SPX, RUT, Silver Updates: The Ongoing Power of the Bernanke Put

On Monday, Bernanke emerged from his lair and jawboned QE3 into virtual existance, again sending the market skyrocketing.  Before I go much further, I want to put up a chart I stole from Zero Hedge, who stole it from Strategas Research.  I don't know if they stole it from someone else.

 
As we can see, the government has managed to forestall systemic collapse with massive amounts of debt and spending.  If this doesn't drive home the point about what sad fundamental shape things are in, then I don't know what will.  Uncle Sam and Uncle Ben (not to mention Uncle ECB) are spending and printing like there's no tomorrow, and the SPX is still below its '07 high, and the economy still sucks.  What does that tell us?

It tells us that, effectively, all the government has accomplished with several years of record spending is to keep the market and economy treading water.  It's akin to being on a sinking ship where the captain is throwing everything of value overboard in an attempt to make the boat lighter and slow the sinking.  The question is whether equilibrium can be reached in time.  Can enough stuff be thrown overboard to keep the ship afloat long enough to make it back to port and live happily ever after?  Or is the ship doomed anyway?

And at what point do we have to start tossing the passengers?

In any case: clearly, we still haven't reached equilibrium, or they wouldn't be talking about QE3 at all. 

Everyone with two-thirds of a brain realizes that the QE program does little except promote inflation.  Oil is already over $100 a barrel, and the market is rallying like crazy anyway -- so why jawbone more QE at this point?

Well, if you're in the mood for a Tin Foil Hat theory, here comes mine.

Retail investors left this market in droves after the '08 crash, and many of them still haven't returned.  Usually they return after a big rally like we've had -- which prolongs the rally while the pros sell off all their inventory to the retailers.  This goes on until the retailers are all chock full of stock and there's no one left to buy any more, except an estimated 26 pimple-faced Burger King employees who just entered the workforce... so the market goes back into bear mode.  Late in that cycle, the pros can buy back their inventory again near bear market lows to sell to the retailers again... and thus the great circle of life is complete. 

But the retailers haven't come back in this case.  I believe some of this is due to the demographics factor -- Baby Boomers are in the retirement phase, and, quite prudently, many are unwilling to take on the same level of portfolio risk they did when they were younger.

How do you complete the cycle without the retail investors? 

Obviously, somebody's buying this market; that's the only way it can keep rising.  That "somebody" has been the Fed's printing press, using the pros as its surrogate.  And more recently, it has been the ECB's printing press.  Ultimately, the pros need the retail investors to come back, to allow them to sell all this inventory they've been accumulating. So how to get the retailers back into the market?

Enter Bernanke.  Jawbone the market higher, make stocks irresistable, make all other investments unattractive, get the retailers back in the game, then pass the bag to them -- and everyone's in the clear.  Except the retailers, of course -- but Bernanke doesn't really care about them.  What have retail investors ever done for Bernanke?  Nothing!  That's what.  And to make things worse, when Bernanke was in elementary school, the other kids (young future retail investors) used to make fun of his beard.  So there's probably a bit of resentment still brewing there.

Anyway, I don't know if that's the plan, or if I simply ate one too many paint chips in grade school while daydreaming of new nicknames for young Master Bernanke's beard -- but sometimes one can't help but look at this stuff with a cynical eye toward the sinister.

Not to say this potential wasn't shown in the charts ahead of time -- clearly it was.  And speaking of, let me step down off my soapbox and on to the charts.  Well, I'm not literally going to step on the charts... nevermind.

At this point, I think 1435-1440 is all but guaranteed.  I don't see much in the market's way until that level -- but there is an interesting confluence of theoretical resistance clustered in that zone, as shown below. 

If the market can break through there, then there really isn't much else to stop it until the 1500's.

There are some indications in the wave structure that the 1500's could be on their way.  If this wave takes a traditional five wave impulsive form and breaks through the resistance mentioned above, then the targets range from the high 1400's to the 1500's (see below).

The chart above references a "false wedge" and mentions 1995.  Below is a chart of (a portion) of the massive wedge that formed from the 1987 crash until 1995.  This wedge was discussed in Prechter's 1995 doom-and-gloom book At the Crest of the Tidal Wave: A Forecast for the Great Bear Market. 

We all know what happened to the market from 1995 to 2000, and it wasn't doom and gloom.  It was all flowers and fluffy bunnies.

Not to bash Prechter, he's a smart guy, and as I've said before, I "owe" him for introducting me to Elliott Wave.  And you can't blame him for missing a call -- heck, I've missed calls too; everyone has.  But you have to adapt to the market. 

It's one thing to miss a call -- it's entirely another to miss a decade. 

Prechter's been looking for the world to end for as long as I can remember -- and finally, after 13 years of looking for it, he finally got close in 2008... but even then, the market never retraced into the price zone where he originally turned bearish, back in 1995.

The point is: don't get married to your convictions.  Nobody's smarter than the market, so let the price action dictate. 

"Demanding" stocks go down because the world is a mess (or because it's all Funny Fed Monopoly Money) is akin to demanding Sears sell you a washing machine for $29 because you don't think it's "worth" $299.  And maybe it isn't -- but that doesn't matter.  Everything is "worth" what the next guy will pay for it. 

If prices have to drop because not enough people are willing to pay current prices, then there will be warnings -- it won't happen overnight.  If the "Great Bear" shows up in either stocks or washing machines, the market isn't going to drop to zero in 3 days.  There will be signs as prices start to fall.

Returning to the charts, it now appears that the bears only short-term hope for a stop near 1440 would be if this wave takes the form of an ending diagonal or similar.  Given the current price structure, there's no way to know today if that will happen or not -- the only thing that's caused me to consider this possibility is the confluence of potential resistance in that 1435-1440 zone.  The wave structure should give indications down the line, if it's going to unfold like this.

Looking at the total market picture, it does appear that the market has now successfully backtested the recent key breakout levels, which means "no long-term bearishness" unless and until those zones fail.  (Right click the chart, select "Open in New Window" for the full-size chart.)

RUT is also very suggestive of higher prices.  The RUT has closed back above its bullish trade trigger.  As long as the market maintains closes above the breakout levels in the charts above, and the trade trigger shown below, there is nothing to be bearish about in these charts.

Next we have silver, which I discussed yesterday, and which is also suggestive of higher prices.  I have provided some preliminary targets for the preferred count, and I'll try to narrow these down as the move matures.

Next, just a simple chart of the SPX showing the trendchannel and the closest support zones.

And finally, an edumacashunal chart.  I didn't publish this chart in the weekend article, because after I looked at some other markets, I felt too much doubt had been cast on my original read of it.  But we discussed some of the potentials of this chart over the weekend, so I wanted to update it now that the move has clarified. 

It does show how tricky market prediction can be at times.  Even now, after the move clarified, it's still hard to figure out exactly what happened within the red circle.  It also reveals that Friday's structure, which looked like an ending diagonal was, in fact, a leading diagonal.

In conclusion, Monday's rally could count as a completed small 5-wave structure, so there may or may not be a small consolidation/correction due over the very short term -- but it's currently expected that this correction will only be part of a larger impulsive rally.

Since early February, while I've been largely expecting higher prices, I have also been quite skeptical of this rally.  I suppose, because of everything going on around it, I still am.  As of this moment, though, as long as the bulls can maintain the recent key breakouts shown on the big picture charts above, there is little in the charts to be bearish about.  Of course, all that could always change tomorrow -- but until it does, there's no reason to assume it will.  Trade safe.