Commentary for the Week of March 8

[Against our own concerns that a stock-market crash is imminent, and that it will not wait until after the November elections, we must weigh the obvious fact that we have plenty of company – perhaps too much company – in the chicken-little camp. In the think-piece below, Cam Fitzgerald, a frequent contributor to the Rick’s Picks forum, expresses similar, contrarian reservations. RA] There is just so much talk of a crash that it has almost become anti-climactic. The thing is that with so many mutual fund redemptions having taken place and so many more 401-Ks being shifted out of equities, it does seem surprising that markets keep floating, range-bound. We obviously have our suspicions.  [Forum contributor Mario Cavolo] mentioned an article that suggested that as many as 70% of all stock-exchange transactions are being attributed to high-frequency trades. Off-hand I don’t know if that is true. However, I will say this: If such trades and the insiders (you know who I mean) who are doing them are artificially inflating the markets on very thin trading, and subsequently supporting each decline in contravention of historical norms, then it follows that the technicals themselves can be manipulated. I do not doubt this for a second. The number of times that we have all seen sell-offs end abruptly, turning on a dime, and key support-and-resistance levels fail to be reached, have been too numerous to be merely coincidental.  What these episodes suggest cumulatively is that market intervention and manipulation are in full force. Meanwhile, there are simply not enough legitimate players remaining in the game to maintain balance in what now appears to many to be a rigged market. Moreover, there are just too many bears anticipating a crash, and too many taking short positions simultaneously. That tells to me that a gold mine

Who’d have believed that small investors have deserted the stock market in droves this year? We’d thought just about everyone but Larry Kudlow was out of shares by early 2009, and that the only players left were the high-speed trading computers maintained by the likes of Goldman Sachs and J.P. Morgan. Apparently not. Investors pulled $33 billion from equity mutual funds so far in 2010, according to the New York Times. If they keep up the pace, it would be the biggest run on mutual funds in more than two decades, not counting the panic stirred up by the banking crisis in 2008. The little guys appear to be “losing their appetite for risk,” a spokesman from Credit Suisse told the Times, putting it mildly. They’re in good company, it would seem, since money managers appear to have thrown in the towel on shares too. Take a gander at the chart above if you want to see where all of their cash has been going. The chart should hearten those who are worried the U.S. Government’s recent decision to embark on a second round of quantitative easing will require a blowout of printing-press money. In fact, the demand for Treasury debt from sources other than the Federal Reserve seems all but insatiable at the moment. Are we being churlish to suggest this mania will not last forever? What Scares Geithner Keep in mind that the T-Bond rally has occurred even as China has turned net seller. You heard that right. Their holdings peaked for the year in April at $900.2 billion, down from a record $939.9 billion in July of 2009, when Europe’s supposed debt crisis was peaking. China reportedly held $843.7 billion worth at the end of June, but what is most significant – or perhaps scary if you are

The Dow looks to be in the throes of a 420-point plunge, even if sellers were unable to deliver the haymaker yesterday that would have put bulls down for the count. At the final bell, the drop amounted to only 144 points, although it would have been closer to 200 points at the day’s lows.  If our prediction of a further 276-point fall over the very near-term pans out, pushing the blue chip average slightly below 10000, that would be just a very small downpayment on all of the plunging the Dow will still have to do to catch up with a U.S. and global economy that have begun to relapse into deep coma. Dow 5000, anybody?  Whatever happens, it seems clear already that the highs achieved by the broad averages earlier this month marked a last hurrah for the most recent bear-rally cycle, and that the major bear market begun from Dow 14198 in October of 2007 has resumed. In retrospect, it’s hard to imagine how DaBoyz could have succeeded to the extent they did this summer, manipulating an 1100-point surge in the Dow Industrials since early July. The economic landscape hasn’t looked as dark since the early days of the Great Depression. Unemployment will only rise in the months, or perhaps years, ahead; real estate prices have failed to respond to trillions of dollars worth of direct and indirect stimulus; and all of the Government’s bailouts have produced not even an iota of sustainable economic growth. Put all of these factors together, and many not mentioned, and Wall Street pros who bought into the rally should be wondering, “What were we thinking?” Threat Is Waxing Looking ahead, although a bout of further weakness might be satisfying to those who have yearned to see stocks get in line, finally,

