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Markets – Macro – Stocks – Charts – Alerts

The Market’s Trend Problem

SPXThe trend is your friend they say. How can it be a problem? Since November 2012 markets seem to have been on auto pilot. Find the trend line, buy at the bottom sell at the top. Easy enough right? The chart on the right for $SPX exemplifies this pattern. For the first time in its history the $SPX has followed this curious monthly pattern for basically an entire year. Hugging the upper monthly Bollinger band, teaser dip into the monthly 5 EMA and bounce to new highs. The two token months of red can’t even be counted as corrections as they produced small pullbacks without resulting in new closing lows.

Record amounts of liquidity, margin debt, and stock buybacks have created the perfect illusion of safety as FOMC policies under Ben Bernanke have relentlessly punished any holders of cash, bonds, commodities and rewarded the most risk seeking behavior amongst investors. It is no accident that the MoMo stocks of 1999/2000 are back, albeit under different names. We all know the names, $TWTR $FB $NFLX $TWTR $LNKD, etc. Even $AMZN is back reaching ever new highs. As long as you don’t earn a thing you do especially well. And if you don’t earn enough organically just buy back your own stock and make things look better than they really are and see your stock skyrocket and get paid millions from bonuses and insider sales. What a deal!

The HeroAs Ben is eagerly leaving the world stage to be paid millions himself in upcoming speaking fees by the primary beneficiaries of his policies and to sign a Texas sized book deal (suggested working title: The 4 Trillion Dollar Man) he has insisted that no bubbles exist and that the FOMC will remain a primary driver of markets for as long as the eye can see. Amazingly in his last major speech last Friday he basically admitted that none of his major targets for employment or inflation outlined during his tenure were achieved. And so what does not work must continue.

RUTSounds good, so what’s the problem? Well, agree with the policies or not, the issue is one of asymptotic ascent. While the 30%+ run rate in 2013 was simply fantastic it was achieved with little real revenue or operating earnings growth and it now has created a trend that requires an ever higher ascent in order to avoid being broken. A glance at the monthly $RUT chart to the right makes this problem perfectly clear. This channel is the tightest and steepest channel in this index’s history. Where have we seen this before?

QQQWell the Nasdaq is in process of putting a repeat performance of the crash preceding run in ’99-’00. In fact something curious has happened in the last part of 2013. The $QQQ could no longer be bothered to even visit its monthly 5 EMA. Upper Bollinger bands? Who cares. Let’s just park above them. $TWTR will introduce something that will produce revenue some day, let’s just buy. Seriously, the silliness of bubbles past is back on full display and is exemplified by the voices who deny a bubble exists in the first place despite record amounts of debt, balance sheet expansions and central banks insisting on levels of intervention compatible only with imminent doom as opposed to record stock prices.

SPX targetsBut don’t worry, Wall Street is projecting higher prices yet for 2014 (#sarcasm). But note something curious. These price targets practically demand a break of the trend lines as they assume a much lower market ascent for the year. Currently the slope of the monthly upper Bollinger band races higher at a clip of about 35-40 points per month with it sitting at the1,880 level for January. Ignoring the S curve shape of the Russell and just assuming a linear curve for the $SPX (to be conservative) you are looking at a price target in the 2,300 range far above the current mid price range. Now granted Wall Street got it completely wrong in 2013. No comedy show was greater than Tom Lee of JPM raising his price target every month or so it seemed for a while.

IWMOne could argue Wall Street will just repeat the same trick again, yet a closer look at the charts reveals that this historic trend is at high risk of breaking at some point soon as key trend lines are starting to converge on weekly and monthly charts.

DJIA 30An eventual break of such a powerful trend will have consequences and the primary one for traders like us being that we will be able to take advantage of some wonderful volatility. So I for one am looking forward to a shift in character in this market. While my 2013 call for a visit to the 200MA remained unfulfilled a break of any of these larger trend lines will likely familiarize markets with its long forgotten friend.

CliffFor the buy and hold crowd that was told it’s finally safe to put all their money back into stocks and to abandon all portfolio diversification and just throw it into MoMo stocks, well, it will be the same old story. At least they can always comfort themselves by watching some youtube clips of Ben telling everyone how he saved the world from the consequences of debt driven speculative behavior by encouraging the same behavior all over again.

For myself, I will continue to trade the market long and short with utmost flexibility. If you want to join our group and get ready for what is promising to be an exciting trading year you can do so here.

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Categorised in: Daily Market Brief, Market Analysis

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