Excerpted from Notes From the Rabbit Hole #237:
Young FrankenMarket Lives
In failing to take a “healthy” correction to the equivalent of SPX 1350 to 1450 from the upside target zone of 1550 to 1590, the market is now running on policy and momentum. Hence we now dub thee Young FrankenMarket; Ben Bernanke’s creation, sustained by government and legacy MBS debt, following Alan Greenspan’s monster that was stitched together with artificially low interest rates that ultimately manifested in a huge commercial credit bubble.
Payrolls came in at 165,000 and an over bought, over loved* market popped its cork and exploded into blue sky. It had to be more than an okay ‘jobs’ report that did the trick. It was likely the combination of a still inflating Fed (and ECB, Europe popped hard as well) with some data that was good enough, but not so good as to call into question the Fed’s systematic inflation regime. This is Bernanke’s FrankenMarket, created by policy.
After making bearish patterns and/or negatively diverging from the Dow and S&P 500, the Russell 2000, Nasdaq 100 and Semiconductors all broke to new all-time (RUT) or recovery (NDX, SOX) highs on Friday. This left one notable holdout, the often-watched Transports. Since I normally do not give much weight to Dow Theory, I’ll not do so now. But it should be noted that the Trannies are not at new highs… yet [edit: They are now].
So it appears that recent writing I have done about a topping process may have been incorrect or at least, early. The current period reminds me a lot of Greenspan’s monster that emerged from the credit bubble early last decade, FrankenMarket as I called it in the first public article I ever wrote.
I remember wanting to be bearish [in 2004] because bearish seemed like the honest way to be. You cannot after all create (print) a bull market and a sound economy to go with it, can you? Well, yes and no.
Through interest rate manipulation, Greenspan created a bull market that really wasn’t (as measured in gold, which stripped out inflation’s effects and gave a ‘real’ and bearish view by the Dow-Gold ratio).
As noted previously, the But It Is What It Is website name came in large part due to my realization that the bull (in nominal stock prices) should not be fought as I looked around and saw (non-gold bug) perma-bears being blown up left and right. Any gold bull who was also bearish the stock market likely did just fine. But the play was long gold, and avoid or long the stock market.
Today we are challenged with a different monster. This one is more dangerous to the honest money contingent because it appears the golden shield has melted down and stopped protecting people from the obvious inflation being promoted in service to liquefying the banks, propping the economy and promoting a stock market bubble.
But here we have to take a step back and realize that it was 10+ years of bull bull bull for gold. Who are we to say what type of corrections should be suffered along the way? Stripping out the emotion, what we have is a really smart (I’d say diabolical in a way that is not entirely negative) policy maker who has somehow either engineered a ‘best of all worlds’ Goldilocks environment or taken the horseshoe out of his ass and hung it up on the wall of his well-appointed office.
I think it might be the latter, which in less crude terms means that it was just time for a technical adjustment. I hate to qualify the pain real people are suffering as an “adjustment”, but think about it. The negative energy at the bottom of markets and the economy in 2008/2009 was incredible. This very letter reproduced the Time Magazine Depression 2.0 ‘breadlines’ cover in support of its then bullish orientation.
Markets may need to work their way through an equal and opposite upside blow off before all is said and done. Who knows when that will come? It could be next week or it could be next year. But it is a near certainty that sentiment will play a big role.
For now, the trends are the trends, there are few signs that anyone is getting concerned about inflation and hence, the inflation continues. It is the Alice in Wonderland market:
“Nothing would be what it is because everything would be what it isn’t. And contrary-wise; what it is it wouldn’t be, and what it wouldn’t be, it would. You see?” –Alice
* AAII (Individual Inventors) had been an inexplicably skittish exception, as its members have fled to a bearish stance at the first sign of every recent minor correction. This had been a caveat to the bear case and the market will now try to suck them and any other holdouts in before a top is realized.
Notes From the Rabbit Hole has been following events with great interest since the Fed’s QE regime kicked in to its new phase (III), and technical analysis has kept us on the right side. When I named the newsletter I did so with Alice’s quote above in mind. Never has the idea of accepting what is contrary and counterintuitive been so important for everyone from speculators to savers to honest money advocates.
We remain intact first, and ready for opportunity – that “contrary-wise” could be big opportunity – second.