Easy Money Today, Hard Market Tomorrow?
There are two ways to look at the annotated chart below.
Either there is no such thing as easy money—because it keeps getting easier, or…
There is no such thing as easy money because it is really hard to climb a wall or worry stepping over the bodies of dead experts.
Of course there are ‘experts’ and there are experts. Some prognosticators are just pundits, some are real speculators and have money on the line.
The latter variety have stops and when things change they change their mind. Unlike media pundits, successful speculators are compelled to change their mind when their stops keep getting hit.
This is the market screaming at you, saying you’re wrong.
Why does Wall Street gravitate to predictions and forecasters when they are proven wrong?
First, there is no sin in guessing wrong, the sin is in staying wrong.
It is better to have an outlook than not; that way the market action doesn’t just roll off you like water off a ducks back.
When you have an outlook and it’s proven wrong, it allows you to hear the market talking.
Second, as Nietzsche stated, any explanation (prediction of what is going on) is better than none.
“To trace something unknown back to something known is alleviating, soothing, gratifying and gives moreover a feeling of power. Danger, disquiet, anxiety attend the unknown—the first instinct is to eliminate these disturbing states. First principle: any explanation is better than none.”
Friedrich Nietzsche
Of course when it comes to easy money, the experts are the Central Banks of the world on the shoulders of Atlas, aka the Federal Reserve—like some sort of new fashioned Flying Wallendas Trapeze act.
Of course the Federal Reserve is not Federal at all. Their constituents are not the U.S. public but the big banks.
America’s banks got talent.
In large part this 114 month old bull market is based on the Fed forcing money managers to drink performance from a fire hydrant of easy money rather than a fountain of fundamentals.
This liquidity along with a rage for passive investing in ETF’s and corporate buybacks has fueled a trifecta of bullishness that has gone so far as to ignore Fed tightening.
As Lord Rothschild stated last month, “We continue to believe that this is not an appropriate time to add to risk. Current stock market valuations remain high by historical standards, inflated by years of low interest rates and quantitative easing which is now coming to an end.”
This is not the first warning from Lord Rothschild.
Alas, Mr. Market has defied many of the best and the brightest who have been crying wolf for several years.
And just as the parable goes, when the wolf truly does show up, market participants won’t believe those announcing him ringing the doorbell.
But one has to ask oneself, did many of the best and the brightest all become stupid at the same time?
While the Fed has started Quantitative Tightening, ironically, the market is committing the cardinal sin of fighting the Fed.
It should not be a surprise that the greatest experiment in monetary policy in the history of the world has an impetus of its own.Like Dr. Frankenstein’s creation, the monster has a momentum of its own and isn’t taking orders.
This has the Fed’s attention just as it did in 1929.
Here is the key sentence of Fed Chairman Powell’s Jackson Hole speech a week ago: “Whatever the cause, in the run-up to the past two recessions, destabilizing excesses appeared mainly in financial markets rather than inflation. Thus, risk management suggests looking beyond inflation for signs of excesses.”
Now where do you think Mr. Powell may be seeing signs of excesses.
Conclusion.
While the line of least resistance as referred to by Jesse Livermore , at the top of this piece, remains up, several headlines over the last week such as “The Bull Market Is Just Getting Started” and “The Case For A 50 Year Bull Market” suggest that we may be at a place that is equal and opposite to the headlines shown in the charts at the top of this piece.
We are at a key moment. If the bull isn’t spent at current levels in league with this time frame then it may extend to 3000 to 3100 SPX; however, the risk, from my perspective is an Eiffel Tower move, a complete retracement of the post-election advance, ie., a decline to 2100 SPX.
This is not a favorable risk to reward complexion and after being stretched, when the line of least resistance bends, risk can happen fast.
After 9 years of an embarrassment of riches, those who are telling investors that the easy money is just ahead may find themselves embarrassed at not having learned as W.D. Gann stated that, “the most money is made when fast moves and extreme fluctuations occur at the end of major cycles.”
Tomorrow’s report will examine how we arrive at the time and price geometry that implies the potential for such a drop.
Strategy.
I haven’t seen setups work so easily since 1999.
A daily LULU from March shows what I mean.
In March 2018 LULU pivoted out of an 18 month Cup & Handle.
It gapped up again in early June spending the next 3 months consolidating.
In late August LULU ‘flushed’ its 50 day line for the first time since March.
However, it never followed through and after reclaiming its 50 day m.a. carved out a little Cup & Handle.
LULU broke out of the Cup & Handle pattern on August 20th and traced out a Bull Flag in front of Friday’s earnings.
Rembrandt couldn’t paint a better technical picture.
So, while we typically don’t like to play earnings, we sent an alert before Thursday’s close to buy LULU in front of earnings.
While the trick of the trade is to believe what you see, when trades get this ‘easy’, often there is danger in the tape becoming a matter of seeing what you want to believe.
Currently few believe in the upside prospects for gold based on extrapolating its downtrend since August— just as players are extrapolating August’s rally in stocks into year end.
However, gold may be on the verge of a change in character.
In the weekly GLD below notice that each turn up of the Weekly Swing Chart defined a pivot high.
Last week, GLD traced out 2 consecutive higher weekly highs.
This satisfied my -1/+2 sell method. If GLD does not respond to the -1/+2 sell pattern, it will be talking if in turn it gains some upside traction above last weeks high.
So, this week it will be important to see if GLD holds a higher low and the gap from 8/24 near 112-113.
I can’t help but wonder if gold is in an equal and opposite picture to the SPX.
99.999% of traders have never even seen the Square of 9... let alone understand its potential.
Do you dare to be different?
