Weekend Strategy Review October 2, 2016
Posted by OMS at October 2nd, 2016
The Dow rose 165 points on Friday, closing at 18,308. It was up 47 points for the week. The NASDAQ was also up 43 points on Friday and up 6 points for the week.
Friday’s rally was not unexpected. The 2-period RSI on the Dow was slightly oversold at 29.63 with No Trend conditions showing on the VTI. So when the French press reported that Deutsche Bank (DB) is closing in on a $5.4 billion settlement with the US Justice Department over mortgage-backed securities from the financial crisis, the market rallied. The original fine was $14 Billion. This fine would have likely caused DB to fold, as the entire bank was only worth about $15 Billion.
So by reducing the fine, Loretta Lynch, the U.S. Attorney General and head of the Justice Department not only averted a world financial crisis, she probably saved Angela Merkel’s job. She also did her part in keeping the markets propped up before the election, making the current administration look good. She also saved Fed Chair Janet Yellen from having to buy stocks and Bonds in U.S. companies, something we have never seen before. Yes, as incredible as this might seem, this was actually talked about as a means of saving Deutsche Bank! The plan would have the Fed print more money and use it to bail out the banks. Not only DB, but many of the other troubled U.S. banks that have financial ties to DB.
Hmmm?
But by reducing the fine, did it really change anything? Yeah, a major banking contagion was avoided for now by reducing the fine by $9 Billion. So this particular $9 Billion probably saved the world $trillions. It was an easy decision. But all of the bad loans and red ink are still on the books of DB as they are on many of Europe’s largest banks. The problem didn’t do away. It was only temporarily averted. If the Justice Department didn’t reduce the fine, Merkel would have come up with the money. Germany could not let DB fail. It would have let to a financial disaster.
A few months back, most European banks were given a stress test. Most of them passed. But this test is similar to the FDIC insurance sticker you see posted on the doors of most U.S. banks. It’s designed to give customers a good feeling about their money. It works only if people keep their money in the bank. When people lose confidence in the bank, they take their money out and the bank fails. No sticker on a bank door or stress test can save it. So this is where we find ourselves this weekend.
The banking crisis has been put off temporarily, but the problem has not been solved. It’s still out there lurking.
This week, we saw how Wells Fargo’s CEO was grilled by Congress for trying to do things to generate income and make his bank look good. His bank had revert to doing questionable things, like generating fake credit card accounts and repossessing the cars of American servicemen while they were fighting in Afghanistan. Nice! Congress had a field day with this, grandstanding for their representatives before the election. I love it when they criticize the banks with their mouths while their hands are taking contributions for their campaign. What hypocrites!
But forget about what happened on Friday with DB or the political theater you saw with Wells Fargo. Here’s what you need to understand.
The underlying problem with banks is being caused by low or negative interest rates. The low rates are keeping banks from making money. So even though DB might live to fight for another day, the negative interest rates will continue to cause problems with DB and other banks in the future. For example, in the tiny Bavarian village of Gmund am Tegernsee — population 5,767, the local bank is charging its customers to hold their cash. Hmmm? How long do you think the locals are going to keep their money in that bank before they start saving the 0.4 percent by putting the money under the mattress? This is happening all over Germany, and in many other developed countries like Switzerland, Denmark, and Japan.
So the banks are in trouble.
But what’s causing these low rates? It’s pretty simple actually. Its growth. There isn’t any. When don’t grow, you don’t need to borrow money. It’s only when you start building factories, houses, whatever; then you need bucks. Big bucks. When an economy is only growing at 1.2 percent, like ours is now, you don’t need a lot of money. So banks are not the place to be.
To solve this banking problem, we need to grow the economy. A growing economy will solve a lot of problems, besides those in the banking industry. When an economy grows, it creates jobs. And when people work, they start to buy things again. That’s when they will need money to build houses, and buy furniture and appliances to fill them.
But the economy will not improve, either here in the U.S. or in Europe, until the politicians figure out that you can’t tax or regulate your way to growth. It just doesn’t happen. It’s Economics 101.
So as I said many times before, as a nation, we need to think about the larger picture. Right now the political pundits, the media, and the establishment all want you to focus on things that will maintain the status quo. This is what always happens. The people in power want to stay in power, no matter how poorly they have performed. The establishment behind the power, the media and the political packs, don’t want to see the boat rocked. They will lose influence. This is why someone like Warren Buffet gives millions to the current administration. He doesn’t want to see the Keystone Pipeline built. His railroad would lose money. Doesn’t matter if all of the rest of us have to pay more for our gasoline.
But as they say in Brooklyn: Fahgettaboutit! Unless we torpedo the current boat with all its regulations and prohibitive tax policy, we’re never gonna get this economy going again. We’ll continue to have a slow or no growth economy, and we’re never going to fix the problem. All we’ll continue to do is apply temporary band aid solutions. So when you evaluate your candidate, pick the one you think will do the best job at growing the economy. Focus on the economy and not on a candidates hair, marital issues, or their emails. Everything depends on the economy: our security, healthcare, defense, education, social security, your retirement, etc., it all depends on growth. We need to get growing again.
Anyhow….
