Professor’s Comments October 8, 2013

Posted by OMS  at October 8th, 2013

The Dow fell 136 points, closing at 14,936. Volume on the NYSE was low on the decline, coming in at only 85 percent of its 10 day average.  There were 51 new highs and 45 new lows.

The SPX traded as low as 1674.7 yesterdy.  So far the low for the current decline remains at 1670.35. I still believe that there is a good possibility that the SPX will test the 1660-1665 level before Wave D down completes.  Because of this, I continue to hold off on any new buying decisions until Wave D completes.  It may take another few days.

If you have been watching the SPX for the past few days, you will notice that the index is forming the Blade of a very nice Hockey Stick Pattern. And now, the lower portion of that Blade is sitting right on the 200 day moving average. As long as this Pattern continies to form, the odds are high that the market will rally once the current ‘cloud’ in Washington is removed.

The VIX rose to 19.41 closing on its high of the day.  The high close was over a point from its Upper Bollinger Band, generating another VIX Buy Signal set-up. The VIX generated its first Buy Signal last Friday, so the set-up would be for another signal. We see this a lot with VIX Buy Signals as they tend to be early and many times occur in clusters. We saw the VIX generate three Buy Signals between 21-30 August, just before the September rally started. So now we have a set-up for a second VIX Buy Signal.

The most newsworthy thing that happened yesterday was a statement that a Chinese representative directed at the US. He warned Congress that they need to resolve the political impasse over the debt ceiling.  Now it’s one thing for Russia’s Putin to say something. He gets a lot of media attention when he speaks, but really doesn’t have a dog in this fight. On the other hand, when a representative of China warns the Congress, folks in Washington should pay attention. China is now the biggest foreign creditor of the United States.  They currently hold over $1.3 trillion of our bonds, and probably a lot more if you count the paper held through intermediaries. They also hold about $3.5 trillion of equities and other dollar-denominated assets, which could get hammered if the US defaults.

This is not something that the US should take lightly. By expressing its concern, China is warning the US that it could start scaling back on its future equity investment and Bond purchases.  If this were to happen, it begs the question of who will buy the all newly printed paper that keeps the US government running?  Even if China were to slow down its debt purchases, it would have negative consequences for the US, as it would send interest rates sky rocketing higher. This is something that the President, Congress, the Fed and every American should be concerned about. When a country owes more than $17 trillion dollars, and its debt exceeds GDP, it is no longer the master of its own destiny. The bank is. And in this case, that bank is China.

Waiting and watching,

That’s what I’m doing,

h

Not sure of the terminology we use? Check out these articles

The Hockey Stick Pattern
The Creation of Waves and Trends
FAQ

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