Guest Post: Where Are The Markets Headed Next?

Tyler Durden's picture

Submitted by Tony Pallotta of Macro Story

Where Are The Markets Headed Next?

Being honest, no one knows. But, using the current road map it appears we may have a little more selling before a decent move higher. Below is the updated 2007 "analog" as compared to the current market. Few interesting points.

The move in 2007 from Point F to the next low was 15.3%. The market then rallied 10% before another leg lower.

The current move from Point F to the current low is 11.1%. Interesting a 15.3% move from Point F would bring the SPX to 1,143 which is the rough target of the head and shoulder's pattern and where key support levels come into play.

 

At some point this market will rally and will rally hard. Remember there are a lot of participants who view this selloff as excessive and based on fear. They view the macro data as a soft patch and see the Fed ready to launch QE3. When this market rallies they will be very loud in their "I told you calls." Many shorts with conviction after a day or two of market strength will in fact panic and begin to believe in the health of the economy contrary to what they know in their heart.

When studying the 2007-08 chart remember Bear Stearns was "bailed out" by JPM in March 2008 which caused a multi month rally that preceded the epic selloff.

My personal view is we are headed for a similar epic selloff. I'm not sure when but suspect it is sooner than most think. BAC breaking down could very well be the modern day LEH failure. We are surrounded by "black swans" right now from rumors of Italian run on the banks to failed Spanish auctions and more.

Vix Skew Divergence

The skew continues to move lower while the vix moves higher meaning volatility is more evenly distributed and "black swan" events are less of a concern among investors. Still based on historical levels the all clear signal for equities is unclear. Below are two charts (1) short term chart that looks like more selling is probable and (2) long term chart to put the current levels in perspective.

I wish I could be more definitive in terms of where markets are headed next based on this signal. Probability would say further selling based on divergence and the 2007 pattern but this market is emotionally charged with lots of leverage. A dangerous combination. Be careful out there, respect stops and don't be a hero.

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tsx500's picture

freaky Friday bitchez

TruthInSunshine's picture

No more glib or sardonic comments from me tonight. I genuinely think we may be on the verge of something awful ('we' meaning the global economy).

This is another credit crisis, with the Fed being genuinely constrained (with rates at 0.25%; what's to lower, unlike in 2007, when those rates were at 6.25%?), and unlike in 2008, with Bear Stearns and Lehman (and many other financials) sinking, now we have the too big to fail but too big to save - sovereigns like Italy, Spain - maybe France & the U.K - in serious risk.

The global economy isn't equipped to deal with this. It's an outsized crisis.

I want to point to this example as how the cascading effect quickly gets to the point that it's unstoppable, and this is quite relevant now, as not even the world's biggest central banks can 'fix' the massive debt overhang that's been accrued since roughly 1983, and the binge and purge is the only thing that will flush the system.

All the world is a debt junkie, some nations more than others, but debt junkies all the same.

Some junkies die during withdrawal. Keeping them high requires larger doses of drugs, which leads to nearly certain OD, also.

 

Here's the example:

 

   RealClearMarkets - Lessons From the Credit-Anstalt Bank Collapse

 

Like I said, this time, the credit risks are major sovereigns. There is no fix, by even the most imaginative angles.

This is what happens when Keynesianism run amok has debt layered on debt for many decades, and the financial parasites designed extremely opaque and uber levered derivative products to try and capture outsized profits on those vehicles, knowing that they will be bailed out - until they aren't, because their sovereign sugar daddy has taken a bullet.

 

Spirit Of Truth's picture

Now just throw a massive dollar short-covering rally into the mix since the dollar carry trade that lifted all boats will quickly sink them when unwound.  The Fed managed to engineer probably the most lop-sided trade and the largest associated speculative bubble in human history.  Ben Bernanke's helicopter just smashed into a cliff.

HarryWanqer's picture

Nah...  QE3 is right around the corner.  I am a buyer here.

Time to load up on BAC, NFLX and AAPL.

TruthInSunshine's picture

I had to double check that it wasn't Hammy, because even by his satirical stupidity, your post is legend.

Make sure to pick up some LULU, too, since your urinal cake business is sure to suffer for the foreseeable future.

Urinal cakes are highly discretionary.

Fish Gone Bad's picture

Might want to stamp: DO NOT EAT THE MINT on the urinal cake so the stupid people won't eat them after they are stolen.

rocker's picture

Harry, Hairy, Herly, Whatever. Your a pimp boy for CNBC. Get a job. They need you.

McConnel & Co. guaranteed the collapse of the U.S. economy.  You may get a dead cat bounce. Hint. Sell the Dead Cat.

Real investment money is going into Singapore and Russia with a little Indonesia.

The U.S.   We are Japan Now.   Means: Declining Markets and Economic Contraction. Japan would acutually be a better bet than USA.

Without fiscal aid from the government to juice anything. We are Dead Money.  Or should I say Declining for the count.

Japan did their 20 years of hell.  We have just begun. Bambi has no balls and is worthless.  He is Not FDR. Maybe Hoover.

