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Charts Are Breaking Down All Over

They say a picture is worth a 1,000 words, so here are 4,000 words worth. My friends at www.stockcharts.com put together this series of charts establishing beyond any reasonable doubt that the ?RISK ON? trade is breaking down across all asset classes.

Everything is breaking down, simultaneously and in unison, including the S&P 500 (SPX), Gold (GLD), Silver (SLV), Oil (USO), Copper (CU), the Euro (FXE), the Australian dollar (FXA), and the Canadian dollar (FXC). In the meantime, Treasury bonds (TLT), (TBT) are moving from strength to strength.

The news from Europe can only get worse. An American recession, considered impossible by strategists only a month ago, is now looming large as our own economic data continues to deteriorate. The flight safety has exploded into a stamped, driving the US dollar index up 12 consecutive days, a new record.

I have included a cartoon below from my old employer, The Economist, that neatly sums up the implications of the Socialist win in the French presidential elections. German chancellor, Angela Merkel, is meeting French president, Fran?ois Hollande, for dinner at Das Austerity Euro-Caf?. Austerity preaching Merkel is having a miniscule single sausage for dinner, while Hollande is enjoying a sumptuous repast and obviously ordering the most expensive wine from the list.

The cartoon would be funnier if it weren?t so true. Austerity is now suffering a retreat on the order of Napoleon?s retreat from Russia in the winter of 1815. Her Christian Democratic Union party suffered its worst post WWII defeat in last weekend?s North Rhine-Westphalia elections. It is now looking like Germany will have to accept a higher inflation rate as the price for bailing out Europe, something it is loath to do. Needless to say, this is terrible news for the Euro.

If these charts continue to break down, as the news flow dictates they should, here are my immediate downside targets.

(SPX)? 1,280
($INDU)? 12,200
(IWM) $70
(FXE)? $126
(FXA) $95
(GLD) $150
(SLV)? $25
(USO)? $32
(CU)? $22

 

 

 

 

Don?t Worry, She?s Picking Up the Bill

Euro Crash Warns of More to Come

A few years ago on the Old Square in Brussels, a delicious luncheon of moules marini?res paired with an excellent white burgundy with some European Central Bank officials ran far longer than expected. They were attempting to convince me of the long term viability of the Euro, to no avail.


That seriously delayed my departure from Belgium to Salisbury in the English countryside to visit some clients resident at Highclere Castle, which is now the subject of a major TV series. I raced my twin engine Cessna at full power into the sunset, across the English Channel, past the white cliffs of Dover, because my destination airfield had no lights. By the time I arrived it was too dark to land, my alternate airport at Southampton had suddenly closed because of a crash, and I only had 15 minutes of fuel left.

I knew that the pub at the end of the grass runway kept a radio with the tower frequency always tuned in. So circling at 1,500 feet overhead in the pitch black darkness I called in and ordered a full bottle of Ron Rico rum. I told the bartender to pour out 16 shot classes and line then up on the bar. I then broadcast my predicament and said that anyone who would take a rolled up newspaper and dip it in the rum, set it on fire, then line up to light the runway would get a free pint if I landed successfully. I said that if I didn?t get help immediately, I might take out nearby Stonehenge, or perhaps Salisbury Cathedral, in the imminent crash.

Within seconds, I could see the flaming torches dispersing along the field, some in a somewhat drunken fashion. I landed right between the two ragged lines of my improvised landing lights, which lit up the field as clear as day. It was the first time that I landed on a runway that was living, breathing, and even staggering.

As I taxied to my parking space, the starboard engine ran out of fuel and shuddered to a halt. So I just abandoned the plane there to retrieve the next morning. Needless to say, I bought rounds for the house that night until no one was left standing.

Watching the Euro shatter its four month support line this morning at $1.2950, I felt exactly as I did all those years ago in the dark skies over the Wiltshire countryside. The concern was that my put options would run out of fuel before the currency made its big break, forcing me to crash and burn, as I almost did over England. The move sent my short position in the beleaguered currency soaring, and rendered the calls that I sold short only yesterday into dust. It was a good P&L day for the Mad Hedge Fund Trader?s model portfolio.

