Commentary for the Week of March 8

Fighting the Fed is one thing. But fighting a global monetary blowout? Forget it. The financial system is so glutted with virtual dollars these days that U.S. stocks would probably hold their ground even if nuclear war were to erupt. Although Friday’s news admittedly fell shy of that threshold, we might have expected a little more deference on Wall Street toward news that Standard & Poor’s had downgraded the credit of France and Austria. Granted, this could have shocked no one, since France had all but begged its comeuppance by pretending to be Germany’s co-equal in the ongoing eurobailout dog-and-pony show. Still, we had come to expect share prices to at least defer perfunctorily to such news, since prop-desk traders typically knee-jerk in whichever direction they expect their algorithm-driven, bipolar colleagues’ knees to jerk. Thus, when the news is ostensibly bad, as was the case on Friday, it’s supposed to cause institutional money to flow out of stocks, much as it flowed out of Carnival shares after one of its liners ran disastrously aground Friday off Italy’s coast. Not this time, though. With Europe once again inching toward a supranational bankruptcy, the Dow fell a ho-hummy 49 points. This seemed especially unusual, if not to say unseemly, given that U.S. markets would be closed on Monday for the Martin Luther King holiday. Under the circumstances, we might have expected traders to take the precaution of fully discounting the scary euroheadlines that were certain to come over the weekend. As indeed they did. Even the Wall Street Journal, a reliable cheerleader for the pathetic, crackpot idea that massive new sums of ginned-up money can “save” Europe, weighed in with some uncharacteristically grim assessments. Gold, for its part, rose moderately, perhaps because the bullion bankers and their friends in very high places

[Rick’s Picks sometimes ascribes human, animal or even demonic qualities to the vehicles we trade, most particularly the ever-vexatious Mini-Index futures. The following, first published here nearly a decade ago, reminds us why. RA] In all the galaxy, could there exist a nastier little critter than the S&P futures? Yesterday, watching the [March] contract leave its hellishly agitated footprints all over my intraday charts, I was reminded of the creature in the movie Alien. In its “cute,” post-larval stage, the then knee-high monster resembled a small dragon, with tiny buzz saws and metallic razors in place of reptilian scales, and venomous syringes instead of teeth.  Those who saw the movie will not forget the way the creature skittered around the space station floor, finally disappearing for a few excruciating minutes before exploding, with a wicked, other-worldly cackle, from the chest of a hitherto unsuspecting male crewman. And so it was yesterday with the [E-Mini S&Ps], as they feinted and darted, bounded and careened, emerging with a bloody victory over all but the very hardiest of day traders. Talk about vicious! The S&Ps would make house pets of monsters such as the one in Alien. Thus, on Thursday, amidst brutal tedium and, until the final hour, trendlessness that was unusual even for this so-far excruciating post-holiday period, did the [March] S&Ps parry an intrepid army of traders, never sustaining a rally or decline for long enough to allow them to draw an untroubled breath. The invincible tormentor of these determined warriors is a Freudian nightmare come alive, an all-knowing predator whose every movement, at any instant of the day, is willed by a thousand ids and egos, each struggling to come out on top.  But even when the S&Ps are momentarily at rest they throb with menace, fueled by the unspent

Comex Gold finished the day with a modest gain of $12, but not before busting through some daunting supply on the intraday charts.  Notice in the 240-minute bar chart below how the top of Wednesday’s rally exceeded three prior peaks.  According to our proprietary Hidden Pivot Method of technical analysis, bulls need only have punched through two such peaks to signal their readiness for a follow-through rally of as much as $30 over the next few days. In this case, however, they went one peak better, taking out the small “external” high recorded during mid-December’s steep selloff. That peak may not look very imposing, but its location along the wall of an Acapulco cliff dive implies that it took some extra oomph to get past it yesterday. The fact that buyers succeeded, if only by a couple of dollars, bodes well for the short-term, and traders should therefore view minor pullbacks of perhaps $4 to $6 as buying opportunities.  In the days ahead, Rick’s Picks will be monitoring price action closely intraday to identify “camouflage” entry spots that in theory can help lower the risk of initiating a trade.  If you’d like to follow along in real time, and to gain access to a 24/7 chat room that draws traders from all over, click here for a free trial to our service. Gold’s performance yesterday was impressive for another reason that had little to do with the charts. Although strength in the U.S. dollar undoubtedly weighed heavily on bullion prices, as did the weakness in stocks, gold quotes soldiered higher. Lest we become emotionally involved if the rally continues, I’ll suggest using the 1681.70 peak shown in the chart as a benchmark for turning very bullish.  More specifically, if the ground between current levels and that external peak is traversed

