Help me, Uncle!

Just a little shout out to Uncle Ben.

QEII couldn’t have been more ill-timed and damaging. It almost singlehandedly increased the price of commodities of all types significantly and it bought some Holiday confidence. Now we deal with the oil shock and realistically nothing left to combat it.

We’ve bought higher assets prices but also demand destruction. And prices for most assets are simply too high. What’s next from your bag of tricks? You cannot raise interest rates or deviate from ZIRP. How about direct transfer payments to all? Get the Jawbone ready!

Bottom end of our new and tight range. Overpriced tech stocks floating down to earth. Energy stocks refusing to skyrocket with oil. A little fear for a change.

I hope you all had a chance to lessen your risk exposure as the “Government as the Greatest Fool” rally pushed ever higher. Now we segue into a new trading range that bookends the one from the summer.

Expect the dip buyers to find a reason to JBTFD as we are still above the Egypt low at SPX 1275. But the 1250 area will be tested and it even looks like the 1200 area is fair game.

But don’t worry as reality has no place in the stock market and Uncle Ben has your back, right?

Some posters here on IBC are adept in very near-term action. Some are great in specific areas or sectors. Others have a knack for money management and writing style. One of my strong suits is anticipating important and intermediate term changes in trend or turning points.

I know that the most fashionable mantra is to not anticipate, to just follow and react. And sometimes these changes take time to develop as the final phases of the trend play out. Occasionally the trend is altered by powerful outside factors that extend trends far past their technical readiness to change. You’ve heard the saying about how markets can remain irrational far longer than you can stay solvent. We certainly are witnessing several of these phenomenon first hand. But there is one market that is surprising most market participants. No, not oil but King Copper.

As the risk of getting the Trading Nymph worked into a frenzy, the Chinese have been massive hoarders of the metal for years as an adjunct to their dollar accumulation and their industrial policy. But Copper has changed trend right before our eyes. Or rather, when your attention was somewhere else (oil, silver, cotton, etc.).

On this second anniversary of the markets bottom, through our celebration of all things market-related combined our angst over the forces of inflation vs. deflation, King Copper may be telling the market something possibly very important. That prices for materials are too high. That any further economic recovery is virtually impossible at this time, even with the Fed’s digital pen. That reality can not be combated much longer.

We gave you this warning back on February 17 when copper was $4.49. Today it is 4.21. I know that is only a 6% fall and only testing its latest primary breakout. But with most every other commodity off to the races, the most important industrial commodity is faltering after a 250% run off the lows set about two years ago.

Perhaps the big-cap industrials that have lagged the two year rally and have only recently begun to lead the market are very ripe for profit taking and a poor second half of the year. Food for thought…

As we approach the 2 year anniversary of the magical stock market bottom set in 2009, markets continue to defy all odds and levitates near where it was before the wheels came off the bus. All that free money has overwhelmed any and all events. As we’ve said in the past, oil prices are even bigger than Ben’s Digital Printing Press. But its taking time to realize its effects as the trend followers grasp at straws.

The FED has made a calamitous error by continuing the greatest subsidy in history, Quantitative Easing, during these last 7 months. Their goals were simple; paying for government spending, stuffing the banks with cash, and levitating the stock market. And so far, mission accomplished. But by putting the pedal to the metal for QEII, they have left little in which to “come to the rescue” in case of an exogenous event. And we have an event in the Middle East turning over. Even if it settles down, the cats out of the bag.

We have massively conflicting forces at work at this exact moment; deflation in the form of real estate and the lack of bank lending (still) and inflation in all hard and soft goods and their ensuing price rises and topped by the cherry of massive speculation based on nothing more than liquidity and fear. You could argue with me because perhaps you’ve made money blindly buying, but you would lose the rational debate. And eventually, after making all kinds of money by following the trend, reality and rationality will set in.

Now that we are sufficiently conditioned to buy the dip, there will be nothing but dip and everyone will join in the trend change that has been a long time coming. In this environment where only the trend followers are successful, the economy and markets are about to get even more head-scratching confusing.

This is why I insist on reducing my exposure while the market has fed at the trough of gluttony. The ensuing indigestion will be epic. Timing is obviously the question, but expect to be whipsawed as long as the FED has more QE money.

After rallying on each first day of the month since September, Ms. Market threw a curve and the Dow dropped 160 points on Tuesday. After all, the pattern was heralded near and far. Plus, with oil going crazy, it was a perfect setup for the front runners.

We had an almost nothing day yesterday. Then we rolled into today and it looked very much like what “Day One” has looked like in September and December. Now we can add March to the roster of big up days “near” the first trading day.

Some traders and investors actually bet against the market–in a small way. After all, any counter-trend bets have been a recipe for disaster. This one was no different. I had been warning about a 500 point giveback but with a move to SPX 1320 first. Well, one day later we are above 1330. As I speculated, with $200B of QE money still on tap, almost anything is possible. I also speculated that a 10% jump in gas prices for the week was bigger than Uncle Bens digital press, but that is wrong. For today anyway. It will hurt soon enough, but for now the game must go on.

I can’t quite figure out who is stupid/smart: Money managers who buy everything they can regardless of price on one trading day during these early month ramps or us 401k holders who give them our money. Following them are all manner of momo-oriented hangers-on. Hence no giveback.

Most major indices are now almost exactly where they were on Tuesday of this week. I know just buy the dip until QE runs out and the uptrend line is broken. I know…Here comes another buy program!

The Dow should be down 500 points from here and the SPX should be 1230. At the very least.

After lulling investors with the promise of endless QE and POMO the markets realize that oil is just too big a bogy to overcome. Unless of course, it reverses and goes to 90.

Be prepared.

PS. Now that I’ve written this, there will be a huge buy program that takes the SPX back to 1320…