First off, I want to say something about QE2. If you read what the Fed said about the operation, they gave themselves plenty of loopholes to stop the operation with very little notice. This is why I have made reference to the market being only a press conference away from a bubble bursting and a lot of people going from "Weee, isn't this great" to a flood of margin calls.
By now it shouldn't be news to anyone that QE2 is hugely unpopular both at home, but especially abroad.
Today from Reuters:
"China said on Thursday that the U.S. Federal Reserve's move to ease monetary policy risked undermining the global economic recovery, adding that Washington should not force others to take medicine for its own disease". That's a powerful and poignant statement.
From the NASDAQ:
| "Brazilian President Luiz Inacio Lula da Silva said Thursday the world economy was headed for "bankruptcy" unless rich nations raise consumer demand rather than relying on exports to power recovery." Clearly his remarks target our QE policy. Moving to the G-20... Obama failed to close 3 trade deals with South Korea, Germany and China (China has been a year long negotiation to get the Chinese to devalue their currency to increase American exports) to reduce their trade surpluses with the U.S. to give U.S. manufacturing a boost. German officials accuse the U.S. of currency manipulation in trying to lower the value of the dollar (which recently has not been working, but QE2 starts tomorrow). Thus far the U.S. has given China a waiver by not labeling China a "currency manipulator" which under laws passed by the Democrats, would require retaliation. The U.S. backed away from calling China a currency manipulator by a matter of hours before the report was set for release about a month ago, going into the G-20, it's now clear that having done such would have been the highest level of hypocritical rhetoric considering QE2. |
A German magazine said "never before has the Merkel government had such a direct confrontation with the United States." With the German Finance minister saying last week that the U.S. Federal Reserve decision to buy $600 billion of government bonds "undermined U.S. credibility and was clueless."
The trade deal with South Korea was supposed to already be a done deal by this G-20 summit, at least that was the goal after the Toronto summit. It's largely a moot point though, even if Obama could get a deal done, Democrats face a lot of pressure from labor unions here at home and it would most probably fail to get through Congress relying on Republican votes alone.
Onto the Emerald Isle...
On Thursday borrowing costs for Ireland shot up to a new lifetime high. The E.U. is ready to step in should help be requested, but it has not yet come. Ireland has a fragile government that risks being thrown out and they are trying hard to prove they can pass the first of 4 austerity measures on their own without a Greek-like bailout.
To illustrate the dire nature of the crisis in Ireland, a final estimate for how much money needs to be poured into Ireland's banks to stabilise them due to the same bad loans the U.S. is currently embroiled in, came in at $50 billion Euros which is equivalent to $50,000 Euros for every household in the country. Now some doubt that $50 Billion is even enough.
To show just how dynamic the global economy is, just a week ago the EU thought it was in the clear, now the markets are afraid there will be what is being termed as a “Domino Effect” among the periphery of the EU because of a European plan to create a permanent rescue mechanism under which private debt holders would help shoulder the cost of future Euro zone bailouts. This s what is causing weakness in the euro and the $USD to gain ground against it. Now we have POMO starting, it will be interesting to see what happens with the currency markets as the fate of the stock market is tied to them.
Ireland's story is much like the United State's. For a decade Ireland's skilled workforce brought it to the pinnacle of European wealth, second only to Luxembourg. Then the banks started building and a housing/construction bubble took hold, just like here at home and about the same time. Much like American banks, they failed to understand the depth of the defaults at hand early on and now they are the first domino in what investors fear might be a chain reaction throwing all of Europe back into crisis mode.
The fear is Ireland falls, then Portugal and Spain and the EU is plunged back into the the worst crisis in its 11 year history.
In London 50,000 University students are tearing apart the city in a protest that is being hailed as “just the beggining” against rising fees and cuts in university staff. Austerity measures that the Europeans seem to keen on are going to cause a lot of civil unrest. Governments like Ireland's are going to fall.
Our own Austerity measures...
In the US, the “Debt Panel” is considering cutting Medicare, Social Security, the end of tax deductions for mortgages, and raising the retirement age. How long before the US looks like London?
What's up with the commodity markets?
I've been saying that we can expect margin rates to go up across the board as soon as the raised silver, cotton and soybeans. Today the ICE raised its margin requirements on Sugar by a stunning 65%!
We know about the YellinBernanke pulls the plug on QE2. Traders who have huge profits on their commodity positions on margin will see those accounts collapse forcing a barrage of margin calls. Interesting huh? I have openly wondered out loud whether QE2 will make it to its finish line for several different reasons, but now I'm wondering if these exchanges know something that we don't? After all, the QE2 announcement was filled with escape clauses that most people probably didn't pick up on and is heavily front-loaded.
Today's market...
Lets start with the daily SPY chart...
As you can see above, the SPY today gave up the slight uptick it had yesterday. All in all, the divergence is a huge relative divergence and these upticks and downticks are more or less irrelevant. If 3C were to cross below the red trendline and enter a negative leading divergence, we'd be seeing distribution like we have not seen probably since 2008.
