Monday, March 24, 2014

Key cycles come to end as geopolitics heats up

By Jeff Greenblatt

Gang, this is it. Cycle season comes to an end right about now. Friday was 618 days off the October 2011 bottom, so we are about to wrap it up by Monday, the latest Tuesday. Let us not forget the last big window in 2007 did not validate until the last day. So it was Friday where tech started turning south. As you can see from the picture, there is no technical damage yet as we are still in the confines of these trend channel lines. However, the way the week was going, the pattern came right up to the line and had an opportunity to break through. It did not. It could have spared us the extra drama. It did not.

What should concern bulls about this other than the obvious, which is it had runners on base and didn’t drive them in, is that people suddenly got skittish about holding positions over the weekend.

What did they think was going to happen? Unfortunately, these days there’s a lot that can happen. The most important thing that did happen is suddenly Putin is using the Crimean crisis as a leverage point in the ongoing nuclear negotiations with Iran. Truth be told, Putin has a lot of the same geopolitical interests the other major powers have concerning containing Iran. But it would not surprise me if Putin changed to the other side of the aisle if the United States pushed for more comprehensive sanctions.

That brings us briefly to last Monday, which I told you could have turned out to be a disaster. Well, John Kerry had warned – no “threatened” is a better choice of words – the previous Thursday about what the United States might do if the Crimea was annexed. These threats never came to fruition, so markets took the opportunity to go higher. Let me put it to you this way: The greater likelihood is bears gave up once again when the news wasn’t the worst possible outcome. We’ve discussed in this space for the past three years how skittish bears really have become. They even have the wind at their backs right now, yet somehow keep the blinders on. Still, someone came along and pushed the sell button on Friday.

But not all is rosy. Have you seen the Housing Index? Granted, this trendline only goes back to October, but it’s the first real sign of a major sector not holding support.

I can’t even tell you the BKX looks like this. But let’s just say for a minute the HGX drags down the entire market. Right now it is leading to the downside. For the reason banking is not doing the same thing if this is all we get whatever real correction develops will not achieve its destiny if banking at some point doesn’t become a major participant.

We are truly at an inflection point because at the end of the cycle period we are either going to have the NDX complete a flag pattern pullback or this is going to be the origin of something more important. That’s what it comes down to, and we should have a better feel for it by Tuesday. Because this is the seasonal change point, day 618 and the Gann master timing window we hardly need an excuse or justification for Friday’s action. Markets are supposed to turn this time of year. I’m sure CNBC can come up with a spin as to why the NDX would break down tomorrow if it does.

The higher probability outcome for Housing is a drop to about 182. Given the high at week 261 was 213 that would be a drop of about 14.55%. So if week 260 off the bottom produced a 14+% correction and less elsewhere we get off the hook very light. When we look back at this period we might come to the realization this sequence could be the origin of a stock market bubble. I told you flat out back in February if this time season did not produce a meaningful the correction the implication was the development of a bubble. There are some elements in place. The most important is dysfunction of bears to operate effectively in this environment. Like every correction since 2011 bears have given up too easily and way too early. On the other hand this is the last chance for a meaningful drop.

The other major event of the week was Janet Yellen’s first Fed meeting. The change in the language is the Fed is finally signaling they are willing to raise interest rates six months after the tapering program ends. Simple math puts that at a year from now. On the surface, I don’t have a problem with that simply because if we rewind the clock, Bernanke originally told us rates would be low until about 2013. Back in 2009, that was a long time into the future. Now that it's 2014 nobody should have a problem with it. However people do have a problem and all you really need to do is look at the HGX to see what kind of problem people have. My problem is Bernanke had to ease much longer than anticipated because Obama and Congress never learned to work together

The economy could have been so much further along by now and as it turns out we have the weakest recovery since the Great Depression and I don’t think the economy is going to ready to increase rates even in a year down the road. Too bad they don’t have a choice because the Fed can’t control long term rates and I think the bond market has already entered a new bear market. What that means is the lower the price the higher interest rates go and 2013 turned out to be a year that greatly exceeded even my lone wolf voice in the dark projections.

Here’s the other problem: Suddenly geopolitics is getting in the way. I warned you a year ago the big geopolitical story of the year would center on Iran. I thought Israel would hit them, I really did. Instead they tried to cut a deal and are slowly finding out that no matter what Iran says, their actions are they will continue to support the terrorists whose goal is to wipe Israel off the face of the earth. It was reported here 2 weeks ago US intelligence played a key role in the capture of a ship headed for Gaza loaded with rockets that could’ve destroyed both Tel-Aviv and Jerusalem. Score a major victory for the Obama Administration.

Why am I spending so much time on geopolitics? Look back at the two world wars and you’ll see they were both preceded by economic disasters. The panic of 1907 was the precursor to World War I in 1914. What year was the financial collapse? So you can see we are in a behavioral/socionomic time window for the outbreak of another major war. Personally, I don’t think the United States can beat Russia in a war. That’s not putting the U.S. down, but I think all sides realize there is never going to be a winner if the US and Russia ever do go to war, so it can never happen. So all of this geopolitical stuff directly relates to our work.

So the economy isn’t likely ready for a hike in interest rates and we certainly aren’t in a position to wage a major war. Not when the government is downsizing the military to pre-World War II levels. The rebound in the economy is promising but in no shape or form are we to the consistent prosperity of the back end of other cycles of expansion. I’ll leave you with this question. Is this economy anywhere near as prosperous as the end of the last two business cycles in the 1980s and 1990s? Your answer to that question should determine whether you think rates should go up. Then you are likely to understand why this bull market is getting long in the tooth. 

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