There was good news yesterday for taxpayers, sort of:  the Federal Reserve turned $76.9 billion in 2011 profits over to the U.S. Treasury.  The not so good news is that it amounts to a meager 2.6% return on the Fed’s $2.9 trillion  portfolio. That may be better than George Soros and John Paulson did last year, but at what risk? Keep in mind that quite a few of the paper “assets” the Fed holds are still radioactive, including a mountain of subprime mortgages that would fatally poison the U.S. banking system if they were returned to their rightful owners.  Not that we even know who the rightful owners are; for in legal fact, the securitization mania of the past decade cast doubt on the title to each and every mortgaged home in America.  Thanks to the Fed, however, our commercial banks needn’t worry about such things. That’s why they pay protection money to Bernanke, buying Treasury paper by the boatload so that everything gets taken care of.  And what does the Fed care if it’s holding trillions of dollars’ worth of dodgy paper for the banks? It could write a check for Fannie and Freddie tomorrow and have enough left to over to buy every bank in Europe. Unfortunately, this is effectively what the Fed has been doing via “swap” arrangements with the European Central Bank. The agreement is formally called  a “temporary dollar liquidity swap arrangement,” but the actual mechanism, like laws and sausages, was not meant to be scrutinized. For if it were, it would make the most brazen Ponzi scheme look as squeaky clean as a Lutheran bake sale.  Actually, compared to today’s high-level paper shufflers, Ponzi was a sap, working long hours to raise real money from new clients to pay old ones. The post-modern central

There were signs yesterday that although Americans went deeper in hock to get through the holiday season, their dietary habits were at least improving somewhat. In separate news items, it was reported that  installment debt jumped a whopping 9.9% in November, while the company that makes Twinkies and Wonder Bread had filed for bankruptcy. Based on the news, dietitians probably had more cause for optimism about the state of the Union than investors.  Whatever the case, neither item had much impact on Wall Street, where stocks continued to patiently bide their time in gluttonous anticipation of news sufficient to reignite the massive short-squeeze that kicked off the New Year. Concerning the borrowing binge by consumers, it was the biggest jump since November 2001, when they economy started to bounce back from the 9/11 attack.  The data did not include mortgage borrowing, just revolving credit for things Americans buy with charge cards, but it left no doubt that the buy-now, pay-later attitude that has buried the economy with debt is alive and kicking after more than three years of hard times. The banks that were the source of this credit could be likened to rent-to-own furniture operators, since they know that many of the borrowers will find themselves on the ropes when the bills come due with a 24.99% interest charge tacked on. Still, if it provided an uptick for retailers, who’s to quibble? *** (If you’d like to have these commentaries delivered free each day to your e-mail box, click here.)

[Our friend and frequent contributor Douglas Behnfield thinks too many investment advisors are looking for the same thing in 2012:  rising stock and commodity prices, a weak dollar, rising interest rates and a bottom in the housing market. They’ll be wrong on all counts, he says. Instead, the enviable winning streak of those holding Treasury debt will continue.  A financial advisor and senior vice-president at UBS in Boulder, Colorado, he sent the following New Year’s message to clients last week. RA] 2011 was a confusing year from start to finish on Wall Street and the arrival of 2012 is not offering much relief. Today the popular message is that the economy is getting better in the U.S. and problems abroad can be overcome. Recession has been avoided and “escape velocity” will be achieved in the second half. Our economy can “decouple” from Europe and some of the big developing nations that have seen their economies slow such as China, India and Russia, now that they have run into trouble. Most economists and stock market strategists seem to have cut and pasted their 2011 forecast into their 2012 forecast. (How is that for the pot calling the kettle black?) But the concerns that clouded the outlook a year ago only seem to have gotten deeper. The positive messaging is focused on the following: The politicians will kick the can down the road and therefore avoid the kind of austerity that could derail the recovery. The Fed will engage in more quantitative easing (a euphemism for money-printing) if the economy or the stock market falters. Interest rates and inflation have nowhere to go but up, so the least attractive place to put your money is in the bond market. That is, unless you keep the maturities short and stick with “spread product”

