A mindset ‘tone’ . . . that underpins the comeback from last week’s ‘flash crash’, is (or was since we said this was ‘hanging by a thread’ and went to a ‘crash alert’ mode early this morning via ingerletter.com on the day’s first rebound rally above the prior high on Wednesday).. very interesting, as we got our ‘key reversal’ forecast (that’s a higher high for the Dow or S&P; a lower low intraday, and a lower close as well). To all the pundits more interested in marketing than the market; they ignore the technical significance of this, and argue that we’re simply climbing a ‘wall of worry’. Hardly so simple; by that logic markets would always become better buys in the face of disaster without considering that sometimes ‘controlled’ forecast rebounds get set to reverse.
So what is this expected turnaround about?
Not just because of HFT (high-frequency trading) manipulators (kind term considering how detached some of that action is to real fundamentals or even technical structures until the algorithms allow the robots to reverse directions) or because of a solid ‘slap’ at common-sense; plus what was a looking at a worldwide scampering into ‘anything’ pretty much, despite what is a threat of Deflation, not inflation, at least for now. Nor is it phased by even the Fed Chairman’s concern about the shifting of ‘swap’ markets in the banking system (of course the banks, not citizens are the Fed’s main constituent).
It’s interesting because the perception that we’ll ‘never see another bear market’ has it seems returned to some thinking out there; a sentiment that often prevails before a break occurs yet again. That’s why Wed night we said they were ‘pouring gasoline on a fire’, and about to ‘crest’ a hill before going down the other side quite soon. Earlier I have shared comparisons with the 1929 crash or beyond experiences; mostly just to denote ‘why’ we could not replicate all of that, because most of the important banks were kept open, and of course these days we have the FDIC to calm the public, who does increasingly ‘get it’, which took time, but may be a great thing to save freedom in America in the fullness of time (do you get the feeling some in government or even media would like to ‘dumb-down’ the news; as innocuous, even if human-interest type stories tend to be featured, rather than investigative analysis of our economic issues).
It’s because there’s something else we pointed-out back in the 2007-2008 semi-panic situation, as led into the eventual market collapse we forecast as an ‘epic debacle’ in the wake of 4 years of solid bullishness; but rebounds were and apparently still are a method of ‘how’ you recreate the confidence of stability, while the truth is a ‘fragility’.
In 1929, as was the case I noted last week in 1987 (without expanding too much on a psychological aspect of why we warned in August of that year that the break was just a preview of coming attractions), bullish enthusiasm had overcome previous the prior ‘flash crash’ (allusion to last week) dips in the market: Indeed the temporary breaks in the market which preceded the crash of 1929, and also in 1987, were serious trials of stamina, for those who had declined accepting the reality of unsustainable moves, or instead accepted what I called then (or recently) as ‘Alice in Wonderland’ fantasies.
Early in 1928, then in June, later in December, and in February and March of 1929, it seemed that the end had come, but each time the ‘controllers’ of the era brought life back to the sputtering uptrends; sometimes even taking them briefly parabolic, which the analysts and technicians of the era said proved the resiliency of the whole market (a theme I recall in my life during our 1987, our 1999-early 2000; and 2007 warnings as well). But back to 1929; on various occasions then, The New York Times happily reported the return to reality (defined as upside). And then the market took flight once again. However, then we got to August; stumble; rebound; failure; rally; um..October.
The point being that in all these environments, without making this a cliché; the U.S. economy was increasingly deteriorating (relative to the increase in debt service and so on as would be the case today; ie: relativity of a modest recovery to rising deficits), and the underlying fundamentals were more or less ‘unsound’. That’s not merely Wall of Worry climbing; looks like a duck, walks like a duck, and quacks; it’s likely a duck.
Technicians like to say that markets totally ‘anticipate’ fundamentals. Not always will be my point; because there are often powerful forces arrayed to defer this ‘coming to grips’ with reality, until they can’t pull the wool over anyone’s eyes further.
