Thursday, October 10, 2013

Ingredients for a blow off top

Ingredients for a blow off top

The DJIA made a marginal new high last month at 15,709. That move was created in part to the response the FED getting cold feet and deciding to postpone the end of QE. Since the announcement and the September high the market has given everything back. We are today testing key support levels. The surge in the VIX over 20 and the massive concern about the government shut down and debt ceiling has led to the 900 decline in the DJIA over the past 3 weeks.

Technically, the DJIA has formed a triple top. A break above 15,700 would start this blow off top. Even if the DJIA breaks below today’s lows of 14,719.43 it should be short-lived. The line in the sand for a continued decline is the 14,377 level. Any close below that level for 2 days would indicate a triple top is locked in and a bear market.

As the title states all the ingredients are in for a powerful surge –

1. Continuation of printing money.

2. Janet Yellen becoming the next FED chairwomen and her dovish stance.

3. Bullish market tendencies for next 2-3 months.

4. The recent reduction in borrowing needs increasing the crowding out effect.

5. The perception that a 15.5 P/E is cheap and earnings will continue to grow.

6. Once the government either pushes out or fixes the issues the market will rally.

7. Rising real estate prices

8. Low/stable inflation

9. Relatively high VIX (22 level) suggesting a possible low although a number in the upper 20’s would be better. A move into the 30’s hasn’t happened since the 2011 and actually would be very bearish.

Of course a failure of our wonderful government to compromise in a timely fashion would set the seeds of disaster. A lasting effect of 3 months or more of gridlock would put the economy into a deep recession not to mention the long term effect on the credit rating. This scenario is highly unlikely. It was interesting to see all the government workers protesting the shutdown. Congress solved the bad press by given them back pay essentially giving the workers a paid vacation. Holding small parts of the government hostage in this stalemate will not be forgotten. For those currently holding office it’s a lose/lose situation.

Longer term all those concerns mentioned in previous blogs remain of great concern. The first to stumble was the consumer followed by the business sector. Our government has picked up the spending of the credit card. The problem now is there is nobody left to bail the government out of the massive debt and spending problems. Sure the government can print more money but that bonze scheme can only last for so long. At the end the majority are losers. The perception the FED can keep the ball rolling will end with the consequences to be felt for years. Just ask Japan how free money has been working out for them the last 20 years.

Gold made a low at $1186 in July. $1270 is very important support and if it fails a retest of $1146 at best is expected. A move over $1439 would be very bullish. As discussed in July a low is expected in the fall. One can start nibbling into gold at the current level. When scaling into a position use a certain dollar amount and buy every drop of $50-$100. Gold could still drop below $1,000 in the next year.

Bottom line is keep trailing scale stops. The market has rallied over 130% off the 2009 lows. Now is not the time to be super bullish but beware the ingredients for a blow off top are very possible. Right now the weak hands are selling especially in the momentum stocks. If the government does fail all bets are off. The assumption here is a deal will be struck. Just like 1999-2000 and 2007-2008 there was a big blow off top. Could the September top be it? It’s a triple top but worth watching however the ingredients for one move higher are still active especially if the Congress reaches some deal. The push the problems down the road and extend and pretend scenario is still very much the political case however next year’s election will change it. As we all know the market anticipates 6-9 months ahead, this blow off top if and when it happens will lead to every sharp minimum decline of 40-50%.

No comments:

Post a Comment