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Graham Summers’ Weekly Market Forecast (H&S Edition)

Submitted by Phoenix Capital Research on 09/27/2010 09:11 -0400

Last week I
forecast that we would see a reversal in stocks. The market did indeed show
signs of breaking down on Wednesday and Thursday, however, the Fed’s juice
managed to keep stocks afloat and closing in the green for the week.

All told,
the Fed injected more than $10 billion into the market directly via its three
Permanent Open Market Operations (POMO) pumps. However, Bailout Ben wasn’t
content with mere open market juicing, so he pumped another $10 billion into
the system “behind the scenes.”

I’m going to
address this activity in depth in tomorrow’s article, but for now I simply
wanted to stress that more than $20 billion in Fed money pumps hit the market
last week. This should clear up ANY questions as to why stocks are holding up,
let alone rallying.

Another way
of looking at this, is that the Fed is trashing the US Dollar to prop up
stocks. Indeed, the US currency has broken down below both its 50- and its
200-DMAs. Even worse, it has broken critical support at 80, which has served as
a MAJOR line of importance over the last 20 years (the Dollar has only broken
below this line twice: once during the 2008 lows and during the 2009 QE-induced
collapse).

This
breakdown could turn out to be a
bearish head-fake. However, if it is, the US Dollar needs to start rallying
hard soon. Indeed, we are nearing a “death” cross pattern here: when the 50-DMA
falls below the 200-DMA.

These
patterns typically are harbingers of further weakness. Combined with the fact
the Dollar is below 80 for only the third time in 20 years, this is a MAJOR warning that unless we get
a reversal soon, the Dollar is in VERY serious trouble.

Indeed, we
have the makings of a massive Head and Shoulders pattern here. As I write,
we’re sitting just on the neckline of
this pattern. Multiple closings below this line would confirm that the US
Dollar is headed lower with a downside target around 71 or so. This would very
likely mean stocks re-testing the April highs (1,220) and Gold exploding to
$1,350 or even higher.

This is
certainly one outcome, however, I don’t think it will prove to be the case.
Stocks are overbought and the US Dollar is oversold. At the least we need to
see a retrenchment or consolidation in the former and a bounce in the latter.

Big Picture: stocks have come up
against MAJOR resistance at 1,150. This is occurring right as the S&P 500
reaches an overbought RSI reading (70) and on dwindling volume.

Furthermore,
stocks have risen to test the upper trend-line of their trading channel dating
back to early May 2010. This line, which coincides with long-term resistance at
1,150, adds to the likelihood of a reversal here.

The first
line of support is 1,123 or so. We actually fell to test this last week, but
Friday’s POMO-induced ramp job stopped the breakdown. So for now overhead
resistance is 1,150 and support is 1,123 or so. A break above the one sets the
stage for a rally to 1,170 or even 1,180… a breakdown below the other (1,123)
and the next real line of support is 1,100 then 1,080.

We have
POMOs this week on Tuesday and Thursday. In light of this, I think we might see
a final impulse push in stocks above 1,150. However, this effort will fail and
we’ll see a retrenchment back to 1,123 or so. And if we take out support a
1,123 on a closing basis then the rally is likely over and we’re heading back
down in a major way.

When that
happens selling pressure should pick up INTENSELY and stocks should absolutely
collapse. This rally has occurred on nothing but fumes and short-covering. The
only thing holding back the sellers is the Fed’s OBVIOUS intervention. But at
some point, even this will prove irrelevant just as it did in 2008.

Good
Investing!

Graham
Summers

PS. If
you’re worried about the future of the stock market and have yet to take steps
to prepare for the Second Round of the Financial Crisis… I highly suggest you
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come.

I call it The Financial Crisis “Round Two” Survival
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Mon, 09/27/2010 - 18:52 | 608460 beastie

DavidSmith,

Assume no one without a law degree or who follows the court action knows what you are talking about. I know what "quiet title" and some of the other stuff you mention. However, like most I am not that versed in lawyer jargon.

