market so what is happening now shouldn’t surprise anybody. However, I see those who are suggesting the stock market is in a bubble. This is not a bubble.

Look at this long term NASDAQ chart. Do you want to see what a real bubble looks like? Feast your eyes on the left side of this chart. It accelerated from less than 1500 to 5000 in 18 months. This market has done what it’s done in about 53 months and doesn’t cover the territory we did back in 98-2000. The definition of what is materializing now is a secular bull market and the problem many are having with this market is they are used to seeing serious sell-offs materialize when we hit new high territory. Bubbles also materialize when everyone denies it and nobody is pointing it out. Bubbles form when emotions go crazy and while the VIX continues to be a bottom feeder at the low end of the range there certainly are not feelings in mass crowd psychology that support a bubble mentality. Why not? I can name many but let’s bring up 2. In a bubble, they don’t climb a wall of worry. Right now everyone is worried about rising interest rates. They are worried the Fed will pull the plug on stimulus. Did they worry about interest rates in 1999? The other problem they worry about every month is the unemployment rate. There’s likely structural employment issues in this country which makes a stock market bubble a virtual impossibility. Then you have GPD where it is. Do you really think we can have a bubble with GDP under 2%?

I’ll tell you we have a chronically overbought market after a four-plus year rally, but we are far from a bubble. So as we move into the height of the summer doldrums season, let’s see what happens with the time windows we hit last week.

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