I am now seriously thinking of becoming a card carrying member of the Greek Communist Party, for it is their young leader, a Mr. Alexis Tsipras, who provided the final straw that broke the camel?s back. Its leaders threatened to challenge the legality of the recent bailout in court. Is Greek rescue package number three now in the cards? The development threatens to undo all of the hard won progress made this year towards resolution of the continent?s sovereign debt crisis. Did anyone expect that asking people to vote for their own austerity and starvation was going to work?

Long term currency watchers had been mystified as to why the Euro had held up so well in the face of such obviously collapsing fundamentals. The markets were rife with rumors of European Central Bank support at $1.30 to prevent a widespread panic that would ignite wholesale Euro dumping. My own theory was that the trade became so obvious and one sided that hedge fund short covering prevented it from falling further. Today, the fundamentals turned so dire that massive selling finally? cleared out? those positions, which is how these things always end.

All I can say is that when it rains, it pours. The profusion of the market developments that I have been predicting all year have suddenly come true in the last few days; the awful April nonfarm payroll, a global synchronized recession that is accelerating to the downside, and the end of the grotesque overpricing of the US stock markets. Also coming home to roost are the contagion effects on all ?RISK ON? assets, including equities (IWM), commodities (CU), oil (USO), the Euro (FXE) (EU), gold (GLD), silver (SLV), and a huge flight to safety bid for the dollar (UUP) and Treasury bonds (TBT).

 

I thought this summer might be boring. Perhaps I could be wrong. And you wanted me to manage your money? Anyone for a return flight to Brussels to finish that bottle of wine?
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Highclere Castle
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A White Burgundy
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The Brussels Old Square
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A Cessna 340
My Advanced Instrument Landing System

The Hard Numbers Behind Selling in May.

If I had a nickel for every time that I heard the term ?Sell in May and go away? this year, I could retire. Oops, I already am retired! In any case, I thought that I would dig out the hard numbers and see how true this old trading adage is.

It turns out that it is far more powerful than I imagined. According to the data in the Stock Trader?s Almanac, $10,000 invested at the beginning of May and sold at the end of October every year since 1950 would be showing a loss today. Amazingly, $10,000 invested on every November 1 and sold at the end of April would today be worth $702,000, giving you a compound annual return of 7.10% .

My friends at the research house, Dorsey, Wright & Associates, (click here for their site at http://www.dorseywright.com/ ) have parsed the data even further. Since 2000, the Dow has managed a feeble return of only 4%, while the long winter/short summer strategy generated a stunning 64%.

Of the 62 years under study, the market was down in 25 May-October periods, but negative in only 13 of the November-April periods, and down only three times in the last 20 years! There have been just three times when the "good 6 months" have lost more than 10% (1969, 1973 and 2008), but with the "bad six month" time period there have been 11 losing efforts of 10% or more.

Being a long time student of the American, and indeed, the global economy, I have long had a theory behind the regularity of this cycle. It?s enough to base a pagan religion around, like the once practicing Druids at Stonehenge.
Up until the 1920?s, we had an overwhelmingly agricultural economy. Farmers were always at maximum financial distress in the fall, when their outlays for seed, fertilizer, and labor were at a maximum, but they had yet to earn any income from the sale of their crops. So they had to borrow all at once, placing a large cash call on the financial system as a whole. This is why we have seen so many stock market crashes in October. Once the system swallows this lump, it?s nothing but green lights for six months.
After the cycle was set and easily identifiable by low end computer algorithms, the trend became a self-fulfilling prophesy. Yes, it may be disturbing to learn that we ardent stock market practitioners might in fact be the high priests of a strange set of beliefs. But hey, some people will do anything to outperform the market.

