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Look Folks…

We rallied based on “Europe is Saved”. We rallied based on “Bernanke to the Rescue”. Neither have proved to be even remotely true, yet.

we are rallying because we completed a standard 50% retracement of the June gains AND BECAUSE TOMORROW THE EU WILL ACT TO SAVE EUROPE again. AND because it is the END OF THE HALF/QUARTER/MONTH and the JULY 4th FLAG WAVING HOLIDAY.

We are back to initial resistance near SPX 1335 and while we probably won’t get another thousand point Magical Mystery Rally like last year, we could easily continue drift higher on low volume. Enjoy!

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What on Earth could the Market be Waiting For?

Did you enjoy giving back exactly half of the “Europe is Saved” rally that began on June 4 @ SPX 1265? As outlined yesterday, it was the area in which to expect a bounce into month’s end and into the Flag Waving Holiday of July 4th.

Markets are up today almost a full percent but it feels as if they are sleepwalking. There is no passion, conviction or sense of purpose. Instead, markets are waiting for something.

It could be the EU Summit statements on Thursday. It could be the wait for more economic numbers that confirm a new recession has begun and the FED will have to act. Or that we are simply “muddling” along a journey to nowhere.

The only beneficiary of market movement within the trading range are HFT computers, degenerate gambling day traders and the System that needs the status quo held at all and any cost. As we’ve alluded to, “uppy goody, downy baddy” for the markets and after a short, sharp pullback the stock markets want to remains in their upward drift.

Remember this exact week last year? A fabulous 1000 point Magical Mystery Rally appeared before the weak economy and the dashed hopes of more QE that sent markets lower. We had this years Magical Mystery Rally in the middle of June. It’s done.

But this year, like last year and the year before, markets will be on the defensive with all the negatives that are well known, especially the realization that the domestic economy is very slow. Then, mysteriously, industrial production will pick up as the world gets ready for the Thanksgiving/Christmas selling season and another year-end rally. Are you waiting for the crash that “must happen”? Or the move to all time highs on the back of a “recovery”. Stop! Either trade the range or invest in cheap non-momentum quality.

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I Hate to Kick the Market when its Down but…

I’ve been talking about this horrible bearish shit for seemingly years–punctuated by the occasional oversold QE related ramp job. I’m no crazed mongrel looking for the dissolution of the financial and political system but investors are faced with some big changes afoot.

The answer to all our ills, so far, is to plunge new, fresh money after bad. But that can only work if there is a foundation to build on and that foundation is credit expansion. We are only in the fourth inning of our credit contraction.

The input of fresh capital has served to liquefy and levitate capital markets and their current prices 100% higher than the lows of 2009, and that is the only factor in keeping people and corporations functioning. Policy makers know that if the markets begin a long downtrend or, heaven help us; a crash, that spending and hiring would stop dead in its tracks.

Last week, our Uncle Ben said that he would extend Twist in order to keep the government in paper, but nothing else unless it was an emergency. And no direct money for Europe. The markets have promptly given back only half their recent gains on the latest “Europe is Saved” rally that began on June 4 from SPX 1265. It is a classic 50% retracement and the first area where a bounce is possible.

But realize what kind of market we are in. We see-saw from one end of the trading range to the other. Sentiment swings from super bullish based on the possibility of more inevitable free money to the doom and gloom of the end of the financial system and therefore the world.

I know that HFT creates the potential for near-term volatility but I have a thought; it is time for the market to get boring. Dull. Horrible for the trading set. Think about it. The histrionics must cease. The range must tighten. Investors have been flushed out, only buying stocks in their 401k when they have to. Perhaps now the trader must be flushed either by horrendous whipsaw action similar to last summer or by the total drop off of volatility. It may just be time for investors to return and for good old-fashioned stock picking, rather than index momentum, to be “where its at”.

The credit contraction will continue for years and FYI, bull markets are built on credit expansions.

