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Graham Summers’ Weekly Market Forecast (reversal week edition)
With the
exception of the usual Fed POMO-induced ramp jobs, stocks did next to nothing
last week, spending most of their time in a six point trading range. Indeed,
the only really significant items to note are the test of support at 1,134 and
the breakout to a new high (1156) for the rally started in September:
However,
Thursday and Friday’s action does appear to have set-up a triangle pattern.
Because we entered this pattern from the top, we should see a breakout to the
downside. We’ve certainly tested the upward sloping trend line enough times in
the last two trading sessions for it to be deemed a significant line of support
for this latest leg up.
Indeed, this
bottom trend line actually extends back to the week of September 20: the week
that stocks broke the upward momentum that carried the rally for most of the
month (see black line in the chart below). As you can see, this trend line
guided most of the market rally for the month of September.
Then in the
week of September 20th we broke down below it. Even more
importantly, the Fed POMO-induced ramp job on Friday September 24 was REJECTED
by this line, revealing that former support was then acting as resistance: a
very bearish development.
Since that
time, stocks have been stuck in a consolidation period between 1,140 and 1,150.
This consolidation period now appears to be ending in the triangle pattern I
mentioned before (I’ve drawn it in blue on the above chart).
Now, this
triangle pattern does allow for a
breakout to the upside. I’m not talking about anything huge, maybe a spike back
to 1,156 or 1,160. However, I believe
that based on technicals and fundamentals, the rally is VERY close to
completion and that we are heading for a massive collapse very shortly.
For
starters, this entire rally has been largely the result of two things:
1) QE
2 expectations (Hype and Hope)
2) The
Fed juicing the market and killing the shorts.
Regarding
#1, the whole notion of QE 2 hitting soon is nothing but pure “Hype and Hope”
propaganda being promoted by the investment banks with the help of the mindless
mainstream media.
After all,
with the Fed pumping the market to the tune of $10-20 billion per week, we
might as well say QE 1 never ended. So if we DO announce QE 2 anytime soon, the
US Dollar is going to plunge and inflation or possibly even hyper inflation
will hit the US as foreign banks and others flee the Dollar for real assets or
stronger currencies (Swiss Franc, Gold, etc).
Moreover,
there is clear dissent among Fed officials regarding additional QE measures.
Indeed, one could easily make the claim
that several of last week’s stock plunges were the result of various Fed
presidents issue more hawkish statements regarding more QE.
In plain
terms, QE 2 is not a sure thing. And the fact the market has bet so heavily on
it is EXTREMELY dangerous. It’s actually quite similar to the 2008 market
action in which everyone operated under the belief that “the Fed will save the
system” right up until the whole system collapsed. The fact this psychology is dominating market action again now should
give you an idea of what’s coming.
Which brings
us to the second reason stocks are rallying: the Fed is juicing the market and
killing the shorts. Put another way, the Fed is devaluing the US Dollar in
order to prop up stocks.
Indeed, the
fuel for this entire rally can be attributed to Dollar devaluation as the
S&P 500 and US Dollar are now trading once again at a near perfect inverse
correlation:
The result of
this is that Dollar bearishness is now at record levels and stocks have just
posted one of the ugliest market rallies I’ve ever seen in my career. We’ve had
no less than six gap ups in the month of September. And as we all know, gaps
ALWAYS end up getting filled.
So let’s
review all of this:
1) Stocks
have primarily rallied on Fed juice/ Dollar devaluation.
2) The
inflation trade (Dollar down, risk assets up) is now HEAVILY lopsided with
Dollar bearishness at record levels
3) The
stock market rally of September has broken giving way to a consolidation period
that will break out soon
4) The
investment world is operating entirely based on the mantra that “the Fed will
supply more juice”
This sure sounds like a perfect set up for
a reversal to me. On that note, I expect this week we’ll probably see a final
impulse high on stocks, but that stocks will end the week down, creating a
reversal week.
This in turn
I believe will be the beginning of a larger, VIOLENT collapse that will take
stocks back to 1,040 on the S&P 500 in a matter of weeks. And ultimately
I believe
we're heading to 875 by year-end.
In plain
terms, the time of hype and hope is ending, and reality is going to start
setting in. As it does, stocks will come "back to earth" which means
the S&P 500 falling 10-30% within the next few months.
There are
already multiple signs of this coming from the markets. Indeed, the
similarities between today's action and that which occurred in April 2010 are
STRIKING (I’ll detail them in tomorrow’s essay).
Good
Investing!
Graham
Summers
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If it feels like fascism ... and looks like fascism ... it probably is fascism. Agreed.
So what is your answer? What would you replace the current "system" with and how would you do it?
Has anyone written about a possible game changer if the Republicans take back the House and remove the filibuster status of the Senate this November?
Ha ha! That's funny, "game changer!"
WTF do people even bother, I mean, what is going to change? Wars? Govt spending? (the GOP has been equal in task to heaping here- I remember Mr. Contract on America -Newt Gingrich's- district received the highest amount of handouts than any other district except D.C.
The only parties in operation are the Rich Party and the Poor Party. The later has no representation; and since they don't have any ability to buy-off those in office, and those in office are members and representatives of the Rich Party, ain't no "game changeer" going to fucking happen- capiche?
Meanwhile the Rich Party can continue to sit on their piles of meaningless shit that's devaluing by the day.