It is important to remember that this cyclicality is not 100%, and you know the one time you bet the ranch, it won?t work. But you really have to wonder what investors are expecting when they buy stocks at these elevated levels, over 1,400 in the S&P 500.

Will company earnings multiples further expand from 14 to 15 or 16? Will the GDP suddenly reaccelerate from a 2% rate to the 4% expected by share prices when the daily data flow is pointing the opposite direction?

I can?t wait to see how this one plays out.

 

 

 

Thank Goodness I Sold in May

Bidding Up the Market

A few years ago, I went to a charity fund raiser at San Francisco?s priciest jewelry store, Shreve & Co., where the well-heeled men bid for dinner with the local high society beauties, dripping in diamonds and Channel No. 5. Well fueled with champagne, I jumped into a spirited bidding war for one of the Bay Area?s premier hotties. Suffice to say, she has a sports stadium named after her.

The bids soared to $11,000, $12,000, $13,000. After all, it was for a good cause. But when it hit $13,200, I suddenly developed lockjaw. Later, the sheepish winner with a severe case of buyer?s remorse came to me and offered his date back to me for $13,200. I said ?no thanks.? $12,000, $11,000, $10,000? I passed.

The current altitude of the stock market reminds me of that evening. The higher it goes, the more people love it, until they don?t. As the bidding becomes more frenzied, not an hour passes without another technical report hitting my inbox screaming that the market is overbought, high risk, and cruising for a bruising.

When I did the research for my webinar this week, I had to struggle to find a single positive economic data point over the previous two weeks. The only one I found was the weekly jobless claims, which fell 5,000. Well guess what? This morning jobless claims rose by 13,000. That was the last fundamental economic point the bulls could hang their hats on.

If the current rally fails in the next few days, it could set up the head and shoulders top needed to drive managers more aggressively to the sell side.? After all, they have to be seeing the same thing I am, that the economy runs off a cliff at the end of the year.

For a more sobering view of the market, take a look at the two charts below for the Dow Average. If we don?t clear the old support at 13,000 in the next few days, which is now resistance, we may have the makings of a serious head and shoulders top setting up. The fact that this is happening in the run up to May makes them even more interesting.

Who was the hottie in question, you may ask? She shall remain nameless, since she is now happily married to a tech titan and with kids, and gentlemen don?t talk. Suffice it to say, she has a San Francisco Bay Area sports stadium named after her. I?ll let you figure it out.

 

 

 

 

Jobless Claims Give More Fodder to the Bulls

No, the important economic event of the week was not the snail like progress towards solution of the European debt debacle. It was the weekly jobless claims announced on Thursday that plunged 23,000 to 381,000, a six month low. That puts it well below the 400,000 level where the economy is generally thought to be expanding.

Yes, you can argue that there are all kinds of temporary, one off hires in these numbers, as retailers step on the gas going into the Christmas season with temp hiring. But there seems to be a lot more than that going on here.

More confirming data came out the next day showing that December consumer sentiment leapt to a surprising 67.7, from 64.1. I think that one big factor in consumers? more positive feelings derive from the fact that the stock market that is no longer crashing, and double dip fears for the economy are now but distant and fading summer memories.

And you can?t view the reports in isolation. They are only the latest in a long stream of modestly improving economic reports which occasionally blow out to the upside.

The news may be enough the enable the S&P 500 (SPX) to tack on another 25 to 50 points by year end. All Europe has to do is to shut up for a few weeks and the US markets will rise. Given that this is the last real working week of the year, that is a distinct possibility.

I am going to use this strength to unload my remaining ?RISK ON? positions in silver (SLV) and the (TBT) so I can go into the New Year fresh, with a flat book. Keep in mind, also, that this is a lousy place to buy. As my friend and former mentor, Barton Biggs, always used to tell me, always leave the last 10% of a move to the next guy.

