The Bear is dead! Yes, that
is a gross exaggeration. However, it is now distinctly possible
that the Bear is playing possum and that his reappearance as a growling
grizzly has been delayed significantly.
Finally, we have some resolution
to the weird and contradictory signals and are beginning to get
a clearer picture of where things are now likely to go.
You, dear reader, have probably been
as frustrated as I’ve been over the past two months as we
tried to make sense of the jumbled omens, portents and entrails
thrown up by both the astrology and our technical charts.
In the end, something weird was
happening … and, in many ways, I am astounded at how our purely
technical charts pointed to a resolution of a crisis which threatened
to collapse the global financial system.
Week-by-week we have gone through
charts where positive divergence continued building below the surface
in spite of a daily diet of news disasters; where the long-term
monthly charts were telling us the potential for a huge rally was
developing, even though we knew the final, sudden downleg of the
current Bear posed a huge threat.
Doubtless you have been as tired
of reading, as I was of writing, that the weakness of the “rally”
out of the July Lows was almost too weak to be believed and that
it was pointing to something seriously out-of-kilter with “normal”
market movements.
A few weeks ago, while warning the
July Lows would be retested, I made these remarks:
“When the markets hit
bottom in July on massive volume and with a record number of new
Lows, the spike in what is commonly referred to as the “fear
index” did not reach nearly as high as August, 2007, or
the January and March bottoms of 2008.
Many commentators dismissed
the VIX as being no longer relevant. However, given the other
strange contradictions between markets which started emerging
simultaneously, I disagreed and it seemed to me to be just another
part of the odd pattern which was developing.
Those contradictions have not
gone away and, at this stage, I still believe they’re occurring
because of the chance a massive rally could get underway after
the next severe plunge.”
VIX Monthly[chart]
click
to view this chart and download the entire PDF file.
This is the latest monthly chart of the VIX – the
“fear index” – and we now see that the VIX was
not “broken”, it had not become irrelevant.
July’s spike did not hit the
former levels needed for a Low in stock indices … because
a Low was not reached! The level of fear did not reach high enough
because the markets had not finished capitulating down.
This opens up a couple of interesting
possibilities we’ll go through in a moment. But first, while
this latest spike may have produced a multi-week tradeable
Low, it is not certain that the Bear is dead.
If we check 1998 and 2002, we see
the VIX maintained a very high level of volatility for three, or
four, months.
Back in July, I remarked I’m
not a big fan of the “it’s different this time”
crowd, because it very rarely is different.
However, this VIX reading, taken in
conjunction with the unprecedented action from the White House and
Wall Street in the past few days, opens two interesting possibilities.
Scenario One:
As we all know, I’ve been blathering on for weeks about the
weakness of the rally from the July bottom, while warning it would
be subjected to a retest because of the record number of stocks
which hit new Lows at that time.
This was particularly so because of
the unusual strength of the downtrend from the May High, which barely
paused for even a mild consolidation.
It now looks as if that entire period
from mid-May to last week was part of the same downleg
… and that instead of being an inexplicably weak Wave 4 countertrend
upwards, the mid-July/mid-September sideways range was the consolidation
which didn’t occur during the plunge from May to July.
If that is the case, Wave 4 is now
getting underway and should make a 50% retracement of the May-September
downleg … just as the countertrend rallies out of January
and March recovered 50% of the drops.
Scenario Two:
The second possibility is that the Bear has been forced into artificial
hibernation early … and that what we’ve just seen is
a truncated Wave 5 down that was cut off at the knees by massive
global intervention.
I repeat … things very rarely
are different and we should consider that as a possibility, rather
than a probability, if for no other reason than that the weight
of historical evidence dictates that the final downleg of Bear trends
is very sharp and very fast and
lasts, on average, 42 to 54 calendar days.
If the rally which now appears likely
gathers legs and can continue its momentum past a normal second
degree countertrend timeframe, which is 7 to 12 days, we are looking
at something more cyclical – a minimum of 30 days, and potentially
running out to 45, 60, or even 90 days.
The Alternatives
The first of these is that we’ve just witnessed a massive
blip going into options expiration and that the rally is a first
degree countertrend (1 to 4 days) which will fail by Tuesday and
the markets will resume their freefall.
The second is that we’ve started
a second degree countertrend (7 to 12) which will fail sometime
next week as we run into the New Moon and a major Fibonacci cluster
of market turn dates … and the markets will resume their freefall.
One thing is different
And that “thing” is the massive intervention by Governments
and Central Banks – but, more specifically, the steps taken
to ban the practice of short selling on stocks viewed as being strategically
important from an overall economic viewpoint.
