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Thursday, July 31, 2014

Review of Nasdaq Composite


Nasdaq
While the path of least resistance is still down, it does not guarantee a big correction or crash. Those expectations, largely opinion driven, have yet to be supported by the message of the market. REV(E)'s positive divergence with price - generating higher highs relative to price, increases the probability of an upside breakout and refutes the bearish arguments populating the headlines lately. A close above the July high, confirmed by force, reverses the trend from down to up.  A close below 4350 emboldens the bears and accelerates the decline.

Chart: Nasdaq Composite


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Review of Russell 2000

Small Cap Stocks







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Review of Gold

Gold





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Review of Sentiment

Sentiment towards stocks, slowly deteriorating as price retreats from July high, follows price. This proportional relationship reflects growing doubts about the health and duration of the 2009 bull market. Since majority's emotional reaction towards stocks is consistently wrong about timing and direction, growing doubts and ill-timed shorts will fuel the next advance once the path of least resistance reverses from down to up. Until then, expect sentiment to follow stocks towards negative (bullish) concentration. The greater the concentration, the more fuel available for the next impulse wave.

Chart: SP 500 and Normalized American Association of Individual Investors Sentiment Survey Bulls As % of Bulls and Bears


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Wednesday, July 30, 2014

It's Always About Expected Profit


Meaning the Fed, like the rest of us, doesn't know and will be following market-driven rates (chart). The view that central bankers - including the Fed control the global economy through its short-term interest rate policy is laughable. Whether interest rates are 0%, 1%, 10% or higher, nobody will borrow if the margin of profitability doesn't exceed the cost of doing business; the cost of doing business includes borrowing costs. On one hand, if a toy manufacturer expects its hot toy to produce a 25% return over the holiday season, it likely jump at the chance to borrow at 10%. On the other, if costly regulations designed equalize the standard of livings for all making new businesses unprofitable for years, only a fool would borrow money at 1%.

Chart:  US TBill Yield and Gold London PM Fixed


Headline: Fed offers no clearer hint on first rate increase

WASHINGTON (AP) -- The Federal Reserve is further slowing the pace of its bond purchases because it thinks an improving U.S. economy needs less help. But it's offering no clearer hint of when it will start raising its benchmark short-term interest rate.

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Human Behavior Means Crash and Burn Inevitable

The game of life, driven by human behavior that includes the stock market, is all about timing. Human behavior means everything, regardless of the definition of money, centralized control, technology etc., trends towards chaos. That is, all systems will crash and burn without the input of energy; the invisible hand driven by the collective self-interest of all participants prevents that. The game of life; therefore, is best played by those recognizing when the probabilities of a crash and burn have reached the point in which they cannot be ignored. Those calling for one today likely underestimate how far an acceleration phases can push trends beyond their norm.

Headline: Ron Paul: Stocks are in a bubble and will crash

Ron Paul , the former U.S. representative from Texas and perhaps America's most popular libertarian voice, has long said that the nation's monetary and fiscal policies would result in massive inflation. According to the common measures of inflation, this has not yet occurred. But Paul maintains that the inflation he has warned of has indeed come to fruition in asset prices, and that once it unravels, a market crash will ensue.

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US, Europe impose tough new sanctions on Russia


The West, most likely eager for distraction ahead of the economic downturn or simply foolish, a coin toss at this point, have widen their sanctions by targeting select areas of finance, defense, and energy of the Russian economy. The European Union, highly dependent on Russian energy, has largely excluded this sector. Perhaps, they (EU) realize that shooting oneself in the foot ahead of cold fall and winter months as their domestic economies weaken would be politically unwise.  Political blunders often result in sanctions against leadership.

Since the line in the sand of 'wise' always seems to move towards political expediency, traders would be wise to discount the dangers of linear thinking within a non-linear world. As Einstein once wrote, only two things are infinite, the universe and human stupidity, and I'm not sure about the former.

Do not be surprise to see the unexpected consequences of sanctions accelerate out of control once the dominant economic cycle turns down. The flight of capital from Russia and Russian stocks suggests big money is moving ahead of future headlines.

Those that believe that the above will force Russia into submission, don't understand human behavior and haven't studied history. Any acquiescence that doesn't allow Putin to save face would make him appear weak within a political back drop that demands the appearance of strength to maintain control. In essence, the more the West tightens its economic grip on Russia, the more Putin will act in defiance of them.

Chart:Russian Stocks (ETF)


Headline: US, Europe impose tough new sanctions on Russia

WASHINGTON (AP) — Spurred to action by the downing of the Malaysian airliner, the European Union approved dramatically tougher economic sanctions Tuesday against Russia, including an arms embargo and restrictions on state-owned banks. President Barack Obama swiftly followed with an expansion of U.S. penalties targeting key sectors of the Russian economy.


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