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Wednesday, January 23, 2013

Checked the Agenda Lately?

With the market surpassing the recent 1474 highs, I am officially laying to rest the analog that did so well for us since last April.  This begs the question: "now what?"  There are three big issues hanging over the market right now:
    • earnings season --  AAPL in particular
    • the US budget/debt ceiling imbroglio
    • new highs justified?


GOOG and IBM both gapped up this morning, but the earnings report most capable of moving the market -- AAPL -- comes after the close.  We'll take a fresh look at the AAPL chart later today.


In a few hours, the House will probably pass a measure to postpone the debt ceiling debate until May.  Reid and Obama have both said they're on board, so this appears to be a done deal.  If House Republicans don't fall in line, as occurred with "Plan B," the market will sell off precipitously.

If the bill passes, Congress is left with the "simple" matter of balancing the budget before the sequester sets in, knocking GDP back by a couple of percentage points and ensuring another  recession (or, extension of the current depending on your POV.)

New Highs

The market's strength caught many permabears off guard.   Many are now calling for new all-time highs for SPX. The 2007 high of 1576 is now only 84 points away, so a few good sessions could do it.

We'll take a fresh look, focusing on the harmonic and chart pattern picture as well as the financial establishment agenda.  Squeeze me?  The what? 

Talk all you want about random walks, CAPM, dividend discount models and Dow Theory.  But, like any other government-managed enterprise, the market is subject to the policy goals and needs of those who attempt to control it.

I know.  Even to my cynical ears, this sounds like the ranting of the tin-foil hat crowd.  But, consider the news on Egan-Jones yesterday.  This is one of the biggest stories of the month, yet predictably earned only this from WSJ/Marketwatch:

CNBC was slightly more generous, yet still presented only the SEC's side of the story.  It's a story that deserves to be told because it speaks volumes about the degree to which the market is presently being controlled.  And, I'm not just talking about quantitative easing, though I suppose we'd have to consider QE exhibit #1.

Last summer the market crashed 22%.  It was an analog (replay) of the 2007 top, so we saw it coming in plenty of time to profit quite handsomely.  But, it was a huge wake-up call for The Powers That Be (TPTB) or Plunge Protection Team, Wall Street Cabal -- whatever you want to call it.

With virtually unlimited power and unlimited resources, why couldn't they prevent something like that from happening?  More importantly, if the top was a replay of the 2007 top, might the rest of 2011 play out like 2008-2009?

It didn't, because they learned from the crash of July-August.  First, they tweaked the markets just enough to bust important chart patterns that were playing out.  Second, they tweaked the rules to provide for more time to contain any damage which might otherwise occur (circuit breakers, etc.)  Third, they attacked those who had "caused" the crash.

S&P CEO Deven Sharma was one of the first victims.  In the wake of the 2007 financial crisis, S&P was rightly pilloried for having pulled its punches -- particularly on mortgage and banking related debt.  This was no surprise to anyone who's ever worked on Wall Street, which pays for these supposedly unbiased views.

An infamous exchange between two S&P analysts in April 2007 aptly illustrates:
“BTW, that deal is ridiculous.”
“I know, right . . . model def(initely) does not capture half the risk.”
“We should not be rating it.”
“We rate every deal. It could be structured by cows and we would rate it.”
Imagine if Hollywood studios funded the reviews of their movies.  Would you care if they received thumbs up or down?  So, in August 2011 S&P found religion and bravely downgraded US debt.  Seventeen days later, Sharma was fired and replaced with the COO of Citibank, the bank whose continued existence relies on the absence of any future downgrades.

Egan-Jones beat S&P to the punch, downgrading US debt on July 16.   Two days later, the SEC’s Office of Compliance Inspections and Examinations called looking for information on the downgrade.

On October 12, Egan Jones was formally notified of a Wells Notice -- they were being investigated.  On April 24, the SEC filed a cease and desist order against Egan-Jones -- the only rating firm not on the take -- stating the action was “necessary for the protection of investors and in the public interest.”

The financial establishment's interests?  Sure.  But, to frame this obvious smack down as "in the public interest" is laughable alarming.  Egan-Jones was the one rating firm with the balls to point out the country's crumbling financial condition and stick to their guns.  Now they've been branded as deceitful, dangerous.  George Orwell spoke the truth in 1984:
"In a time of universal deceit, telling the truth is a revolutionary act."  
That other deep thinker, Jim Morrison, offered a similarly profound observation:
"Whoever controls the media controls the mind."
 The extent to which the market has been manipulated is deserving of its own post.  But, this Zerohedge article, forwarded by a member, is a great preview.

Okay, so I know what you're thinking: if the market is so heavily manipulated (and, presumably, insulated from downturns) why bother trying to beat it?  Simple.
  1. Chaos theory tells us they won't have enough fingers to plug every hole in the dike (TPTB have enacted similar "never again" strategy sessions after every crash.) 
  2. Even when things do run as programmed, we can still effectively capture enough significant swings in the markets often enough to boost returns and, more importantly, try to avoid huge downdrafts.
Over the very long-term, stocks return 8-10% -- depending on the time frame examined.  Unfortunately, most of us mortals are limited to 40-60 years of investing.  So, a 60% crash right before starting a business, buying a home or beginning retirement could be devastating.

So, we keep plugging away, letting the markets tell us where they want to go...while trying to get there first.

So, the question is "Now What?"  We'll start by looking at the harmonic picture, then AAPL and finally the agenda question. 

As detailed in our last review of all the recent tops, harmonic patterns are very likely to come into play.