Take the midst of 1929 (or 1987 when we spotted Dollar shifts far before the market broke); the ‘bullish tone’ may not have been firm (rocky moves but basically holding together) while the analysts would be paraded to proclaim that the entire bull market remained in place. In the current environment this would be the crowd convinced that this isn’t just a cyclical extended rebound, but a new orthodox bull market of a secular nature (partial comments on this subject redacted in fairness to our ingerletter.com members) is proclaimed. That’s how they pledge reform, only to then backburner it.
Few participants in 1929, 1987, 2000, or 2007 anticipated a collapse in stock prices, much less a recession or Depression. Few if any accept my view that in the current situation we’ve been muddling through a ‘controlled Depression’ as I term it. In all those historical references, most saw the market’s quick recoveries as a good bit of evidence that the economy and market were both sound. They were not then, to say the least, and they’re not now; though of course we want to see sustainable recovery.
What’s occurring can be summed-up by saying that the economy, domestically and in Europe too, is fundamentally unsound; while the media parades ‘experts’ saying that even Europe is sound. Really? Trade may be helped by a lower Euro; but there’s so much more for them; like a melting of their social umbrella in ‘peripheral Europe’ and a deflationary environment that will also reduce absorption of more-expensive goods from China, or the U.S. for that matter. Nobody talks about the multiplier effect -of our debt servicing- bringing forward the ‘day of reckoning; nobody suggests a survey of Germans to see if they would like to extricate themselves from the Euro; and nobody summarizes the market by saying that the HFT moves by a handful of professionals masks the reality that we are and will increasingly face. The day-to-day euphoria might just be less of a factor than considering what last week’s ‘flash crash’ was really telegraphing; a mite early. The importance of all this should be first-rate in discussions; and is a warning. (This is also expanded upon to our members tonight.)
Bottom line: important tops are characterized by wild swings amidst great turbulence. In reality this market has been hanging by a thread; and our admonition of a resumed ‘crash alert’ to ingerletter.com members Thurs morning (ie: idea of outside-down-day semi-collapse characteristics to the session; with emphasizing taking-aboard near the high this morning new bearish positions), was right on-the-money. On Friday, they’ll try hard to not pull the trigger on a further plunge, but may not be able to abort it, in front of Monday which will face substantial nervousness over proposed trading rules.
I’ll delve into this more via the video a bit; plus have a further new update on Pure Bioscience (speculative; not for everyone; and breaking out to the upside based on what we discussed last night); but in any event encourage general market caution. In the ‘Flash Crash’ last week we suggested taking gains; and projected the Eurozone version of a Plunge Protection Team bailout for early this week; then down anew. In light of that we advocated bearish posturing (including long volatility) early Thursday.
The world may be flush . . . with liquidity; but that doesn’t mean it will press stocks right back to totally unrealistic levels; especially when you assess the impact on S&P earnings that ‘Deflationary’ conditions (even if mild) can suggest, combined with the diminished results for U.S. multinationals with respect to their export business as the Dollar (which we were almost alone in correctly called the prior decline, all this year’s rally, and the currency debasement which does not automatically result in inflation). Only clowns suggest that lower prices caused by deflation (including oil) is favorable. Cash is king; not trash; and we have reiterated that during the past days of rallying.
Debt impairment . . . is the concern; not earnings and recovery optimism as prevails, at least among the delusions of those who see a sustainable economic recovery with no contractions to test the mettle of the turnaround efforts domestically or worldwide.
Gene Inger, Ingerletter.com
This is the third periodic contribution to ‘Mad Money’, and we’re pleased to participate with this new advanced social media format. While our normal comments are provided each evening and four or five times daily via video to our website members, we do want to share with you highlights of this complex evolving investment scene. We try to be neither permabear nor permabull, but permarealist for over a 40 year timeframe, since I had the honor to pioneer financial television in the U.S.A. This dangerous time is not over, and that’s a point I want to convey, so everyone realizes there are 2 sides to this coin.Tags: gene inger, HFT, ingerletter, online investing, stock market predictions, the street, thestreet, what is the stock market doing