Good Luck all.  We are going down here.  Cats included. 

long-shorty's picture

Harry,

as usual, anyone who fails to appreciate your humor and gives you a thumbs down is not someone I would like to have a beer with (and therefore also stands little chance of being elected President in 2012). keep up the good work.

long-shorty's picture

wait... shit... sorry, I got confused. I thought you were Hamy Wanger. You're not joking, are you? You are in for pain.

spdrdr's picture

L-S,

 

Note the putative surname of the poster.  It's not Harry, it's not Hamy, it's........ ANOTHER one!

Liquid Courage's picture

And when QE(Strike)3 bites the dust ... and it will ... the fortune you make in MicroDollars will be worth how much in  *NewImproved* MegaDollars?

About One dessicated cheese sandwich. Bon Apetit, Harry!

TruthInSunshine's picture

Floyd Norris of the New York Times, a through and through Bernanke & Federal Reserve Apologist, is just the latest in a long stream of Fed Apologists to criticize QE2 and QE, generally, as being an ineffective program.

I am not shocked, but I am surprised that so many Fed boosters are now publicly and loudly claiming QE is bad medicine, especially given that Jackson Hole is mere days away, and consensus view is that QE3 is a given.

And this isn't some article buried in on page B11 of the business section, it's a prominent and highlighted front page article.

There have been some hints that the Federal Reserve might be willing to resume purchasing government bonds, which it stopped doing in June, despite opposition from conservative members of Congress. But the revised economic data may indicate that the previous program — known as QE2, for quantitative easing — had even less impact than had been thought. With short-term interest rates near zero, the Fed’s monetary policy options are limited.



  • Time to Say It: Double Dip Recession May Be Happening
  •  

    moldygoat's picture

    FEMA camps and global currency ( not cigarettes or bum sex). Global fiatso coupons for food instead of debit cards. Great! Hope you can stash a kugerrand in your aynusrand.

    Tejano's picture

    It's unstoppable until it stops; and it will stop. Then there will be something else. This is not the end of the world. Life will go on. Embrace the change.

    caerus's picture

    like nickels and dimes right?

    Tejano's picture

    '42 - '45 nickels and mercury dimes.

    Manthong's picture

    The humble nickel still has nickel content and value.. about 30% over face.

    The rate we're going, it may be the new barter dollar.

    TruthInSunshine's picture

    Anyone  with pre-1965 Washington Quarters will be big pimpin'.

    wisefool's picture

    Absoloutely. Been stated here, and other places on the internets. common, physical metal US coins will be the day to day currency if TSHTF. PMs like silver eagles and gold ozs. will only be seen at hospitals, used to pay doctors for legitimate illnesses, or for surgeries after gunfights over said precious.

    EDIT: Fed has 1 Billion presidential and sacejwea coins stored in the basement. presidential dollar program to be halted. last president minted rutherford b. hayes. Sorry Jimmy, Bush boys, Bubba and Obama.

    http://www.bloomberg.com/video/72859192/

     

    DormRoom's picture

    There's no credit crisis yet.  What' the LIBOR spread?  You'll have to wait until one of the big European Banks fail, and create a cascading failure in Europe, which will spread across the globe in hours, thanks to the electronic age.

     

    Forget BAC.  If there's a credit crisis, it'll start in Europe.

    falak pema's picture

    In EU the central issue is will the Germans allow the ECB to print away if the Italian crisis creates bank liquidity crisis. That is now the overhanging cloud on the EU front. Looks like the printing presses will have to churn overtime all over the world : FED, ECB and BOJ! To keep the bears out of the honey pot!

    ZeroPower's picture

    Exactly. US banks are already on life support - but theres no way its getting pulled by Dr. Ben et al.

    Over here in London, some big decisions will have to be made regarding RBS and Lloyds, probably the 2 most probabaly suspects. Otherwise, pick any handful of SPA or ITA banks (hello France, you arent excluded) and we could easily see  not just a 1-2 LEH-AIG event but im talking systemic failure across the financial sector.

    Scary stuff.

    Seer's picture

    "The global economy isn't equipped to deal with this. It's an outsized crisis."

    Ah... the global economy is predicated on endless growth, so, sure, it's NOT equipped to deal with the fact that this is a finite planet.  Slinky down the staircase (note: not my description, but it really is the best one).

    Debt is just claims on future growth.  We wrote too many IOUs on the future.  We blew our wad.  We threw a rod.  Stall speed here we come, and then the reversal of economies of scale whipsaws us out of our sleep.  This is what collapse looks like just before it can't be denied any longer.

    Oh, someone here (ZH) mentioned that we were re-entering a recession within the depression.  Yup, it's a matter of changes in deceleration, but it's all down and to the right.

    golfrattt's picture

    Excellent, excellent post...

    Sorry, sir.... we're all out of silver bullets

    TruthInSunshine's picture

    Here's a more direct link to a very fine article on Credit-Anstalt:

     

    Lessons from the Credit-Anstalt Collapse

    And here's a very finely written, and eery (history rhymes, as Mark Twain would say) excerpt:

    The Austrian government stepped in to guarantee all the bank's deposits and other liabilities—but that only brought the government's own creditworthiness into question. "In today's language," says Schubert, "Credit-Anstalt was too big to fail, but too big to save."