Long-term yields could be bottoming here if a T-Bond futures target that we’d flagged the other day holds up.  The target, a Hidden Pivot resistance at exactly 134^09 (basis the September contract), lies just two ticks above yesterday’s high, 134^07, and corresponds to a yield of about 3.64% on the 30-Year Bond. However, since we cannot rule out the possibility that bond prices will continue to rise, driving yields even lower, we will continue to monitor the target closely. There are several possibilities going forward. One is that the target gets decisively penetrated within the next few days. If that were to occur we would regard it as a clear sign that the extremely powerful rally begun in April is likely to continue at its recent pace. T-Bond quotes have been rising steeply since spring as yields have fallen from around 4.86%, but it’s conceivable that yields could drop to as low as 3% if the rally continues until November.  Another possibility is that the 134^09 Hidden Pivot contains the rally for the time being. That would suggest that yields will either remain steady or move higher. Usually we can discern a reason for trend changes in the trading vehicles we track and forecast. But in the case of the long bond, the logic of a downturn in prices can be very elusive, if not to say arcane. Explaining why bond prices have risen in recent months, on the other hand, is not rocket science. The conventional explanation is that investors around the world have bought U.S bonds because they are still the safest investment around. If there is any borrower that can still be reckoned as too big to fail, the U.S. Government is it. (For the record, we see the U.S. as a bankruptcy-in-progress and cannot conceive of any

DaBoyz managed to squeeze a 100-point Dow rally out of punk Q2 earnings from Wal-Mart and Target, and the gain might have been closer to 200 points had traders not suffered an uncharacteristic anxiety attack in the final hour. Imagine what these bandits could get away with if there were actual good news to leverage. Trouble is, it’s unclear what would even qualify as good news these days.  A rebound in employment sufficient to put the economy back on track is almost beyond imagining, since it will take fully eight million new jobs and re-hires just to replace the positions that have been lost so far in the Great Recession. As for a surge in the retail sector, Americans have doubtless wised up to the fact that more consumption will never be the ‘A’ answer. Not that any of us is bursting with eagerness right now to binge on flat-screen TVs, quartz countertops and hot tubs. The news media remain behind the curve on this matter, since each and every anomalous uptick in retail sales – i.e., the mediocre, 3.6% gain in profits announced yesterday by Wal-Mart -- is greeted as fresh evidence that the economy is somehow hanging in there. As any sentient adult will have long since surmised, it is not the economy that is hanging in there, but the stock market. The Dow is trading above 10,000, so how bad could things be, right? Or so the thinking goes. We suspect that this argument is losing its hold on the nation, and that when Brian Williams or Katie Couric mentions that stocks jumped 1% on a given day, most viewers greet the item with a shrug. And those who truly understand the markets just shake their heads, wondering how anyone could be so naïve as to think

Gold forced a few green shoots through concrete yesterday, setting the stage for a shot this month at June’s all-time highs near $1270. That would require a further rally of just 3.5 percent from current levels, based on yesterday’s $1226.90 settlement price for the Comex December contract. We’d anticipated Monday’s $13 push through resistance with the following forecast, disseminated to Rick’s Picks subscribers Sunday night: “Last week’s bullish finishing stroke brought into focus a minor Hidden Pivot target at $1229.10 that we should use as a minimum upside objective for the near term.  That may seem like a conservative goal because it lies just $12 above Friday’s settlement price, but it would have decisively bullish implications, since the target is above heavy supply created over a two-week period in early July. The futures are almost certain to push above the supply zone this week, but the earlier in the week they do so, the more bullish the implications will be going forward.” As it happened, the bulls’ successful use of the battering ram came earlier in the week than we might have expected -- on a Monday – and this is indeed a sign that buyers are probably eager for more.  By day’s end, they had pushed the December contract past our target by 40 cents, as well as through a supply zone near $1222 that had resisted their best efforts for nearly a month. Moreover, a subsequent pullback from the 1229.50 high amounted to just $6, more than half of which had been recouped by day’s end. All of this augurs more upside over the near term to at least 1244.20, a Hidden Pivot target that appears in the same sequence as yesterday’s. Seasonal Factors In the Rick’s Picks chat room -- which has been quiet lately, as is often the case at this time

