EPISODE VI: THE NEW, NEW HOPE

Equity and commodity markets are exhibiting some of the most intense and compressed volatility in history. The DOW has been up and down 700 points in just two days six times in the past six weeks. Gold has fallen $100 in a day and rallied just as much the next day. Silver swings 15% daily. If  I’m starting to get dizzy, then I can imagine that the individual investor has closed their eyes and completely turned away.  

The news flow is being held responsible for the massive swings. First it was the domestic economy. Then it was Bernanke and the FED. Then and again it was/is Europe. Allow me to outline the true causes of the past two moves over the past two weeks.

Last week was a record setting drop, as the speculative money betting on a “traditional” QE3 were disappointed. That unhappiness was primarily manifest through the outright dumping of the metals complex. After all, metals–precious and otherwise–were elevated based on the uncertainty of money printing by the FED. When that didn’t happen, the hot money exited and the equity markets dropped quickly to test the August lows. Needless to say, bearish sentiment zoomed amongst the professionals that have been banking on more Free Money from Uncle Ben.

There was plenty of fear and trepidation over the weekend about what would happen to markets on Monday, especially since there was no real agreement to create the multi-trillion dollar bailout that would be needed to save Euro-banks and Countries. Futures were down again and traded at the August lows near SPX 1100. But mysteriously, by the time most of us came to work in the morning, futures had reversed. Metals had reversed. And the heavy-duty sellers that were all over every market last week were gone. Poof.

The bid was initially for industrials, then banks, then multinationals, then materials, then technology. And it spread from there. Never mind that there was no real agreement to fund Europe. We were faced with the end of the third quarter this week, with a Jewish holiday during the last two days. So there we were, again subject to another “Magical Mystery Rally”, almost exactly like the one that occurred during the last week of last quarter. Do you remember? 80 SPX points in four days. Magical! And then markets fell off a cliff.

I cannot help but think that this kind of gigantic mystery rally is nothing more than Bear Market Action. But then I see how the major indices are trading in a almost perfect 100 point SPX trading range and this range is sandwiched between two almost perfect 100 point SPX trading ranges. The lower range is bordered by SPX 1040 to 1140 outlined during last summer’s wait for QE2. The upper range trades between 1250 to 1350 and is labeled “Distribution” on my CreateCapital chartwork published yesterday. Our current range is the meat in a multi-year trading range sandwich and we remain trapped for now, even with the abnormally volatile movements in equities and indices.

Do you want to use technical analysis to pick your spots? You will have to buy when things are overwhelmingly negative and at the bottom of the range and you’ll have to sell just when your getting comfortable with a mending market. I don’t know if Europe can be fixed and neither does the stock market. But they do know that the end of the quarter is the time to make hey, because if they don’t, they won’t get paid. Plain and simple.