BTW, I read an interesting anarchists take on quiet title in which he suggested person or persons flood the courts with these on behalf of other homeowners. At $8.50 a pop it sounds like a fun thing to do as apparently they all have to be recorded if they look legit.. I haven't looked into it beyond that though.

Mon, 09/27/2010 - 20:29 | 608629 davidsmith

Here it is in plainspeak: The question is, what in FACT is the policy of the United States? There have been some lawsuits which claimed that, because the U.S. has an ownership interest in HAMP banks, that these banks are in effect the United States, and that therefore homeowners have a Due Process right to modification. The reason the modifications have failed is that the U.S. has arbitrarily set 31% of net income as the figure you have to pay on your mortgage. But is that in FACT what it takes to successfully modify, and do you have a RIGHT to a modification which in FACT minimizes the risk that you will default? Other cases argued that since there was language in the legisliation appearing to give the Treasury discretion as whether it modified or not, there was no right in HAMP. However, in Huxtable the judge refused to dismiss on the grounds of having no standing (no right to participate in HAMP), when the plaintiff alleged government ownership share in the banks. It is ownership interest which makes the banks into the United States. If the banks have a policy to modify, so does the U.S., and therefore you have a due process entitlement to a modification which in FACT minimizes the risk of housing loss. I haven't seen anyone litigating the 31%, but it is clearly much too high. The only problem has been that people have been too timid to insist that part of their due process right is to have a modification which in FACT minimizes the risk of default, instead of accepting, once again, what the United States SAYS is the right figure. There also now appears to be no question that homeowners have a right to participate on a third party beneficiary theory regarding the contracts between the United States and servicers (there is the Marques) case. Read the Lorenz opinion online. There was some doubt about it, but his reasoning is much the better reasoning. It is very clear now. Thus, whatever the United States SAYS its policy is (their discretion, not your enforceable right), the FACTS of what the United States has done, say that you have a right to have your mortgage modified in a way which will minimize your ever defaulting on it. OK. Next, the FACT is that the United States reduces the principal outstanding, if a HAMP loan is approved. Next, the FACT is that you don't pay income tax on that reduction. Next (and here you should look at Reggie Middleton's chart on his site), the FACT is that the return/chargeoffs line is rapidly descending toward zero. Reggie's work really put the icing on the cake, and together with the other facts, lets us know that the U.S. has a policy, and it also has a lot of self-serving BS behind which it hides its policy. The long and short of it is that the FACTS show that the United States is in the process of forgiving/having forgiven mortgage debt. They have pencilled it out, and the result is that the only policy consistent with the FACTSis that homeowners have no more home mortgage debt. The U.S. has let itself get into the position of having to keep people in their homes, acknowledging huge losses, and then being in the position of having no interest in foreclosing. I think the breakthrough is Reggie Middleton's analysis. He has always been right in the past, and he is VERY careful. If his signs point to zero return for the U.S., there is zero return. And if he knows it, the U.S. knows it perfectly well. Once lawyers put all these pieces together, they will sue to quiet title, claiming that the United States has in fact--regardless of what the United States SAYS--forgiven their clients' mortgage debt. So please hand back the title. And ultimately they will win. This thing is proceeding very rapidly. The U.S. is trying to play a double game. It can't let all this housing be foreclosed on, and at the same time it can't grant that it is game over and that there is no money to be made by foreclosing. So what does it do? It hides its policy, trying to hide the bad loans on bank books on the one hand and on the other implicating itself with contracts and ownership stakes in keeping people in their houses. But that's not the homeowners' problem. The question is what is in FACT the policy of the U.S., not, what does the U.S. SAY the policy is. The question now is, how will the U.S. spin this, because if it comes out--which it is already starting to do--that there is no economic incentive to foreclose, then everyone will simply stop paying on mortgages. I suspect the government is now trying to devise some tax policy, either to "force" people to keep paying who can pay, or to set up some "incentive" for them to pay. But the facts show that it really is game over. Soon every state will have banned home foreclosures, and it is not a matter of simply cleaning up the documents and then we can move forward. In the interim, people are going to put 2 and 2 together and realize they never have to leave and never have to pay another dime in home mortgage. Get used to the fact that "mortgage" has nothing to do with "economics."