 

 

 

Winging My Way Back From China

I am writing TO you from my first class seat on Singapore Airlines, winging my way the 12 hours from Hong Kong to San Francisco. While most airlines jettisoned their first class sections years ago as a cost saving measure, Singapore carried on to maintain its reputation as the best airline in the world. The small section at the front of the bus is populated with a few Chinese billionaires, Taipans, and CEO?s flying at shareholder expense. They are transported in untold luxury with a fully flat bed almost the size of a regular single and a 24 inch high HDTV with a vast movie library. The plane carries double the number of stewardesses on American airliners.

They say a change is as good as a vacation, and this trip certainly fit the bill. I covered 23,000 miles in 17 days, which is really a trip around the world, touching down in New Zealand, Australia, Singapore, Hong Kong, and mainland China. The people I met were fascinating, and included a Maori chieftain, an Australian media mogul, gold miners from Queensland, sheep farmers in New South Wales, Chinese bankers, a Singaporean F-5 combat pilot, and senior officials from the People?s Republic of China. I even managed to track down a Chinese renegade rare earth miner on his day off, and the good news is that he didn?t shoot me, as long as I didn?t take pictures.

I heard some amazing stories and gained some first class intelligence, which I will translate into killer trading opportunities. I will be feeding these out as fast as these old, arthritic and scarred fingers can type them. Alas, I can only knock out about 1,500 words a day before it starts to turn to mush and my back gives out. I will be publishing a series of Pacific country reports over the next four Fridays.

The market? Ohhhh, you want me to talk about the market! Let me give you my quickie read here. My fall rally kicked in right on schedule, my call to cover all shorts coming within a point of the actual bottom in the (SPX). This is the closest I have ever come picking an absolute bottom. After that, it was off to the races with a ?RISK ON? trade with a vengeance. Corporate earnings are coming in much better than anticipated.

This has triggered a buying stampede for all risk assets as hedge fund traders rush to cover shorts and conventional managers frenetically readjust substantial underweight positions they only recently achieved. This has truly been the year from hell, and the word is that 40% of active managers are underperforming their benchmarks by 250 basis points or more.

Having discounted a double dip recession that was never going to happen, Mr. Market is now backing that possibility out again. The net result of all this was to take the S&P 500 from a 1,075 bottom up 17% to just short of my target at the 200 day moving average of 1,275. The entire script unfolded exactly as I expected. Followers of my Macro Millionaire trading service got the memo in my October 8 webinar, The Short Game is Over, and have been laughing all the way to the bank since then. Their year to trade performance now stands at a new high of 42.13%.

The easy money in this move has been made, and we are now bumping up against 200 day moving averages across all equity classes. Expect a prolonged battle to be fought here. So this is not a great place to initiate new positions. Bonds have died, but yields have not risen as much as I would have thought, given the ebullience of the price action.

The (TBT) is the sole position I currently have in my portfolio, and it has only picked up a measly 23% in this move. I would have expected more.

Expect the rally to fail several times at these levels before they make further progress. There is a lot of hot money to flush out here before they can mount a break out to the upside. Take a look at the chart for crude oil and the (USO), which is telling you that this risk on will have longer legs than most expect. What will be the trigger? Surprise progress on the European sovereign debt crisis, or even a deliberate kicking of the can down the road.

One additional note. You have noticed some modifications to the website. No, it has not had a sex change operation to get even with me for my absence. I am launching a major upgrade, redesign, and improvement in functionality, plowing in new capital that thousands of new subscribers have afforded me. The final version will be up and running in a couple of days. But like all great birthing events, this was has not without surprises, difficulties, and setbacks.

Rather than willingly give up its toys to the new kid on the block, our hosting service has chosen to break them instead. In addition, moving over two War and Peace?s on the Internet, the extent of the content I have written over the past four years, is no piece of cake. It took Tolstoy seven years just to write it once, but that was in long hand with a quill pen, so I?ll forgive the old man.

For those who wish to participate in Macro Millionaire, my highly innovative and successful trade mentoring program, please email John Thomas directly at madhedgefundtrader@yahoo.com . Please put ?Macro Millionaire? in the subject line, as we are getting buried in emails.