Written by William Kurtz
The "sequester" is getting closer. When it was first proposed by the President's adviser Jack Lew some time ago, both houses of Congress and the President thought it was a fine idea. Congress passed it, and the President signed it. They all thought that "the other guy" would never be so arrogantly stupid as to allow it to really happen. They all misread each other. Now, both sides increasingly appear to be ready to let it happen, so that they can blame the other guy.
Some of its effects will be felt immediately. It will take time for others to filter down through the economy.
You might wish to look at the enclosed monthly chart of the S&P 500. At the top left, you will see the all-time High in October 2007. The disastrous decline into the low (and the start of the Great Rally) in March 2009 comes next; and then the Great Rally into today. Note how volume (and especially SELLING volume) increased on the way down; and how volume has trended down all the way through this Great Rally - and especially how volume spiked up during selloff months within the Rally. If this were a true bull market, one would expect that volume would have been trending UP during the Rally; and that - especially now, having in mind the one-sided furore expounding the argument that a new bull market is just now beginning - one would have expected that volume would be rising. But it isn't.
Click to enlarge
Click to enlarge
This leads to the conclusion that everything since March 2009 has been a bull rally within an underlying bear market - that is, a Correction.
Keep your eye on the Highs of February 19 in the Dow Industrials, in the Dow Transports, and in the S&P 500. So long as at least two out of three of them remain below their respective February 19 Highs, I think that the likelihood of a strong selloff in the markets, soon, will still remain on the table.
Click to enlarge
Click to enlarge
February 19 also marked the top of the "e" wave in the "Ending Diagonal Triangle" that I mentioned a few days ago. So long as the top of that wave is not surpassed, the "Ending Diagonal Triangle" hypothesis (which is bearish) will remain viable. (In other words: "so far, so good.")
Equity mutual funds have almost no money in the till - they're more fully invested now than in decades. Insiders are selling shares in their own companies, 9 "sell" orders to 1 "buy" order. Traders are super-confident, by multiple gauges of sentiment. Bullish financial writers are becoming downright nasty in their arrogance and in their stated disdain for the opinions of world-class financial writers who express reasoned positions contrary to theirs.
The stock market reminds me of the boy who was furiously pumping up the tires on his bike so that he could get a faster ride on hard tires which offered very little "rolling resistance." He was willing to give up a smooth ride in exchange for a faster ride. He kept on pumping until the tire exploded.
Central banks do the darnedest things. Great Britain sold a large percentage of the Gold in its Treasury, right down to the Low in 2001, which of course was the opposite of what it should have been doing. More lately, central banks have been buying Gold in quantity, right up to and including and after the High of October 2011 and again during 2012, right up to the lower High of October 2012. Gold is off 19.5% from that October 2011 High. It recently hit the "support shelf" that I had mentioned a long time ago, and is bouncing off that support. It ought to bounce a little further before resuming its downhill slide, although it is becoming overbought in the very short term. Its underlying trend is Down. I think that its January 17 High of $1702 is not likely to be surpassed, and certainly not its October 2011 High.
The same general observations apply to Silver, except that it has not yet fallen to its own "support shelf." It may rise a little more before returning to its operative downtrend. Silver posted a long-term peak in late April 2011. That High is not likely to be surpassed for many years.
I believe that upside opportunities in the stock market are very limited. All investors and traders should be in defensive mode.
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