A FAIRY TALY - Do you buy the spin...?

Table#1

Monetary / Fiscal Stimulus (% of GDP)

Peak Trough  Length(Months) Decline in GDP  Monetary  Fiscal  Combined

% of GDP

Aug ‘29 Mar ‘33  43 27.0%  3.4%  4.9%   8.3%

May ‘37 June ‘38   13  3.4%  0.0%  2.2%  2.2%

Nov ’48 Oct ‘49  11  1.7%  -2.2%  5.5%  3.3%

Nov ‘73 Mar ‘75  16  3.1%  0.9%  3.1%  4.0%

July ‘81 Nov ‘82  16  2.6%  0.3%  3.5%  2.8%

July ‘90 Mar ‘91  8  1.3%  1.0%  1.8%  2.8%

Mar ‘01 Nov ‘01  8  0.2%  1.3%  5.9%  7.2%

Dec ‘07 -  15  1.8%  18.0%*  11.9%*  29.9%*

*Estimated

Source: Federal Reserve, Congressional Budget Office; as cited in Grant’s Interest Rate Observer,

“Sold to you, Uncle Sam,” Vol 27 No 7, 3 April 2009, p 2, “What the government did—and didn’t do” table

“hat tip” Jim Puplava

TABLE #2

Imagine your are a politician in power and you experience the crisis of your lifetime. 

You push on every button and stimulate (pls see #1 . table)  the economy at a pace 4x as hard as your predesessors did during the GREAT DEPRESSION.

But this sucker still panics and goes into a deepdive into March 2009.

What would you do, how could you pull the people out of a mood of desperation?

Wouldn't you turn to someone you trust, who could let's say support a tailspinning ,mood darkening Equity market....?

(Pls look at Table #2, showing Goldman's prop desk spinning a huge wheel)

Voila, a miracle "green shoots" rally emerges with more momentum and power than anything we've seen a long time (we are talking decades in terms of technicals!!) 

but ....unfortunately with lacking Volume, meaning some folks are still hesitant to believe what their eyes are seeing....

After 8 weeks of "pure force" Uncle Ben from the FED tells us the that the worst is behind us. (pls see below)

Do you buy it ?

http://www.federalreserve.gov/newsevents/press/monetary/20090429a.htm

"Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower....."

THE GOLDEN5: VOLUME

Observations Short Term Volume Flows:

1) recent flows were fairly one sided and a good saturation cluster has developped (top of the page)

2) buyers look tired but the saller haven't started their bear raids (middle of the page)

3) buyers are loosing control by allowing single day bear spikes (bottom of the page)

Observations Medium Term Volume Flows (MA55):
1) the medium term volume flows look to have reached their Overbought target area (Bear market Range is lower than Bull range)
2) the reached high is below the JAN/ FEB high, i.e. we see a weaker Volume support of the recent move the curve has turned down
3) recent lower highs provided good quality signals (only 1 bad in 2006)

Conclusion:

Sellers seem to wait for month end to realign and potentailly re-attack. The near future will prove whether they can re-gain control.

The structures clearly favor the bearish case, but bear in mind that consolidations come in 2 dimensions, ie. TIME & PRICE.

A back and forth around the same price level and thereby holding up through time could also fullfill the objectives of a consolidation, although unlikely...

Fundamentals vs Technicals

http://www.thedisciplinedinvestor.com/blog/2009/04/26/tdi-podcast-106-zerohedge-and-mish-o-nomics/

great podcast, particularly the last 25min with zerohedge.

Nice framing of the inherent market risks!

Golden 5: Sentiment

Let's turn to sentiment and wonder how much juice is left in the current rally.



The blue line shows the S&P500 and the pink one my proprietary VIX OSC indicator.



VIX OSC calculates the trend adj. delta btw. the SPX and a synthetic SPX proxy based on the VIX.



The simple idea behind this is the notion that the optionmarket leads the cash markets and the OSC tries to capture this leadership.



Step 1-Observations

• the current OB (overbought) reading is in the top3 of the last 14yrs (ignore scale), ie we are experiencing an extreme


• the ascent (2. derivative) of the pink line ("from down to up") is the steepest of in the entire series


• the primary move in the OSC is one of the largest


• it seems to have peaked


• extremes to the downside (PANIKS!) result in even more extreme oscilations

Possible Interpretation:

1. Unless it is different this time we should see limited upside potentail for the market


2. A new precedent would be set with an upside break out, i.e. we'd be in uncharted territory and anything could happen there....


3. The risk is clearly that we are in a topping pattern which could trigger an avalanche on the downside given the monster move on the way up

The Golden 5

The guiding principle with respect to technical analysis (TA) has always been the THE GOLDEN 5 (dimensions) of TA. The GOLDEN 5 represent the 5 dimensions of TA, which are:

1)Context & Relative Strength
What themes are driving the market?
What sectors are leading ?
What is the path of least resistance ?
Does the a.m. make sense from a fundamental angle?

2)BREADTH
Do we see a broad participation?
Do they all have fun or just the High Beta animals (like ...aapl, rimm, goog)
Is the herd exhausted, ie Overbought (Oversold)?

3)MOMO (Momentum)
How much "umph" do we see ?
How strong is MOMO?..or is fading?

4) VOLUME
Do we see real buying or just some hedgie and/or prop desk action?
Are patterns supported by Volume (like upside break out with strong, high volume)?
Bottoming / topping Vol pattern ?

5) Sentiment
What is driving the herd?
Are they all bullish or bearish?
What is the optionmarket telling and does it reconcile or diverge with the cash market ?


The Golden 5 just offers a desciptive framework, meaning we are still in the "VIEW FREE ZONE". The challenge or art now is to bring all observations together in harmony with the twist that you have to gage them from the perspective of the 2nd derivative. This means you don't have to wonder about the meaning of 1-5 but how the "regular analyst" would assess 1-5, what story they would spin to rationalize and what (contrarion) opportunity is left for you from a risk reward point of view.



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