Friday’s rally saw the Dow close with an RSI of 65.33 and a VTI showing No Trend. When the Dow was up about 220 points, the 2-period RSI was way overbought, and that’s when I started to establish a few short positions using inverse index ETFs. With the Dow still in a trading range, and The Professor not generating a trend signal, I wanted to put on a ‘trial’ trading position. So when the Dow dropped 45 points in the last 15 minutes of trading, I had to smile. Once again, the combination of an oversold RSI with the VTI proved deadly.
With the market rallying on Friday, gold fell. GLD fell 0.43 cents to 125.64. So now the VTI on GLD is 44.4 but the 2-period RSI is an EXTREMELY oversold 3.01. In other words, gold should rally early next week to relieve the oversold conditions.
Here’s the thing to watch: If you overlay a chart of UUP, the Dollar ETF on EUO, the ETF for the Short Euro, there’s not a nickels worth of difference between them. They’re practically the same chart, only one (UUP) is a long ETF and other (EUO) is a short. In other words, when the Dollar goes up, the Euro goes down.
On Friday, EUO closed with its VTI heading down and reading 44.9. IF EUO continues to fall this week, as the Euro rises in response to DB being ‘saved’, the Dollar should fall. I’m still watching the lower trend line of UUP, now located near the 24.6 level. A decline below 24.6 on the Dollar ETF would be very positive for gold.
One of the things that I’m troubled by this week is all the volatility. Friday was the eighth consecutive day that the Dow has made moves of over (or near) 100 points. This volatility is not something I would normally expect to see in a wave 2. Wave 2’s are normally straightforward a-b-c affairs, with the ‘b’ also being a simple a-b-c pattern. But this wave is different. Yeah, the current ‘b’ wave that started on 14 September still looks like a ‘b’ wave, but because it’s been so volatile, I can’t discount that it could be a ‘b’ wave within a Major Wave ‘D’, instead of a wave 2 within the start of a five wave down sequence.
Hmmm? What’s the difference?
Well, for one thing, it means that the Major Bear Market that I am expecting has still not started. It means that once Major Wave ‘D’ down completes, probably in the next month, we could see another major rally leg for Major Wave ‘E’ up before things start to get really ugly.
So once the current minor wave ‘b’ completes, minor wave ‘c’ down should take the Dow down about 8 -10 percent near 16,500 -17,000, with the SPX approaching 1940 before Major Wave ‘D’ down completes. So don’t get too Bullish yet.
But after Major Wave ‘D’ down completes, the current market action (all the volatility we’re seeing) is suggesting that another Major rally leg will develop later this year that will take the Dow and SPX to new all-time highs.
I know that what I’m saying is pretty speculative stuff, but just like General McClellan had to move his army when he found three cigars in an envelope with Lee’s battle plans, those eight days of extreme volatility are a major warning sign to me that the Bull Market is probably not over.
Besides, if I’m right about the next wave down being the ‘c’ wave of Major Wave 4 down, it’s going to feel like your portfolio has been ravaged by a war. If we get a 10 percent hit on the averages, there’s a good chance that many individual stocks will suffer 15-20 percent loses or more.
It all has to do with the Principle of Alternation. If we’re dealing with a Major corrective wave (wave ‘D’ down), then the Principle of Alternation applies. It basically says that if wave ‘a’ is short, wave ‘c’ will be twice as long. Also if wave ‘a’ is complex, then wave ‘c’ should be simple. So IF the current volatility is part of a corrective wave sequence, the next wave down should be twice as long as wave ‘a’ and almost straight down.
OK, stay with me….
So if wave ‘a’ down on the Dow started on 15 August at 18,866, and completed on 14 September at the 17, 992 level, that’s a decline of 696 Dow points. So twice that is about 1,400 Dow points. In other words, wave ‘c’ down of Major Wave ‘D’ down should end near the 17,000 level, minus a hundred points or so if panic sets in.
But IF this happens (no guarantees), then we should look for another major rally leg, Major Wave ‘E’ up, to complete the sequence. Remember, if the next wave down follows the path predicted by the Principle of Alternation, then it MUST be a corrective wave. I would have to label it Major Wave ‘D’ down and NOT wave 3 down. This means that it should be followed by a Major Wave ‘E’ up. This rally wave will likely happen after the election. The media will probably call it a Trump or a Hillary rally, depending on who wins. But we’ll know better.
If everything happens like I described above, it happened because of the Principle of Alternation in corrective wave sequences. Not because who won or lost an election. Hopefully we’ll be able to profit from all the moves because we learned about the Principle in Class, found a few clues, and then made the necessary adjustments to our battle plans.
Later today, I’m going to sit in my hot tub, light up one of my nice stogies, and plan my attack. I always think better with a good cigar.
Enjoy the rest of your weekend.
h
Market Signals for
10-03-2016
DMI (DIA) | NEG |
DMI (QQQ) | POS |
COACH (DIA) | POS |
COACH (QQQ) | POS |
A/D OSC | |
DEANs LIST | NEU |
THE TIDE | NEU |
SUM IND | POS |
VTI | POS |
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All of the commentary expressed in this site and any attachments are opinions of the author, subject to change, and provided for educational purposes only. Nothing in this commentary or any attachments should be considered as trading advice. Trading any financial instrument is RISKY and may result in loss of capital including loss of principal. Past performance is not indicative of future results. Always understand the RISK before you trade.
Category: Professor's Comments, Weekend Strategy Review