December 27, 2012 – Could a black swan stock market event ring in 2013? A “Black Swan” event has the following three attributes: 1) It is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility; 2) It carries an extreme impact; and 3) In spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.
Merry Christmas and Happy New Year to all. May this season bring you all of hopes and aspirations for prosperity, health and good people in your life. We carry on with the possibility of a black swan come Jan. 1. With Congress on a break and President Obama in Hawaii, this fiscal debate has come down to the bitter end.
Here’s the good news: It seems these negotiations don’t get very serious until one side or the other looks at their reflection in the ditch and decides they don’t like the picture they see. I wish it was otherwise. But now we have the distinct possibility the politicos misrepresented the potential of a deal to us. The day Reid, Boehner, Pelosi and McConnell posed for the cameras like age-old bridge partners, they gave the impression there was going to be a deal. Being reasonable people, we believed them. Maybe they believed the Mayans and figured everyone would be off the hook?
There’s still time and in the Obama era, deals tend to materialize in the bottom of the 9th inning so there’s still a chance to kick the can into 2013, something they do very well. But now we have to consider the possibility they don’t get it done. What that is likely to do is give the market wild swings this week. It’s a short week on light volume and whoever is at their desk has the opportunity to push the market around. My best advice to you is not to take these mood extremes too seriously. It’s just the nature of post-Christmas trading.
What is likely to be the most important chart this week? We’ve had a reversal in the Greenback again which has defended a double low. Granted, the greatest calculations are not there but we have a condition where the bulls control the lower end of the range while the bears control the upper portion, a perfect recipe for a trading range. But on the daily I like the reversal candle formation on the Greenback and on the intraday we’ve seen some decent levels of short covering. Bears have removed themselves from the discussion on the Dollar.
What does the coming of Christmas mean to the markets? It means the Santa rally is over. I’m not saying the rally is over but the Christmas euphoria sequence is over. If markets are topping they have the chance to top in the period between Christmas and New Year’s Day. We usually don’t know it until the middle of January when in hindsight we look back and see how obvious it really was. Let me say this, I don’t come into this coming January with the same level of bullishness I did last year at this time. Last year we were coming off a VIX (CBOE Volatility Index) that got as high as 48. This year we haven’t been able to get above 20. The big event of the month other than the fiscal cliff is the Fed’s new modus operandi of a targeted unemployment rate of 6.5%. What concerns me about that is a shift in psychology that makes us in a late stage bull. If the jobs picture improves the market might just sell off because they know we are getting closer to the day of higher interest rates. If the unemployment rate goes up, the market might just sell off just because. We could lose whether coin comes up heads or tails. I know the market is a perverse mechanism but even I can’t accept the notion the market would rally on bad economic data.
But for those of you looking for a repeat of 2008, don’t go there. I battle it out with the ultra-bearish and not a one of them has a seriously good understanding of the longer term cycles which enables them to avoid that doomsday scenario. I think 2013 can be a rough market year but that doesn’t mean we have to revisit the bottom in 09. I never come here with a market opinion without a serious reason to back me up. I might not be right all the time, but I’m never guessing. The European markets have taken out the October anniversary time windows. As you know we waited on those windows all year to fire off and they didn’t disappoint. While some of the market topped in the September seasonal change point, the Dow topped right in that September/October window and we had a correction. But the European markets were bold enough to make recent new highs. That tells me the big 5 and 10 anniversary point isn’t as powerful as it might have been. So while I think we can still get a garden variety bear that scares everyone half to death, we are not likely to experience anything like a real financial meltdown on the order of 2008.
The other takeaway is whether the European markets can get back to the 07 highs. The DAX high is 7682. The top is in the 8100 handle. We are not that far away. Could they get there? Part of our new work for 2013 is to look at the psychological motivation of specific points on the chart. How did we get to the 09 bottom? Wasn’t it a result of a generational panic? What are the chances we get the cousin of the generational panic?
Not very good and the reason being there are still too many people who think it’s possible. You’ve seen all of the doomsday predictions and one particular commercial they used to air on CNBC. They started showing that commercial in the latter part of 2011, right? When the world was still here on January 1st they changed the doomsday scenario into 2012. We don’t see that commercial anymore. Such is the life of false prophets. But others prophets of doom have popped up. All you have to do is hang out in the Twitter universe and you’ll find them. The point is and always has been there was nobody preaching doom back in 07 when the country was in grave danger and nobody saw it coming.
I have to tell you, the world is messed up. It took me a few days, but I figured out this gun issue is very similar to the mania psychology we experienced with stocks in 1999 and real estate in the middle of the last decade. We are a bubble culture and seem to go from one mania to the next. Originally, we all wanted protection from the bad guys. Now the biggest threat is no longer from the criminals. You can’t tell me Adam Lanza was a criminal. His record was clean up until the time he pulled the trigger. Let’s keep in mind that for a mania or bubble to exist the participants have to deny the possibility that a bubble exists. By Wayne LaPierre coming out the way he did on Friday by suggesting the answer to the problem is by having even more guns by way of arming people in the schools proves this entire gun psychology has crossed the line into a form of psychosis or paranoia. According to Bill O’Reilly the main reason people don’t want to give up their assault weapons is because they fear the government. So let’s say they do decide to put an armed guard in every school in the country. Aside from the fact there was an armed guard at Columbine which did nothing to stop that bloodshed, according to what I heard it would take at least $6.5 billion to cover every school in the country. This at a time when the same political party who supports the NRA is calling for massive spending cuts. Where exactly is the money going to come from? Wouldn’t this money be better spent tracking the mentally ill? Suddenly we have a country where the mentally ill are more dangerous than the criminals or terrorists but nobody is really talking about how to solve those problems.
But none of this has much to do with the stock market. All I know is Newtown is likely to be the watershed event that pops the gun psychology and we are likely to see meaningful reform. Mr. LaPierre’s response is a hysterical move from a desperate organization that is likely on the wrong side of history on this issue. But only time will tell.
I suspect the market could be all over the map this week. Be careful and don’t take the intraday swings too seriously. There aren’t enough people working to give us a meaningful, lasting move.
Pictured above, the U.S. Dollar Index – combined electronic and PIT trading – continuous futures most liquid contract. (Credits – Jeff Greenblatt for Futures Magazine).
The Master of Disaster