    Freddie's picture

    Was't Credit-Anstalt the trigger for the 1930s Depression while Unicredit in Italy with other branches outside of Italy - the trigger for this one?   Don't both of them have the name Rothschild involved?

    Freddie's picture

    Was't Credit-Anstalt the trigger for the 1930s Depression while Unicredit in Italy with other branches outside of Italy - the trigger for this one?   Don't both of them have the name Rothschild involved?

    Oh regional Indian's picture

    All true TIS.

    Yesterday, the first grain on the sand shifted.

    Avalanche ahead. o doubt.

    ORI

    http://aadivaahan.wordpress.com/2011/08/04/many-drafts/

    Roger Knights's picture

    "too big to fail but too big to save"

    Here's a neater way to put it (feel free to use, everyone):

    "too big to fail but too big to bail"

    Use of Weapons's picture

    "An Outside Context Problem was the sort of thing most civilisations encountered just once, and which they tended to encounter rather in the same way a sentence encountered a full stop. The usual example given to illustrate an Outside Context Problem was imagining you were a tribe on a largish, fertile island; you'd tamed the land, invented the wheel or writing or whatever, the neighbours were cooperative or enslaved but at any rate peaceful and you were busy raising temples to yourself with all the excess productive capacity you had, you were in a position of near-absolute power and control which your hallowed ancestors could hardly have dreamed of and the whole situation was just running along nicely like a canoe on wet grass... when suddenly this bristling lump of iron appears sailless and trailing steam in the bay and these guys carrying long funny-looking sticks come ashore and announce you've just been discovered, you're all subjects of the Emperor now, he's keen on presents called tax and these bright-eyed holy men would like a word with your priests."

    km4's picture

    This is much more informative

    Here's The Problem With This Market Crash... http://read.bi/qcCJqt

    Diatribe's picture

    silver/gold to the moon!

    HungrySeagull's picture

    I have been watching Kitco all night on the Hour chart.

    It's limp as a 90 year old bedridden on sedatives.

     

    I look at this one of two ways. A complete capituation of previous PM positions by those who don't know better from either Physical or Paper shares or.... a complete surrender not by choice to cover losses demanded by the Market.

     

    I am getting too damn old to be pulling an all nighter waiting for Europe to open. But when they do, Asia's experience should repeat itself.

    Several times I have set up a ask; only to pull it and wait/see because of the persistent weakness shown by Kitco hour chart.

    HungrySeagull's picture

    It sure did.

    Used to be China bought hand over fist by the goddamn ship load and you can see it in the crappy PM Tape off Kitco or whatever.,

    Now? Nothing. Makes anyone standing about with a hand out for a Bid listing to buy something look like a Orphan "Oliver" holding the bowl up and asking "More?" only to be punished for such self initiative.

    Europe is going to open soon and I have a bad attitude. If you recall the old bumper stickers long ago about those with the Bird being the word... then we will see how this fine morning goes.

    Spitzer's picture

    gold to the moon

    Fixed it.

    Gibu The Great's picture

    We will rally to infinity on a +infinity payroll number. Barry made a phone call.

    Atomizer's picture

    Charles Hugh Don't Fight Bet On The Fed 

    http://www.oftwominds.com/mobileOTM.html

    Seer's picture

    Mother Nature laughs at the Fed!  And Mother Nature bats last!

    tip e. canoe's picture

    "Naturam expellas furca, tamen usque recurret"

    tip e. canoe's picture

    Since we all know any such Grand Gesture will fail, then the Fed would be committing institutional suicide.

    if you replace 'institutional' with 'intentional', the choices may become a little clearer.

    falak pema's picture

    Thanks Atomizer, I like reading this guy CHS's bearish view on what the FED can do.

    This is one of the key issues : Has the QE-2 failure (sterile can kicking) and the recent Congressional gridlock (no mercy on US fiscal pumping), changed the view of international markets on the reserve currency role of USD? Is this the straw that broke the camel's back and destroyed the sovereign creditor world's confidence (China, Japan, Germany/Norway, ME oil kingdoms; Russia), in the ability of the FED to pump and dump effectively.

    If this is the case than the american HF and their highly leveraged plays on derivatives will lose international surplus, (hot), money support. And the heat will turn directly on the US economy.

    "We don't believe you anymore" is the most damning thing a central banker wants to hear from his peers. In this case, QE-3's effectivenes will lose all effect. As Marc Faber says, the coming weeks will be crucial to see if the FED, and the US WS oligarchy it represents, still has financial clout to convince the sovereign creditor market to follow it.

    Grand Supercycle's picture

    S&P500 head and shoulders target is 1,176 and further downside
    expected.

    As mentioned for some time - S&P500 monthly has been tracking sideways this year. This extensive distribution signified a bearish big picture and that a significant downtrend would follow.

    http://stockmarket618.wordpress.com

    rocker's picture

    Where did you find that number, I posted it a few days ago.  Right on. Bounce from there.

    Zh says lower. Either way. It's DOWN from here.