Why I’m Worried About Being Wrong, Or Not

I wouldn’t be a normal human being if the strength of the stock market rally didn’t make me worry that my long term outlook for a bear market is wrong.

Back on January 9, I posted a likely outside rally target of 2640-50. The S&P was then trading at 2584.  Now it’s at 2725, and in the wee hours this morning, it’s looking even higher.

It’s small comfort that I’ve been suggesting that you look to several of our gurus here at Money Map Press for trading picks that are indifferent to the market’s direction. These are short term plays that take what the market gives. Our guys have been incredibly successful at finding hugely profitable trades regardless of market direction.

The moneymaking power doesn’t stop (even when the market drops)

But in my big picture repports here, I’ve recommended not chasing this rally for the long term, because the liquidity backdrop is bearish, and so are the long term technical indicators up to this point.

The Fed came out with some strong words last week that set the market off again. They made it look like a major policy reversal toward ease is under way, and the market and the media universally perceived it that way.

But is it really? Maybe not. And what does cyclical and technical analysis say now about how high this rally will go and whether we’re still in a bear market?

Click here to find out, day tripper!

As far as the liquidity backdrop, the Fed threw lots of words at us, but as I explained in Saturday’s post, it hasn’t really changed anything.

Talk is cheap. The Fed is still tightening the availability of money. Until it stops that and actually reverses policy by pumping money into Primary Dealer accounts via renewed QE, that’s bearish.

The financial markets must absorb an average of $100 billion plus of new Treasury supply each month. Since the ending of the government shutdown on January 25 the Treasury has already issued or scheduled $120 billion in new supply through February 15. That’s gargantuan. $15 billion of it settles today (Feburay 5).  Another $50 billion in previously unscheduled cash management bills will hit on February 11. Circle that date on your calender. Then $30 billion in long term paper settles on  February 15.

That should be a very rough week for the stock market.  The money to absorb that paper has to come from somewhere, and the Fed ain’t printin’ the stuff. In fact, it’s still making $50 billion per month disappear from the system. Buyers of Treasury paper will need to liquidate other holdings to be able to pay for the new Treasuries.

If those Treasury settlements don’t trigger a stock market selloff, then we’re in an alternate universe where debt fueled speculation rules. It would be an incredibly dangerous environment, but it could continue until something that forced traders to face the facts.

We’ll cross that bridge if we come to it. The market run should exhaust itself by next week. We must rely on technical analysis for price targets and signs that the move has reversed.

As far as determining whether this is a bull market again, I believe that the Fed must do more than just talk about adjusting policy. It must actually do it. If the market remains near or above the current level and economic data stays strong, then there’s no reason for it to do that. It will continue to tighten.

Furthermore, if the Fed merely slows the rate of balance sheet normalization, that will not provide the liquidity to underpin a bull market. The Fed would need to return to full blown QE.  Or in the absence of the Fed taking that step, either the Bank of Japan, or the ECB would need to do so. They all pump into the same worldwide liquidity pool.

But a Fed action would be the most effective.

What about short term targets for the rally? I post short term, intermediate and long term cycle price projections in my weekly market updates in the Wall Street Examiner. This weekend, short term and intermediate projections pointed to a target range of 2730 to 2850. It looks like we’ll hit the low end of that range today.

Then we’ll be on standby for signs of reversal.

But there’s a potential problem looming for the bearish case. Technically, any weekly close above 2816 would present a quandary. It would raise the prospect that the market is back in a bull phase, which long term indicators are neither confirming, nor signaling at all.

Clearly the 10-12 month cycle has turned, and that could be good for a bullish phase lasting a few months. It doesn’t guarantee that the market will break out above 2816, but the conditions are there.

If this is a big cycle turn, then the longer term indicators are huge laggards. So be it. They would be late in confirming, but once they have, then we could be more comfortable about buying the dips.

I’m skeptical that that could happen without the Fed reversing policy in fact, as opposed to simply talking about it.

Meanwhile, we know that since the Big 3 central banks are no longer creating the liquidity to fuel a rally, that this one is being fueled by the expansion of debt. Conventional investment funds are depleting whatever cash they have. Hedge funds and dealers are using increased leverage to bid up prices.

These processes are not sustainable without the backstop of QE. So for better or for worse, my conclusion is that without the central banks restarting QE, this rally will end violently. For now, I must continue to recommend not chasing this market for longer term investments. If that changes, there will be lower risk entry points available, and I will make it a point to look for and report those.

In the meantime, I recommend seeking short term profits using limited capital to trade options regardless of the market’s direction. Our gurus here at Money Map Press can provide you with a constant flow of high potential options trades.

The moneymaking power doesn’t stop (even when the market drops)

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