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Saturday, February 23, 2013

Saturday, 2/23/13 update

I hear bears growling in the woods.  And well they should.  In recent weeks some cracks have begun to appear in the market's foundation:

1) 4th Qtr 2012 GDP growth reported as negative;
2) Wal Mart reporting sharp sales drop off in February;
3) MOST IMPORTANTLY rumblings from the Fed that QE Infinity may not be infinite after all.

But as usual for the market, successful trading not only needs to answer the question of what but also has to answer the question of when.  And the "when" in this case may be "not quite yet".  A good EW case can be made that the ES 1530 high of Wednesday was the final thrust high of an ending diagonal, which in turn was the final move in a double zig-zag "X" wave bull market dating back to the Mar '09 lows (Alternate 2 below).  However, the preferred count is that the 1495 low on Thursday was either a Minute W4 or wave "a" of a Minute W4 - also in an ending diagonal which is the final move in the run up from Mar '09, but dictating a Minute W5 rally yet to be completed (Alternate 1).

Alternate 1

Alternate 2

At this point the alternates are pretty close to a 50/50 shot IMHO.  Alternate 2 is pretty much eliminated on any move up through last week's highs, so that answer could come fairly quickly as those highs are still very nearby.

The bounce into Friday's close off of Thursday's lows was instructive.  It started as a very corrective looking move with a lot of overlaps and sluggish momentum.  But it started gaining a more impulsive look after mid-morning on Friday.  Follow through buying first thing next week will be important to the bull case.

Also of note is that Al's Daily Indicator generated a weak buy signal on Friday when it bounced up off a low of .96 established on Thursday.  A weak buy signal at that juncture would be expected to kick off a 5th wave, which in equities is usually a weaker move.


Some random thoughts.  Ben the Beard certainly has a quandary.  Matter of fact, our country as a whole is facing that quandary.  Anybody with half a brain is aware of the ominous facts, but let's review them anyway:
- Our government is running continuous deficits of incomprehensible proportions - a trillion dollars is $1,000,000,000,000 - I don't know about you, but I have a hard time wrapping my head around that number;
- The accumulated debt is at $16 trillion;
- The Fed has been financing that deficit on an ocean of liquidity;
- This ocean of liquidity will have to be sopped up at some point or risk hyper-inflation and a collapse of our currency and thus our economy;
- A possible solution is to raise taxes significantly - and regardless of White House propaganda those taxes will have to be on everyone to gain enough revenue to be meaningful - but that risks economic collapse as well;
- Another possible solution is to make significant cuts in the Federal budget, but that appears politically impossible;
- If the Fed ends QE Infinity and begins sopping up the liquidity that has been created, then interest rates are almost certain to rise, which also invites disaster (more on that below).

And that's where we get to the real rub.  One solution beloved by conservatives is to "grow ourselves" out of the problem by effecting a major tax reduction to goose the economy.  History has shown that this has actually worked, and quite effectively.  The problem this time is that mountain of government debt.  If the economy were to take off, then interest rates are bound to rise regardless of what Ben the Beard wants.  And an increase in interest rates to more normal levels will blow up the federal budget via higher interest payments on the debt, and thus an ACCELERATION in the deficit accumulation and thence even higher interest payments, and so on.  So rather than getting out of the soup, we stay in it as it gets even hotter.

One enlightening conclusion that can be reached here is this:  it appears that a sluggish economy is actually less risky than a booming one in the context of current constraints.

How do we get out of all this?  I don't know, but I fear that an economic disaster precipitating a major reset is in the cards.

And that's why I'm long term bearish.

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