I share your cynicism. What I'm talking about is the PERCEPTION that *this time* they might mean what they say: lower taxes, repeal Obamacare and initiate austerity measures, etc. If they do, this would be good for the economy. If they don't, wellll then ... they'll just be kicking the can down the road like their predecessors.
Lower taxes? Can someone tell me how this could possibly make ANY difference other than to the Rich Party (and it'll be only an illusion to them)?
And as far as Obamacare goes, well, this is a zero sum game. It's the insurance and health companies against the rest of the big corporations: no, the small folks [businesses] don't matter.
And austerity "measures" aren't going to do anything either. Why? Because that'll further kill the consumer-class that the Rich Party requires in order to feed itself.
Is this cynicism? No. It's realism. As long as one understands that this isn't about petty crap like sick-care and austerity measures, that it's the death of an entire System, then it's all pretty clear (and predictable). NOTE: the whole system existing system, or even any "pure/ideological" system, is structured to deal with zero or negative growth. Try as people might to put bandages on all of this, the bleeding won't stop until the patient is dead, and that includes just about everything that you or anyone else has come to rely upon.
Any "corrections" are going to do nothing more than delay the eventual collapse.
But... if you feel like drinking tea then, by all means, busy yourself with that...
Okay. It's my turn to make an assumption about you.
Your solution is to load up on PMs (and other commodities) and move to a) Canada, b) Germany, c) Singapore, or d) China? ;-)
Sorry. Wrong leg...
If it feels like fascism ... and looks like fascism ... it probably is fascism. Agreed.
So what is your answer? What would you replace the current "system" with and how would you do it?
OK... so if this does happen, GOLD and SILVER go down with it and we have the buying opportunity of our short lives to fill our pockets! N'est pas?
Should have called this article, GOLD and SILVER Sale! Find some, get some!
.
Is that u, Lord Blankfein?'
Tryin' to scare everyone into selling to you so that u can romp on up higher and higher?
What deal did you make with the politicians you bought and paid for? You and the remaining TBTF playuhs collected trillions in bribe/bonuses to agree to keep the market from further corrosion for a couple hundred years? Enough to pay a worth less dollars to pensioners, insurance policy holders, and orphans?
I don't buy any crash talk unless you and your Tribe have already taken your short positions. With short interest at extremely high levels a good bet can be made that any small rally will necessitate getting on our
" Dow 11K ^" beanies.
I think it is wrong in this market to think long term. I do not agree everybody is short/waiting collapse, ZH and other blog followers are minority among investors still. And establishment players rarely wish market going down. Many times market falls 3-4 percent, and targts of 8-900s on SP comeabout, or Hindenburg omens etc. I think that is time for covering shorts opened before, and if I couldn't open short on highs , because it falls 3 % in a day, I just wait now, for PPT to give support, downside trends are just not allowed. But I dont have to go long at overbought conditions either.
This sounds so right, it must be wrong.
I aint buy'n nuttin, I aint shorting nuttin. It's a scam, just a Rigged Casino.
Obamas collapsing approval numbers heading into an election virtually guarantees false flag events in markets and world stage, got to use 'fear and panic' now that 'baffle em with BS' has failed.
Now looks like a good time for buying short term vol.
Nice post; thank you.
Come on, everybody here wants the market to crash(like it should) but Benny is going to pump money into stocks until everything blows up because it is the ony thing they can do. Every bit of todays news sucked and the market is still green.
(Reuters) - The Federal Reserve must not launch a new round of asset purchases without setting out what it wants to achieve through the policy, the Financial Times quoted Philadelphia Fed President Charles Plosser as saying.
I enjoy reading Summers' analysis of current market events. Also agree with most of his content; like Bill, I think 875 may be optimistic. All depends on how/if Ben plays QEII and how his allies want it played. Too little/too late will be carnage for the happybulls. Who else is left to skin?
Great article and agree with most every point...not sure we will reach S&P 875 by year-end but think we will see that again within a year.
Hey, but if we did, that'd be grrreeeeeaaaat...
Thanks a bunch.
Let me be the "devil's advocate":
Why would expect <> if we already knew:
a) The mass already exited the stock market and fled to the bond market (witness consistently low volume for over a year now)
b) The Fed has already hijacked the market and can goose it up at will with its POMO nonsense?
In fact, does TA (study of footprints of mass psychology) when mass is not even present anymore?
If this market isn't going down this month, a lot of shorts will get creamed.
There is a hughe short interest out there.
You're right, but the absolutely *worst* thing that could happen is we just jack around in a 200 point range on the Dow going nowhere. That is a option-premium burning purgatory that I do not want to witness. (Unless I was long option strangles, I guess.)
"*worst* thing that could happen is we just jack around in a 200 point range on the Dow going nowhere."
I agree, but there's absolutely NO way that it could condintue indefinitely. I believe this is all the result of trying to postpone the plateu of growth, that, in essence, we should be falling down the backside of the growth curve. Regardless of what anyone does with stockmarket numbers, eventually they become more and more distanced from physical reality, reality, which, cannot be hidden. The string cannot be pushed on and all we're doing with all these manipulations is creating MORE string!
I think stocks are screwed. I'm not going near them. Only essential commodities like oil and foreign ADRs. PBR, CNOOC, BHP
Let's not forget we've been there already a few times when the market was expect to crash... and it didn't but did the oposite.
When Erin Burnett gets stressed her talk becomes increasingly nasal. Maybe she read this article