Here's an indicator by Don Worden (probably one of the most important pioneers of modern technical analysis and money flow indicators) which is probably one of the best long term money flow indicators I've seen available in commercial charting packages, it's called Money Stream (MS).
If you have followed 3C's tracking of the rally that started in the 1st quarter of 2009, then you probably know that 3C started ringing alarm bells around October of 2009 showing distribution as having commenced. You can see that here in MS as well, right to the top in April of 2010. However, look at the green arrow comparing price now to price at the April highs and look at the difference in Money Stream between the same two relative points. This is an excellent example of a relative divergence and it's quite deep. It also is in line with 3C readings, although the two indicators share little if anything in common with source coding.
FX Markets...
As you can see by the 5 min chart below of the EUR/USD currency pair, little happened with the Euro today during regular U.S. market hours, the green arrow shows the U.S. market close.
However, in after hours we are seeing a move lower and this is significant because of the bigger picture and the market's high inverse correlation between the $USD and the stocks.
Looking at the bigger picture....
This daily chart of the pair shows the important Euro support level or the Dollar resistance level has been breached. I said earlier today there would likely be volatility around this level until it's taken out once and for all, which may be days or? In any case, currencies and commodities trend much better then stocks do so a turn down, would mean a strengthening dollar and a weaker stock market as well as many commodities. Perhaps this is part of what the commodity exchanges are trying to avoid by raising margin rates? And we are seeing this just on European weakness in Ireland, forget if the domino effect should occur or retaliatory actions are taken against the U.S. for QE2's own thinly veiled currency manipulation. *Remember the charts I've shown the last few days of the Dollar Index with its positive divergences as well as the Index's proxy, UUP and the positive divergences there. Or the recent charts of FXE and the negative divergences taking hold there.
Above is FXE's daily 3C chart showing both relative and leading negative divergences.
A while back I wrote an article, “What if the market turned and nobody noticed?” There's obvious manipulation in the averages like the S&P, the Dow and the NASDAQ and especially in their underlying ETFs; it's just too easy to do with the weighting of the averages and lack of volume. A few select stocks or ETFs get a bunch of money thrown at them through the QE POMO process and the markets close higher, but there's a degree of illusion in this. As I have recently posted, when we look at market breadth we can see clear declines in the number of stocks participating in rallies or the extent to which they participate. This is because there is not broad based strength across the market, but only in certain stocks and sectors that influence the averages to give the semi-illusion of a healthy market-it IS NOT a healthy market or else the breadth readings would be strong, instead they are weak. Maybe this weekend I'll do another post of breadth readings.
Look at what has happened just in the last week with names like BA, CSCO and DIS. Consumers are not spending at HD or LOWES. Retailers are feeling the pinch everywhere. This is still an excellent market to pick up shorts in stocks despite what the broader indices are doing. BAC is still a favorite of mine.
For your GLD/SLV updates, I want to show you slightly longer charts. We've been seeing intraday signs that SLV may be ready to outperform GLD and some general questions about GLD being under distribution. We know for a fact that PIMCO was selling a majority of its stake in Gold and I believe this is part of the reason we are seeing these negative divergences in GLD.
You can see an obvious difference in the 30 minute 3C charts showing basically confirmation in SLV and negative divergences in GLD which is exactly what I've been seeing on intraday charts as well as many of you have seen them in the updates.
Tomorrow starts a huge round of POMO operations, I believe 19 in all in the next 20 days which is 3x bigger at 2x + the frequency compared to the last round. I've been saying in the run up to the POMO schedule that I believe they will heavily front load the operation, which it appears they have done. Why? International pressure, internal pressure, at least 3 new hawks who have spoken out against Quantitative Easing who will come into voting rotation in 2011, and the fact that there's no evidence whatsoever that QE even works. If you watched the “Money Masters” series as I told you about a few nights ago, you will quickly become skeptical of the Fed's reasoning for QE in the first place. You'll have a better understanding of what the Fed really is and a healthy dose of skepticism toward their actions. The argument of whether QE works or not is subterfuge and the real reasons the Fed has gone down this path are most likely not something the general public would ever tolerate had it been made public. Which brings me to another reason, Ron Paul heading up the oversight committee in Congress and you can be sure he'll be right on the tail of the Fed at every juncture.
So tomorrow we'll see what this new piece of super charged artillery is going to do in the market. Watch the Euro/USD pair especially close and lets see if QE is going to do what every emerging market is afraid it will do. If it does, expect retaliation and soon. Currency wars and protectionism could follow which is why I have said numerous times, "I wonder if QE2 will really be the same as QE1?" There's a lot of risks if it is. We'll see the first round tomorrow. You'll want to watch the accepted to submitted ratio to see what effect this will have later in the day on the market. A high ratio will likely mean a close that is not too effected by POMO or even a close lower, a low ratio will likely mean a close higher.
After we get a feel for what is going on, new ideas will be up, or if any trigger during the day I'll bring them to you.
Lets see what POMO part 2 brings.
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