The North American equity markets were stuck in neutral as if they were frozen last week, while awaiting the next Quantitative Easing announcement from Ben Bernanke and the FOMC due out this Wednesday.
Yet somehow at the opening of trading this morning (Monday November 01, 2010) Wall Street was extremely strong in the plus column, until a late-day sell campaign that looked like hedging returned the SP 500 index to again close at 1184 - a neutral level that was first reached on October 13, 2010.
The financial media immediately attributed the early 100 point Dow rally as due to everything from USA GDP data to strength of the Chinese economy. All bunk we say.
As I have stated before and teach, listening to this type of economic noise or media hype is largely a waste of your time. The financial markets are following exact trends and cycles, and after the fact, media portals rush to attempt a logical explanation.
However, the exception to this rule is when surprise news is of a material nature. In essence, Man has the ability to temporarily intervene.
This coming Wednesday will be very different, in that release of further quantitative easing and stimulus from the USA Central Bank, will be of a material nature.
Given Bernanke's money-printing track record, I would personally wager that Mr. Bernanke will once again come to the money-printing rescue, or at least imply in typical hidden Fed-speak lingo, that he is acting, but cannot release all the final details. One can certainly bet that the first beneficiaries on his gift list will be his bank friends and Wall Street.
Meanwhile, no one should speculate about what could happen this Wednesday, and certainly not I, since I do not receive the insider or whisper news from the Federal Reserve, an institution that was once more secret than the CIA, the FBI and the Pentagon combined. Remember this is the only USA institution that has never been audited and is accountable to no one.
All joking aside, we cannot and no one should speculate about the quantitative easing announcement. However, we can guarantee one thing as highly probable.
This will be significant news that will spread at the speed of light through large global institutions - which will then likely begin casting their Bernanke QE2 vote with their mega-sized buy and sell tickets.
If Bernanke decides to further inflate and add more stimulus, one vehicle besides adding liquidity at USA banks or buying additional USA Treasuries or MBS, that is currently being speculated, is a direct equity investment in selected USA stocks.
This plan if evoked or even hinted, could set-off a significant equity rally, and a large upside surprise, especially given that at present most managers expect stocks to sell-off. The idea here, is that QE2 is already built in to current prices. Wall Street invariably follows the maxim, buy the rumor and sell the news.
In technical analysis terms, assuming the market rallied from here, these are invariably called cycle inversions or Elliott Wave extensions.
Further, any significant additional money-printing would tend to continue pressuring or lower the value of the USA dollar, and as a consequence make stocks look at least temporarily more attractive. This would be truer in large-cap USA stocks that export internationally (and receive foreign currency).
Although the FED may have high hopes in QE2 of being effective and selling their economic ability, adding more liquidity will do nothing to cure the real problems of the USA. This includes persistent high unemployment, high personal debt levels, a sluggish USA housing market, and a very cautious consumer and business attitude about spending.
In summary, it seems everyone in the world knows that too much debt is the real problem except the FED Chairman.
Our trend and cycles based on Natural Law, suggest that not one, but two major changes in trend (CIT) will occur before the end of November. Indeed it will be a volatile month.
We remain nervously long, but with our red alert DEFCOM warning in place to have your stops in. We expect this situation is best described as a true make-or break that will soon be over.
We will keep you posted as time permits. We had two additional forensic clues today, but they gave opposite signals.
The first was the strong morning rally. We wondered if someone at Wall Street had leaked news of the FED, and possibly caused a buy program at Goldman. The second clue was watching the money-center USA banks, or monitoring the BKX (Bank Index).
A large or successful QE2 program would tend to add further liquidity at banks and also keep interest rates at the FED discount window abnormally low. This will undoubtedly help the fat-cat banksters of Wall Street, and subsequently one should keep both eyes on USA bank stocks this week for buying or selling clues.
We have included a chart of the NYSE Net New Highs, which like the SP500 Index is stuck at neutral.
Expect high volatility and use caution (and protective stops) as this is not a market for amateurs.
Sincerely,
James Kelly Sr.,
Editor in Chief, BBTL Blog
www.KRTT.com
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