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Simple Trickery

On June 4, markets bottomed just like they did on October 4. The movement away from the lows was fast and in a significant percentage, therefore meeting the requirements for an acceptable near-to-intermediate term bottom. The mantra has been to “just follow price” and to “not fight the Central Banks (FED)”.

But this time there is no new and big money to throw at the  markets. There is some more Treasury buying to keep the government funded through the election and the half trillion raised in April and planning to be used to buy some European Sovereign debt. But no new bazooka.

And this time the markets rallied 100 SPX points like before, as if everything is well. Well, it isn’t well, yet the major market indices are near yearly highs.  I frankly find it facsinating that defensive issues are doing so well in holding those major indices at current levels.

I do not think that you can “just follow price” at this juncture. It is clear that there is a large worldwide economic slowdown apace as well as the outright deflation of asset prices due to the inherent falsehood of commodity prices that have not reflected actual supply and demand. We are faced with a classic unwind underway now. But this unwind has been cushioned by the markets levitation. So do you simply buy or sell? It is getting far more complicated that that simple formula.

In this market environment my strategy has and continues to be to find what has been blown up and/or unloved. Then patiently wait for the stock in question to be “cleaned out” and “dry”. Then I begin to accumulate fractional positions.

I know that it is not exciting nor will it provide instant gratification and it is intermediate-term in tactics.

Two recent examples are Astrazeneca PLC (AZN) and Molycorp (MCP). We looked at AZN in the heart of the Euro-meltdown as it is one of the great pharma companies, selling at 6x earnings with a 7% yield and trading near 2008 lows. What is my risk? And Molycorp was all the rage last year at $75 and hated this year near $20.

I am perfectly willing to wait with these types of ideas for months as they develop. I do place mental stops but don’t necessarily place a hard stop. I am willing to ride out most market dislocations with these types of ideas with the intent of buying more. That is why I only buy fractional positions.

So, I do get long regardless of my sarcastic market-hating tweets and comments. There is a method to the madness.

The fact is that based on everything most investors have been historically taught, the DOW should be closer to 10k than to 13k and there remains risk that it may be the eventuality. But it is not there now. I still expect a long sideways slog through the summer so try and cancel the extremes from your thinking and carry on.

 

 

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Your Training is Complete

Just like last year and the year before and the year before and the year before, the markets are faced with a major crisis of the Economic System. And just like in the past four years, markets sold off to a varying degree. As the crisis grew, the market response became more muted and responded negatively from higher levels.

This time, during what appears to be the potential for a complete default of the European Banking and Sovereign funding regime, the SPX dropped by 150 points or about 10% from its yearly highs over a period of about 8 weeks. It was the smallest and shortest pullback of the entire Credit Crisis. This time, like the last times, the Central Bank Policy Response rumors and proposals were enough to snap the markets back to near their previous highs. Markets have made back 60% of the entire loss in less than 2 weeks. It is the shortest and fastest snapback of the entire Credit Crisis.

As I have postulated over the past year, and is now seemingly common knowledge, is that Central Banks have been spending copious amounts of Capital to train market participants that the stock market is the only real evaluative measure of economic confidence and keeping it “inflated” is Job #1. Considering that we are one good QE rally away from testing all time market highs, I would say that the Central Bankers and their Policy Response have been successful.

There are no more “Black Swans” as they have been made extinct by the expectation of unlimited digi-money creation and locked in the closed loop of the financial/investor system. There can be no inflation nor deflation. Earnings matter not. The System and the Game must survive at all costs, even if it means destroying the savings of the world. But in this world, people don’t matter, only institutions and their Balance Sheets. Political leaders are expendable and are in fact easily replaceable.

The Central Bank Corpratocracy is the 21st Century version of the 1960’s Military Industrial Complex.

With this information and realization by “investors”, there will no longer be major selloffs because everyone knows it will be greeted with Policy Response. What this means is that markets will remain “elevated” but may now begin a period of going nowhere that could last for years.

Your Training is Complete.   

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