Mon, 09/27/2010 - 23:56 | 609051 StychoKiller

Please let it out before two more years have passed! Our mortgage only has that amount of time left on it.

Mon, 09/27/2010 - 21:31 | 608749 tom a taxpayer

Do you have a link to the Reggie Middleton analysis ?

Mon, 09/27/2010 - 18:50 | 608455 Richard L

The Fed runs POMO with increasing frequency, at will, with no check-and-balance. It has an infinite "balance sheet". It IS the Plunge Protection Team.

So how do we know the market will EVER sell off?

Mon, 09/27/2010 - 20:20 | 608611 Prof Gulliver

Everybody sing....

"POMO in the morning,
POMO in the ev'ning,
POMO at supper time."

Mon, 09/27/2010 - 15:09 | 607842 davidsmith

As an update, here is the emerging legal case for an action to quiet title.

Through its

1. ownership stake in banks (creating Fifth Amendment Due Process rights to what is in FACT--not the arbitrary 31%--minimization of the risk of housing loss: see Huxtable v. Geithner Order on this [not the Order to Dismiss, sounds like a settlement was reached since Huxtable filed no opposition);
2. contracts with servicers (creating third party contract rights in borrowers--see Marques v. Wells Fargo);
3. mortgage principal reduction;
4. adjustments to gross income for principal reduction; and
5. loss of economic incentive to foreclose,

the United States has in fact forgiven home mortgage indebtedness.

Mon, 09/27/2010 - 14:57 | 607795 GetReal

Graham,

Where is the dollar and gold headed, if your scenario holds?

Mon, 09/27/2010 - 13:10 | 607453 tunaman4u2

I called this H&S in UUP yesterday... I'm going to let that R shoulder drop the buck to 77 when everyone & their little niece is in Gold.

Buy when no one else is. We all know every country will intervene somewhere around there to keep their export economy alive. China, Japan, Europe buying dollars. Its not being talked about right now... get ahead of the curve. Gold may go up but stocks will suffer.

Mon, 09/27/2010 - 13:05 | 607436 davidsmith

I want to coin a phrase and I want people to start using it. Graham is going to be discussing an example of it tomorrow, but it is going on everywhere now that we have a statist economy. The phrase is

stealth monetization

This concept will present a much fuller picture than what appears in the media as quantitative easing, or whichever of the popular terms you have used in your own mind up until now.

I am sure specialists in various areas will look at the term and say, "Gee, maybe that's what's happening in my field, because I notice..."

For example, real estate. Zerohedge's presentation of Reggie Middleton's discussion that banks, in short, no longer have an economic incentive to foreclose, is the talk of, frankly, everywhere. I'm from Michigan--it's being talked about there (even in RURAL Michigan). Was in Palm Springs, it's being talked about there. Implications? Who will ever make another mortgage payment, once this gets around? Who will lend on another house, once this gets around? Sheesh! It's over. The Middleton observation is, in my opinion, the black swan. It means game over. The mere appearance of the idea ends it all, and it will reveal it all, too. Just wait.

In a statist economy, that's stealth monetization. Basically, the Federal Government is stopping homeforeclosures nationwide on a permanent basis. Period. There simply aren't going to be any, anymore. Wrap your mind around that, because that's the way it is. Ally didn't simply decide to stop foreclosures--that order came from on high (according to my Wells insiders who should know, since their bank is crawling with Treasury agents).

In what other areas do you find "stealth monetization." How about in the hardware business, how about in education? You see what I mean. Once you get over accepting what Uncle Sam calls his activities, then you can call MORE of Uncle Sam's activities by their right name, if you have the right name.

Once the true dimensions of stealth monetization are known, the dollar will fall apart. Try this little secret: there is no longer an "economy" in this country. Economics has no relation to the United States. You have to wake up from that particular enchantment.

Mon, 09/27/2010 - 14:30 | 607711 pat53