The Hindenburg Omen is once again predicting a stock market crash, and we don’t know whether to ignore it and relax because (even) the Wall Street Journal has picked up on it this time, or to instead batten the hatches because sometimes even lousy indicators can be right. Over time, the indicator, invented by a blind mathematician named Jim Miekka, has compiled an unimpressive track record. While virtually every crash since 1987 has indeed been signaled by the Omen, there have been so many false signals that the indicator’s overall accuracy has been a dismal 25 percent.  Now, according to Miekka, the Omen is signaling a crash in September, having registered two key statistical events. For one, NYSE highs and lows both exceeded 2.5%; and for two, a rising 10-week moving average for the NYSE diverged relative to a negative McClellan Oscillator. The Journal had no trouble rounding up the usual skeptics to comment on the voodoo aspects of an indicator that takes its name from the fatal and still-unexplained 1937 explosion of a German passenger airship docked at Lakehurst (NJ) Naval Air Station. Thirty-six people died, including 35 people of the 97 people who were on board, and the cause of the fire was never determined. “We always love good conspiracy theories,” market strategist Joseph Battipaglia told the Journal. “I for one dismiss all these things because they usually erupt most numerously during bear markets.”  Well, at least Battipaglia seems to be acknowledging that stocks are in a bear market. Many in his and the Wall Street Journal’s line of business – i.e., telling the public what it wants to hear about the economy -- have yet to accept that all of those “green shoots” that supposedly were springing up a little more than a year ago were just hallucinations. For the hard-core optimists, the stock market’s weakness

[Editor's note: Thursday's commentary drew such a strong reponse that I've extended its run by a day.  RA] We suspected years ago that the day would come when the Fed would have no more room to move. Administered interest rates were bound for zero, and once they got there easing would cease to be an option. Except that we were wrong.  Now it turns out the Fed can, and will, ratchet up the desperation meter, already well into the red zone, to new and untold heights, stepping up purchases of long-term Treasury debt with proceeds from the sale of mortgage-backed securities from the central bank's fatally swollen dumping-ground-of-a-portfolio. Bernanke’s cheering section always said he would do whatever it takes, but perhaps it’s time for them to acknowledge that, in actuality, he is doing not what it takes, but only what he can do, short of triggering a hyperinflation. Surely the Fed chairman’s minions must be disappointed that his latest, unprecedented attempt at stimulus has a cash value estimated at only $300 billion – a mere pittance in a global Ponzi game valued nominally at perhaps three thousand times that. Paul Krugman, the New York Times' hairy-knuckled Keynesian, must be asking himself whether Helicopter Ben is ever going to get serious. Sorry he has let you down yet again, Mr. Krugman. Although earlier predictions we'd made here may have overlooked this latest, hopeless step the Fed has taken, let us hazard another prediction by which you can judge for yourself our foresight, or lack thereof. To wit:  The Fed’s suicidal, capital-destroying bond-buying ploy may suffice to jolt the mountebanks, imbeciles, pedophiliacs, thimble-riggers, thieves and suppurating grey matter on Wall Street into pretending that “something” has happened, but the likelihood that this “something” will have a positive, long-term impact on the economy is about

Stirred into this week’s lively discussion of inflation/deflation was the notion that although Americans seem to live better now than they did fifty or sixty years ago, our parents and grandparents would be appalled to see how deeply in hock we’ve gone to enjoy the supposed good life. And if the standard of living has risen so impressively, why is it that the single-income, middle-class household of the Fifties could afford things that are barely within the reach of households that today are supported by two incomes? Sure, your neighbor has a composite-frame trail bike that he bought for $4000, another a $30,000 movie room, and your good buddy and his wife went scuba diving in Tahiti last Christmas. But did they have to take out a home equity loan to put their kids through college? And will the kids be able to pay back their fair share out of the meager income they have begun to earn with their $150,000 degrees in business administration, journalism, advertising and English literature? Some readers may recall the scene in the movie Back to the Future where a motorist pulled into a gas station and a swarm of attendants gave his car the kind of once-over that all filling stations routinely provided in the 1950s, checking the oil and fluid levels, and even putting air in his tires.  Setting aside the fact that this mini-inspection, if so princely an amenity were even offered, would probably add 25 cents to the price of each and every gallon of gas sold today, consider that the lowly gas-station attendants were likely in better financial shape than most middle-class couples are today. With his small monthly mortgage payments and easily manageable grocery and medical bills, the filling-station employee probably had enough left over each month (after taxes!) to accumulate a