Bernanke And His Game Of Chicken

David Fry's picture

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Sometimes things can get out of control. So you have to wonder if the “taper caper” was either:

A. A deliberate ploy or trial balloon to gauge investor reaction

B. An effort to reduce speculation in extended equity and high yield sectors

C. Something that just got out of control as vigilantes showed Ben they’re still around

E. Even if Ben gives markets more QE, will they still trust him?

D. All of the above.

We’ll know more next week Wednesday when the Fed meeting concludes with a language parsing contest. In the meantime, stock market volatility is increasing as we’re experiencing alternating triple digit days now. Thursday was a combination of algos ramping a tag of the 50-day moving average, the McClellan Oscillator (NYMO) again displaying a short-term oversold -100 reading and the obligatory Hell-Sin-Wrath (WSJ reporter & Bernanke oracle, Jon Hilsenrath) blog post the Fed believes investors are over-reacting to “tapering” talk and to just calm the hell down. This combination allowed stocks to rally. 

Now markets are getting more volatile with each passing day. The IMF stated U.S. economic growth looked “modestly tilted to the downside” weaker. This followed the World Bank lowering global economic growth the other day. Most would spit on their always late opinions just as with rating agency’s opinions. Both may give the Fed cover for more QE.

Economic data Friday included a rising PPI of 0.5% vs 0.2% expected, and the prior -0.5%; the always amusing “core” rate came in at 0.1% vs 0.1% expected, and prior 0.1%; Industrial Production was flat at .0% vs 0.2%, and prior -0.4%; Capacity Utilization declined to 77.6 vs 72.9 expected, and the prior at 77.8; and lastly, Consumer Sentiment declined to 82.7 vs 84.5 expected, and prior 84.5.

One thing that pissed the average RIA or DIY investor was a story stating the ISM, (Institute for Supply Management) which releases its reliable manufacturing indexes to the public, are said to be now releasing it early enough to paying HFTs who can jump ahead of everyone else. This does and should be upsetting. But this is now controlled by Thomson-Reuters who are always interested in making a few more bucks no matter if it’s unethical or not. This is just another way to destroy trust in fair play for investors without connections or deep pockets. If this is true, drop da boyz at Thomson Reuters a note about how you feel.

Meanwhile, “bond daddy” Bill Gross stated that investors should avoid long duration income related investments: "We believe caution is warranted not just for fixed income investors, but for investors in all risk assets; avoiding long durations, reducing credit risk away from economically vulnerable companies and sectors". And, as if on cue, Detroit just defaulted on all its unsecured debt.

One thing I’ve been watching is the monthly DeMark sequential 9 counts which, even during previous bouts of QE, have proved reasonably reliable in producing a countertrend reaction. It may just allow markets to move sideways or decline. It’s hard to know since other DeMark indicators, especially from daily views have performed poorly this year. Nevertheless, we utilize them especially when markets are extended from this view.

6-14-2013 6-34-34 PM dow jones

Oil rallied once again making some wonder why given poor economic conditions. We did a short chart video on the subject and featured some analysis from a guest contributor.

As a consequence our exposure to equities is only at 30% (mostly token positions) with the balance in cash.

So down triple digits, up triple digits and down triple digits will probably freak-out many investors not liking the volatility. Most sectors just reversed course from Thursday to wrap up the week, failing to achieve the Friday follow-thru as achieved last week. If markets don’t rally after the Fed meeting next Wednesday, then it may become obvious markets are topping out.

Volume overall was lighter and breadth per the WSJ was negative flirting again with short-term oversold conditions.

6-14-2013 6-35-17 PM markets diary

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NYMO

NYMO

The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term.

NYSI

NYSI

The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends. I believe readings of +1000/-1000 reveal markets as much extended.

VIX

VIX

The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge". Our own interpretation is highlighted in the chart above. The VIX measures the level of put option activity over a 30-day period. Greater buying of put options (protection) causes the index to rise

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Bulls couldn’t do an instant replay from the previous week. Perhaps now we’ll just remain sideways until the Fed meeting or bears will force the issue before then.

It’s upsetting that reputable economic index providers would stoop to sell their services to allow HFTs to front run everyone else. What’s next? Will the Labor Department start sell employment data?

Next week is important obviously as all eyes will be on the FOMC.

Happy Father’s Day!

Let’s see what happens.