As I write, the proposal on Wall Street
is to maintain the ban until October 2, with the option of extending
it another 30 days.
We need to weigh the potential impact
of this ban very carefully … and especially since a 30-day
extension would run us out to the possible 45-day rally period I
mentioned above.
It means this … the weight of
forces now favour a substantial rally, simply because much of the
downside risk has been compelled to change direction.
Something significant has taken place
in the past few weeks and it’s this … Governments have
ganged up to bash the hedge funds into submission.
Russia has shown a willingness simply
to shut down its markets.
The sovereign wealth funds –
the very, very big operations run by the Arab Gulf States,by Singapore
and the mainland Chinese – forced a collapse in commodities,
including oil and gold, by shifting their focus to the US dollar
and support of the world financial
system.
And the reason is simple … they
all own massive amounts of that system. Dubai and Singapore have
been forced to watch as hedge funds played with the stocks they’d
poured billions into just a few months ago.
The Arab States have been converting
their petrodollars into financial assets for decades and have been
involved in gearing up the Emirates zone as a world financial centre.
China, in particular, has watched
its stock markets collapse as commodities price rises attacked its
competitive manufacturing position while dragging down the value
of its enormous greenback reserves.
The hedge funds got too greedy and
too arrogant. They have been forcing down the price of shares in
some stocks to the point they know will trigger a massive flood
of margin calls on directors, executives and other stock holders.
And Governments worldwide have decided
it’s time to break their back. Who would now dare to short
Russian stocks, knowing that Prime Minister Putin would simply lock
the doors and not re-open them until he was sure every short would
get burned into
oblivion?
Ditto for the City and Wall Street.
Will anyone dare to short anything on the New York Stock Exchange
after seeing the lengths to which Bush, Bernanke and Paulson are
prepared to go?
What it all means is that now the
only downward pressure can come from institutions selling shares
they actually own.
And the massive, massive volume all
through last week would suggest there may be very, very few sellers
left in the market until it goes significantly higher than it was
at Friday’s close.
Too, the hedge funds can now enter
the markets only on the long side … their impetus has been
forced to change from shorting, to short-covering and, now, to playing
the long side – if not of industrial and financial stocks,
then back to commodities, oil and gold.
Remember, though, that China, Singapore
and the Arab sovereign wealth funds do not want to see a resurgence
in those areas until the security and the stability of the world
financial system has been locked down.
An overview
We cannot yet be certain the Bear has been isolated and forced into
early hibernation.
But that is, also, a possibility we
cannot rule out!
Remember, there is now no traditional
Bradley Model turn date until December 14, following the one which
occurred yesterday.
We have a Fibonacci turn cluster and
a New Moon centred around the start of next week.
But we need to be careful that these
do not mark only a temporary High – or Low.
Traditionally, October is a bad month
for American markets, although it also usually brings a recovery
which starts off the almost-annual Santa Claus rally.
And there are some short-term and
longer-term cycles which are not due to bottom until mid-October.
And one further complication …
the enormous political pressure on the Republican side of US politics
to fix the economy before November.
Add all those political imperatives
together – from Singapore to Dubai, from Moscow to the Potomac
– and there are some very heavy players with some very big
money with some very vested interests in shooting this Bear, and
not just with a temporary
tranquiliser.
On top of those considerations, we
still have the contradictions. Year-to-date, the Russell 2000 is
down a piffling 1.6%, and rose last Friday with volume running at
177% of its 10-day moving average.
Look, I’ve heard every explanation
under the sun for this apparent “quirk” and I am as
disbelieving of all of them as I was of the notion the VIX was “broken”
and “irrelevant”.
All of the “explanations”
boil down to one thing – Russell 2000 investors are morons
who can’t recognise a Bear on the rampage.
If the broader American economy were
truly in dire straits, why on earth would Pissant Publishing and
Whacko Widgets continue to outperform Boeing and Caterpillar? It
just doesn’t make sense. It’s not logical.
And it’s not just the Russell;
it’s the S&P Midcap 400 (down 6.2% YTD) and the Dow Transports
(up 11.6% YTD).
Let’s look at some technical
charts …
AUSTRALIA
ASX 200 Big Picture[chart]
We’re starting this week with
a look at the ASX 200 because there’s something I want to
illustrate with the use of trend lines.[charts and comments follow...CLICK
HERE to view the charts and download the FULL version of this report
with all technical charts and further comments. (PDF format)
The World At Large is delivered in advance to Astrological
Investing Premium Member subscribers. Randall Ashbourne
is a former journalist and political strategist residing in Australia.
*QHT Technical Charts created using Quick
Harmonic Trader Software, by P.A.S. Astro-Soft, Inc. makers
of Galactic Investor Astrology software.
***
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