Jumping the shark

Fear of change has gripped the world. The centerpiece of “Western” foreign policy is becoming unhinged and the cost of commodities are getting a renewed shot of adrenaline.

The other day we spoke of  “Breaking the Pattern”. Change is sometimes good. But when it comes to “cheap” oil supplies, no change is welcome. You can rest assured that no matter who takes control–short of Al Qaeda–the oil will flow. They simply need the money. And allowing prices to spike to some ungodly figure anytime soon would kill the goose.

This event is almost the only event that is bigger than the FED’s digital printing press. Obviously the Powers That Be lie regularly. But everyone simply snickers, winks and goes about their business. But there are doubts that even QEIII can stop what will happen, GDP at 1% or worse.

The Genie is out of the bottle, the cat is out of the bag and Pandora’s Box has been opened. The spike in cotton and wheat and silver is almost tolerable. The spike in oil is not.

Analysts should, right now, be taking a 20% cut to earnings over the next year. Of course they won’t do that until the market falls 20%. And the $200B left in QEII is NOT enough to stem the tide.

The technology group and the “anointed one’s” have begun a correction while the mega-cap laggards have led. This is a clear warning sign that hot money is moving in a different direction. We may get a spike in the energy sector that looks like the early 80’s. But be careful because it left an entire generation of energy investors in the hole.

You know that I have been very hesitant to chase POMO. I have sold the majority of our summer portfolio but still hold some stocks. I will continue to hold a few cheap and non-volatile stocks. But certainly the times, they are a changin…

How’s this for a statistic? In each of the last 6 first trading days of each month, the DOW has gained about 850 points or approximately 42% of the entire 6 month gain. Almost half of our gains since summertime occurred over 6 trading days!

We are now facing the beginning of a new month next week and the markets are attempting to rally off the very first pullback since November. This pullback comes on the heels of a bone-fide extemporaneous event. A real event, not just a fictional financial one. The change in the Middle East’s status quo could bring real change to the economy of the world. Its potential is so big that it could even dwarf Uncle Ben and his digital printing press, but that remains to be seen.

Today the markets are getting the new 401k money to work in the sectors that have been most successful yet have corrected somewhat. Materials, grains, metals, oils,  technology and the “annointed ones”. And the rally today looks very similar to past moves–low volume and program driven. The feeling is that any crisis has mostly past and it is time to get back to the all bullish all the time market again. Our near term bounce forecast to SPX 1320 has been mostly met.

With about $200b in QE money still on tap, anything is possible. But as our friend Chess alluded to, something has changed. Volatility and uncertainty are picking up. Very large percentage moves denote uncertainty. And considering how spectacularly extended markets are–as measured by almost any techinical or sentiment-oriented measure–it would be wise to scale back expectations for both directional trading and intermediate-term investing.

This FED-driven market rally is the second biggest and fastest rally in modern history. It’s two year anniversery is coming right up. I doubt that Prechter is right forecasting Dow 1000, but there is way too much new and bullish money flowing through the veins of the market. It sure feels like it is time to do a little real bloodletting.

Today the markets are highly fragmented, which is not good for its overall health. Just the other day the market would not dip more than 20 Dow points without a buy program hitting an already thin market.

Today, ostensibly because of Libya and a million barrels a day off line, the markets tone and tenor has changed. Remember when the Gulf was leaking? That was about a million barrels a day offline. Oil was a lot cheaper and so were all other commodities.

Remember back to the first Gulf War, when Saddam left Kuwait in a hurry and torched millions of barrels a day? Oil was $30bbl. And don’t tell me oil is $80-100 because of dollar weakness; the DXY traded between 80-90 for most of that decade.

The exogenous event of the Mid-East blowing up is the excuse for the markets to do something different. It would have begun to correct at some point, maybe after a parabolic blowoff and a little crash, when QEII was finished

These high oil prices seem good for oil producers. They will have better earnings going forward because of the higher value of their reserves or inventories and equipment companies may do better because of increased desire to get oil to the market. But the price of oil–like the price of other commodities–until very recently–is a demand killer. Nobody can afford to buy much of anything at these inflated prices. I’ve seen it written that the retracement of soft commodity prices in the face of higher oil prices is proof that the price increases were from economic recovery. I call bullshit. It is part of the risk-off trade, plain and simple.