In the Rick’s Picks forum, Gary Leibowitz is a square peg in a round hole. A steadfast Obama supporter, his outlook for the economy is almost as annoying. He actually thinks we’ll muddle through 2012 without a global financial collapse and believes the U.S. economy is on the mend.  Here’s Gary in his own words, posting to the forum yesterday:  “As Obama is being bashed for his outrageous spending spree over these last three years, the economy is showing improvement across the board. The dollar has to do well in this scenario, which will place pressure on commodities. The corporate earnings picture is a bit more cloudy. Overseas exposure will certainly hurt the bottom line.” Crazy, right?   In the first place, where would economic growth even come from, given the shrunken state of America’s manufacturing sector and the death spiral globally of our former bailiwick, grotesquely leveraged financial “products”?  Factor in an apparently intractable deflation in the housing sector, and the best we could hope for in 2012 is to keep the Second Great Depression at bay for another year, right? And yet, is it possible he could be right – that 2012 will end, just as 2011 did, with no world-shaking financial catastrophe to end these tolerably hard times?  In fairness to Gary, we should note that he is not all lollipops and roses. “I am not proclaiming all is well, or that we will come out of this unscathed,” he continued in his post. “I just don’t see the Armageddon everyone is expecting.  If we do hold off a recession this year, then the odds of a severe recession in 2013 increase greatly. Real estate and other ‘assets’ will most likely take it on the chin. Deflation pressures will mount. Can’t see many winners except cash.” We’d have

Here’s a piece of advice for frustrated day traders: try night trading. While we’d be the first to concede that scalping at any hour of the day will never be easy pickings, many opportunities that we see in the middle of the night seem less challenging than the ones served up intraday. An obvious reason is that there just isn’t as much competition. To be sure, the predators who work the graveyard shift are not the kind of guys you’d want to sit down with at a poker table. They have special skills, like the adaptations of lizards and insects that live in the desert. For one, they are experts at gauging exactly how markets will react to news that hits the tape when relatively few are watching. This in turn allows them to get out of the way of buyers or sellers when mini-stampedes occur in relatively illiquid markets. By “fading” the action in this way, stepping aside when the panic-stricken come a-charging, DaBoyz are able to maneuver their prey into trading with them at atrocious prices. Implicitly, that’s what we all want as traders – i.e., for the guy on the other side of the trade to discover immediately after it has been consummated that he’s been hosed. As it happens, our proprietary Hidden Pivot Method is well suited to traders who want to avoid being the patsy. It offers an effective way to sniff out the swing highs and lows where the other party to a short-term trade is likely to regret it. Look at the Silver chart above and you’ll see how very subtle such opportunities can be. By our lights, the area highlighted in yellow was the best place to buy Comex March Silver futures when bullion markets were at their absolute deadest early Wednesday

It’s days like yesterday that seem to suggest the central banks could keep stocks afloat more or less indefinitely. How can shares possibly go down as long as there’s a sea of digital dollars to support institutional players with no better use for interest-free money? Actually, it took relatively few dollars to push the Dow Industrials up 260 points at the apex of yesterday’s short-squeeze.  That’s because the rally was all but over minutes after it began. Stocks opened on a gap well above Friday’s close, with almost no shares changing hands in-between.  Indeed, it wasn’t a buying stampede that added tens of billions of dollars to the value of publically traded stocks; rather, it was the premium sellers tacked on when pent-up demand, mostly from bears, exploded after a three-day holiday. With shorts caught in the ringer, why would sellers want to get in the way of the resulting melt-up? So they stepped aside. And anyone who was not long stocks when the market closed on Friday was locked out.  In retrospect, we can’t understand why we weren’t in more of a betting mood ourselves when trading wound down last Friday, the final session of the year. Betting the pass line would seem to have been a no-brainer for anyone who “knew” that nothing horrific would happen over the weekend.  As it happened, the headlines concerned arson in L.A. and the Iowa caucus. No scary new bailout plans from Europe. No tankers sunk in the Strait of Hormuz. Just routine stuff. Although popular wisdom has always said the stock market hates uncertainty, these days it would appear that nothing thrills Wall Street quite like a dull-news weekend. *** (If you’d like to have these commentaries delivered free each day to your e-mail box, click here.)