And today the only real bastion of strength is in technology, primarily mobile. The morning meeting across Wall Street went like this: Gee, what benefits if oil prices rise and people stay home? What if they have to comute on a bus or train!  Mobile computing? It reinforces our recent buying! Let’s sell our other shit and buy some more momo tech stuff! Hence its outperformance today.

And remember, it’s month’s end. The first day of the new month is just around the corner and we know how that works…

At least now, when the economy double dips, the powers that be will have an excuse. Instead of having to admit that all the stimulus, subsidies and QE was a failure, they can blame it on oil prices.

As I write, I can see that the fragmentation continues with buy programs attempting to sop up some of the selling below SPX 1300. It is simply amazing that we have still not tested our primary breakout at SPX 1250. We certainly should.  That is where some smart and broad buying can occur. But with $200b still to spend on QEII, it may be delayed a bit as we bounce to SPX 1320.

The strategy of not chasing POMO has allowed me to watch this action mostly from the sidelines, and without a lot of risk. Very fast trading can work, but could be a fools game with renewed volatility. My entire modus operendi is to be able to take risk when appropriate and to sit back when it gets tough out there. I may miss some opportunity, but there will always be plenty of others. Isn’t it a nice way for investors to be positioned?

Today we have the first really damaging day in the market since 2001 and the dip buyers are waiting–in earnest–for the end of the day JBTFD. Who knows, they may get it. But it would be “unjustified”. It is taking the youthful plunder of the Middle East to instill the desire to sell and to overwhelm POMO and Dr. Uncle Ben.

I’ll tell you how this plays out: Civil War between Shia and Sunni. Anarchy. Chaos. Everywhere but Saudi Arabia and Israel. In case you didn’t know, there are fences around those two countries to keep out the huddled masses yearning to suicide bomb. There will be no armies. Just lose confederations of gangs roaming the deserts. Think Somalia.

There will certainly be oil supply disruptions but we will learn to live with them. And the House of Saud will be just fine, pumping and earning.

I want to again thank Dr. Bernanke for plying the commodity and equity markets with billions of free dollars. The endless JBTFD days, HFT trading and non-stop short squeezes have given the markets a sufficient cushion for when the markets would have to face reality or when the POMO runs out. We have a good cushion of about 200 SPX points after today and we should certainly lose about 100 from the recent peak. That will test our most recent primary breakout at SPX 1230-1250. That would be a perfect technical pullback of our six month gains. See, technical analysis does work!

When Egypt fell, the hair on the back of my neck stood up knowing the potential ramifications. They are being played out now but are only in the 2nd inning. With the average age of the Middle East about 24 years old, there will be a lot of anger and potential zealotry. Be ready.

I put my neck and ass on the line buying 35 stocks during the summer when it was “assured” that we were double dipping. I took an intermediate term view of markets when taking that risk. I was pleased to sell almost all of those positions will superior profits and an 80% batting average. We commenced to selling them during a heady and historic market run based on free money and I refused to chase the easy POMO because my technical, fundamental and valuative matrices were violated. But I still took plenty of shit for not being as careless as many. I want to take risk but I do not want to get stuck. 

Now that we have an exogenous event, all longs are either stopping out quickly today and getting short or they are buying more and hoping for a JBTFD bailout. Lemme tell ya. The market is not cheap regardless of estimates. The technicals are past the point of ridiculousness. This action would have happened with some event or no event.

There will, of course, be some kind of bounce. And there is about $200 billion more to go in QEII. So please, be careful out there and don’t get punched in the face by giving back all your hard earned profits. And don’t believe the bullshit coming from the mainstream or business media. Very little of it is fully true.

Technically, the target is as high as $40. With the Mid-East Melt happening right now, the fear trade is on in Gold, Silver and Oil. But interestingly, Copper is down. Chart published Thursaday 2/17/11 on CreateCoin Premium.

They don’t call it “King Copper” for nuthin…It is supposed to represent the state of the industrialized world. Instead it has become the single biggest way for the Chinese to hoard and to hedge their long Dollar and Treasury position.

It has been flat or higher in 20 of the last 24 months. It has made a marginal new high and stalled. It has given some very provocative Japanese Candlestick signals. Here, have a look at the monthly chart: