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To Hit in the Field of Financial Market Delusions, Keep Your Eye on the Ball 3/31/21

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Yesterday, a couple of you highlighted the fact that there are so many different opinions about what the Fed is doing and trying to achieve, it's hard to know what to pay attention to.

I want to bring some of those posts over here today. I need to head out for some personal business that may take most of the day. So let's have at it, and I hope that you will continue the discussion, along with your market observations. 

Before we start, here's the hourly chart of the ES fucutures as of 4:30 AM in New York, 10:30 here in central Europe. What a mess. The quintessential meat grinder for swing traders. Looks like it's edging lower here. However, the 5 day cycle projection is only 3934 at the moment. Ho hum. 

Oh, and there's Dino again. I don't even need to outline him. We know how that usually ends up. Dinosaurs eat bears for lunch. 

tvc_c39809c90bd04a2eb29b1944046d9c19.png
Click to engorge

 

Meanwhile, the discussion in the Wall Street mafia media has focused on the issues of Treasury yields and inflation. It completely misses the point, which is in fact what they want. Wall Street's game is to always get you to focus on the sideshow so that you don't look to see what they are stealing, or how criminally malfeasant they are.

The problem isn't yields. That's a second order consequence of the crooks' outrageous behavior over the years. And whether there's inflation or not is completely tangential. It's a sideshow. The problem is the falling price of bonds and the massive, highly leveraged inventories of fixed income investments that it is crushing. The crooked Wall Street crime syndicates and the Fed crooked cop on the beat built this house of cards, and now it's collapsing.  We're in the early stages.   

Using the 10 year yield as a proxy for price, because yield is what we all relate to, I had been warning for months that once the 10 year yield crossed above, first 0.8%, and then 1.0%, there would be waves of forced selling by Primary Dealers, whose gigantic bond inventories would be increasingly under water. Then I always added "AND OTHER LEVERAGED SPECULATORS." The dealers weren't the only ones leverage long up the wazoo. They're just the most important ones, because the ARE the system. 

Can you say Archegos? Tip of the iceberg. The dealers themselves are in the same beached boat. The Fed keeps pumping enough to give them the appearance of being afloat, but the situation is dire. Switching metaphors, we illustrate the problem like so. 

Quote

Hindenburg Warning Update

by Lee Adler •  • 0 Comments

This is for the Treasury market. Proxy TLT.

Click to inflame

Click to inflame

Nobody thinks that an accident is guaranteed to happen until after the conflagration is raging. Then those who were behind the scheme say, "No one could have foreseen this."

Such bullshit. Over and over and over. 

So this is bad now, but you ain't seen nothing yet. Looking ahead, oh, the humanity. 

With that thought, let's continue yesterday's discussion. Thanks to potatohead and he who is No Einstein for stimulating me to think and expound on this.  

  

13 hours ago, potatohead said:

I get the sense, he is very knowledgeable about the system.  However, he has been pro banks and the Federal Reserve. He has done a good job of understanding their game and how they operate. However, your analysis seems more time tested and consistent than many others I have read. Maybe not him, but oo many of these twitter stars have been broken clocks. 

My sense is that the Federal Reserve or the big banks are trying to reign in speculation. They may know the game is long in the tooth. They are using tools that give the appearance that the game is being fed liquidity but as you have uncovered, the banks are walking out the back door quietly until last week.  Example, the T bill pay downs. That crushed very short term rates while allowing some to simply deleverage rather than throwing back in the market.   He is saying the Fed could use RRP to bring short term rates back up and show they are still in complete control . However, this drains liquidity. The existing leverage and margin debt still remains. That's where your analysis really shines. At the end of the day they are still in the same shell game.

  

13 hours ago, DrStool said:

Well, RRPs don't drain liquidity, and can't move rates. They're just overnight deposits with a different name.  

There's no voluntary deleverage in my opinion. Big banks never voluntarily reign in speculation. And the Fed is telling everybody that there's nothing to see here, move along. 

This is a forced march because of massive losses on leveraged positions. Nobody is doing this voluntarily. My surmises is that most of the dealers, virtually all owned by very big multinational banks, are walking dead men.

The Treasury market is in deep shit. And that's why the Treasury got a head start on shrinking its cash pile by doing paydowns rather than wait and just spend it for stimmy. 

 

13 hours ago, potatohead said:

This is why I enjoy your work. I read others but something does not add up at the end of the day. When I play out their entire thesis, we are still over leveraged and the debt needs to be serviced or extinguished. Yet the Fed's  balance sheet keeps expanding. Logically, that leads me back to your work.

The size of the Fed's balance sheet needs to be viewed in relation to supply of and demand for financial assets. That's the issue for us -- the price of financial assets.

The US Treasury creates so much supply of securities, that the market could NEVER absorb it on its own. The Fed must provide the demand.

This started with the first TARP which, ironically, the market was able to absorb on its own because there was so much panic that the world massively panicked INTO Treasuries. The problem at that time was, Primary Dealers were net short Treasuries.  They got killed because they got that so wrong. And in getting killed themselves they crashed the system. There was nobody left standing to make and maintain orderly markets. That forced the Fed to step in. 

Fast forward a dozen years and everybody is filled to the gills with long Treasuries. They don't have a choice. The US Government is burying the market with wave upon massive wave of never ending supply. 

Primary Dealers have been accumulating and holding record long positions, and leveraged those positions to the nth degree to carry them. Therefore the Fed must print enough money to buy enough or fund enough of the Treasury supply to keep prices high and yields low.  Ever since QE1, the magic number has been 85-90%. Month in and month out, the Fed has maintained that purchase ratio. When the tried to deviate, the market went against them so badly, the Fed relented. It puked from the pressure.

The relentless drop in bond prices tells us that by buying or funding 85-90% of net Treasury issuance today, the Fed isn't creating sufficient demand to absorb enough supply to keep prices stable. Dealers and institutions are so stuffed with inventory and overleveraged that they can't take another dime of new supply. 

Look at the timing of when bond prices started falling. The market has been choking on this shit since last August. During the early months of the pandemic panic, the Fed did enough QE to fund 120% of new Treasury supply. Extra slosh to stop the panic and reinvigorate animal spirits. 

It worked. 

The Fed then reduced emergency QE back to their normal 85-90% in July. Bond prices topped out and immediately started  their relentless decline. Direct cause and effect.

The total amount of monthly issuance is now so huge, that the Fed financing 85% of it is no longer enough to preserve the appearance of a stable, working market. 

In other words, the Fed is too tight at the given level of supply.  And supply will soon double.  We're about to see the MMT crowd face their come to Jaysus moment. 

Then what will the Fed do, and when will it do it? Those are the two great questions.  I address these issues in every Liquidity Trader report. We answer them based on the Fed's historical behavior. I have been interested in the Fed for 44 of the 53 years that I've been observing the markets.  The Fed is people. People behave in similar ways in similar situations. We learn from the lessons of history. 

So, many tanks and dungs a lot for that! 

And away we go! 

Animal Spirits are Waning and Money is Disappearing

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Yesterday, a couple of you highlighted the fact that there are so many different opinions about what the Fed is doing and trying to achieve, it's hard to know what to pay attention to. I want to

Holy cow that was fast once it broke above 12968 on the fifth try. If it clears 4/8 at 13125 and then 3/23 high at 13172, then I guess it's time to consider the possibility of 13281 relatively soon. O

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Today's Raw Stock Screen Data

This is raw data. They are not recommendations. They represent charts that have triggered short term signals near key cyclical support or resistance levels. Pick through these and see if there are any that you like from your own charts. Feel free to post your charts here with comments. 

Symbol Buy Sell 500 200 125 50
VNET.O 1 0 0 0 1 0
AY.O 1 0 0 1 0 0
BIDU.O 1 0 0 0 1 0
CX 1 0 0 0 0 1
ESNT.K 1 0 0 0 1 0
AQUA.K 1 0 0 0 1 0
HOG 1 0 0 0 0 1
HSBC.K 1 0 0 0 0 1
INSM.O 1 0 0 1 0 0
PSCE.O 1 0 0 0 0 1
IEZ 1 0 0 0 0 1
LADR.K 1 0 1 0 0 0
MTB 1 0 0 0 0 1
MAXR.K 1 0 0 0 1 0
MD 1 0 0 0 0 1
MGP 1 0 0 0 0 1
MS 1 0 0 0 0 1
NTR 1 0 0 0 0 1
PTEN.O 1 0 0 0 0 1
RF 1 0 0 0 0 1
RDSa 1 0 0 0 0 1
RDSb 1 0 0 0 0 1
SBRA.O 1 0 0 0 0 1
TEN 1 0 0 0 0 1
USFD.K 1 0 0 0 0 1
VER 1 0 1 0 0 0
YNDX.O 1 1 0 1 0 0
ADI.O 0 1 0 0 0 1
AVGO.O 0 1 0 0 0 1
CHD 0 1 0 1 0 0
ED 0 1 0 1 0 0
DHR 0 1 0 0 0 1
DLR 0 1 0 1 0 0
ETRN.K 0 1 0 1 0 0
WTRG.K 0 1 0 0 0 1
ES 0 1 0 0 1 0
GFI 0 1 0 0 1 0
HTA 0 1 0 0 0 1
INFN.O 0 1 0 0 0 1
IEI.O 0 1 1 0 0 0
EWJ 0 1 0 0 0 1
IWP 0 1 0 0 1 0
LMT 0 1 0 1 0 0
MXIM.O 0 1 0 0 0 1
MSFT.O 0 1 0 0 0 1
MRNA.O 0 1 0 0 1 0
NNDM.O 0 1 0 0 1 0
NBIX.O 0 1 0 0 1 0
PFE 0 1 0 1 1 0
PCG 0 1 0 0 1 0
RWM 0 1 0 0 0 1
PHYS.K 0 1 1 0 0 0
PSLV.K 0 1 0 1 1 0
SYNH.O 0 1 0 0 0 1
TTWO.O 0 1 0 1 0 0
TRP 0 1 1 0 0 0
TMO 0 1 0 1 0 0
VRNS.O 0 1 0 0 1 0
WEC 0 1 0 1 0 0
XLNX.O 0 1 0 1 0 0
Totals 27 34

 

     

The scorecard today is 61 total signals, 27 buys, 34 sells. That's a hefty total, and the nearly even balance shows how disjointed this market is. It's characteristic of a rangebound meat grinder market that will stick its hand in your pocket grab your cash and grind it to useless dust. 

I stupidly tried to trade this slop yesterday and it cost me, despite sticking to my system. 

Today, thank goodness I have errands to run. 

Here's a sample chart with my proprietary squiggles, that I thought was interesting. Not a recommendation. 

image.png
Click to engorge

 

I initially screen 9000 NYSE and NADSACS issues for stocks that have been trading more than 1 million shares per day and are trading above $6. There are normally between 30 and 100 results, depending on where we are in the cycle. There are more signals at cyclical turning points and fewer as a move progresses. Monday looked like a significant turning point. Fool me once, shame on you, Mr. Market. 

I use these screens to pick stocks for my ready list for my personal trading, and also for my weekly swing trade chart picks for Technical Trader subscribers.

I developed the algorithm to hunt for stocks that looked primed to have a good move, ideally over a period of 4 weeks. In practice they range from 1 week to 7 weeks. I consider the move finished when they break trend support, using the indicators from which the screen program is constructed. 

From the screen output I visually review the charts. I make my picks from that review.

There are usually between 2 and 8 good looking setups every day. The numbers are bigger around intermediate term turning points. 

 

 

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Now there's a pattern. woo. Buy signal, my ass.

image.png

The standard measurement target on this is 125.  That said, the right shoulder is higher than the left. Those usually don't break all the way down. 

 

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Just noticed that one of the sell signals was on an inverse fund. That means that 28 signals were bullish, 33 bearish. Fugly. 

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Today's installment of something works until it doesn't--32M NQ edition. I keep thinking it "has to" decisively break either the 3/8 line up at 12968 or 2/8 line down at 12812. Five times up and three times down so far. It's early here--let's see what happens today. Pretty easy to see where stops should be set on up and downsides the last few days while waiting for an up or down break. 

Screen Shot 2021-03-31 at 5.35.58 AM.png

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Lee's clarity is what makes his analysis invaluable. I have to admit, the slight of hand tricks and design of the script can be difficult to see through. The velocity of money has been a very big question which few have actually explained. My theory is that the money or reserves being created is  simply being funneled to financial assets and then leveraged umpteen times over. This financial engineering pins this velocity number down because money is trapped but it really does not mean much. By that I mean, a true turn in confidence in the market out of paper assets would change velocity overnight, equivalent to holding a beach ball under water and letting it go.

The reason I see the need for physical gold and silver is this systemic and counterparty risk that Lee says is unfolding. Been in this game for 30 years and at this point, the timing is not important as much as the protection. When it unfolds, you have to be prepared for it otherwise you will get run over.

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19 minutes ago, DrStool said:

Rule number one of modern technical analysis. 

All patterns are bullish. 

Assuming that is true--and at this point I have little reason to doubt you--then the 9th edition of Edwards & Magee needs to be only one page in length. 

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14 minutes ago, PullMyFinger said:

Assuming that is true--and at this point I have little reason to doubt you--then the 9th edition of Edwards & Magee needs to be only one page in length. 

Absitively! 

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1 hour ago, potatohead said:

Lee's clarity is what makes his analysis invaluable. I have to admit, the slight of hand tricks and design of the script can be difficult to see through. The velocity of money has been a very big question which few have actually explained. My theory is that the money or reserves being created is  simply being funneled to financial assets and then leveraged umpteen times over. This financial engineering pins this velocity number down because money is trapped but it really does not mean much. By that I mean, a true turn in confidence in the market out of paper assets would change velocity overnight, equivalent to holding a beach ball under water and letting it go.

The reason I see the need for physical gold and silver is this systemic and counterparty risk that Lee says is unfolding. Been in this game for 30 years and at this point, the timing is not important as much as the protection. When it unfolds, you have to be prepared for it otherwise you will get run over.

It's amazing how Velocity (V) confuses people. It's because it's a misnomer. It explicitly refers to the speed of an object. Economists pretend that V represents the speed of transactions in the economy. It's absolute horseshit. V of M has nothing to do with the speed of transactions whatsoever. Nothing. Zero. Zilch. Nada. 

It is simply the ratio of the measured quantity of GDP divided by the measured quantity of money in the banking system.  V=GDP/M. It's a fixed ratio that changes over time. It does not measure movement. It does not measure speed of transactions. Whoever came up with that concept was full of crap. And as usual with most crap in eConomics and finance, it became accepted as Truth. 

When the Fed prints a few trillion and pumps it directly into M, M expands by, for example, $3 trillion overnight. 

Changes in GDP, on the other hand, are slow and normally steady. They tend to expand at a fairly constant rate, other than when there's a crisis. GDP typically rises by 100-200 billion quarterly.

So if the Fed pumps $3 trillion, and GDP grows by 200 billion, then V is slashed by a factor of 15. V will only ever increase if GDP rises more than M, and that won't happen until the Fed stops printing. 

It's money that the economy can't utilize for growth even if it is growing at a very rapid clip like 6% like now.

The Fed is currently printing money at a rate which would approximately equal GDP growth, so V should flatten out here. The chart below reflects that. But when the next crisis hits and the Fed prints another massive wad of money, V will shrink a great deal again. 

This chart illustrates. It shows M2, GDP, and V. M2 and GDP are indexed to the bottom of the 2008-09 recession in March 2009, when the Fed started QE1. These are on the left scale. It shows their growth relative to one another in percentage terms over the past dozen years. 

image.png

 

The Fed started full QE 1 in March 2009. It bought Treasuries from Primary Dealers to inject cash directly into the banking system and directly grow M1, and thereby M2. For the first two years, the Fed kept QE about even with GDP growth. V, the ratio of GDP to M, stayed almost stable. GDP was about 1.7 times M. 

Then the Fed stepped on the gas with QE 3 in mid 2011. You can see the pop in M. It looks tiny relative to today, but then it was huge. V plunged as a result of that increase in QE. 

From 2011 to 2017, the Fed pumped QE continuously at a rate greater than GDP. The GDP/M ratio, aka V, declined steadily. 

Then in 2017-2018 V rose. What happened? Mother Janet tried to do the right thing by shrinking the Fed's balance sheet. She tightened money. M2 growth slowed, but GDP kept growing at the same pace it always does. So as M slowed relative to GDP, the GDP/M ratio, aka V, rose. 

Along came Lord Jaysus, continuing that "normalization" policy until 2019.

The bond market wasn't having it, though. The US government was issuing the same massive amount of debt month after month, but the Fed was buying less and less of it. Bond prices fell continuously and the 10 year yield rose relentlessly to 3.25%. 

Jaysus cracked at the end of 2018. He stopped shrinking the Fed's balance sheet and V rolled over. 

Then in September 2019, the shit hit the fan in the money market and the Fed started its giant program of NOT QE, which was QE, but the Fed said it was NOT. We knew better. As the Fed pumped money into M at a high rate,  the GDP/M ratio, or V, rolled over.

Then came March 2020, and we all know what the Fed did. This time, the economy really was crashing. That and all that Fed money printing caused the GDP/M ratio (V) to drop sharply.

It will go much lower again later this year when the Fed is forced to massively ramp up QE even more.

The US economy is a huge rumbling giant of a thing that has massive inertia. It's the biggest, baddest, goddam force in the whole fucking world. Nitpicking it with monetary policy has absolutely no impact on it. That is until shit breaks because of the greed and malfeasance of the Wall Street crime bosses, and the corrupt cop on the beat Fed, who protects the Street con game. 

When shit breaks, the economy stops for a rest. Then it gathers itself; the general motion returns; and it starts moving again. Over the long term it just keeps expanding at about the same pace all the time, REGARDLESS of monetary policy. Monetary policy has absolutely no impact on the US economy over the long haul. 

But it sure as hell has an impact on the stock market because the stock market is one of its only two direct policy conduits. The other is the bond market.

Whatever happens in the economy is relevant because policy makers THINK that their policies matter, so they react to shit that they don't need to react to. Their support of massive financial chicanery schemes just makes the system more fragile all the time. 

So V is meaningless. It doesn't tell us anything. We already know that money is exploding, and GDP is growing at a semi constant rate of 2-3%, with rare exceptions in response to crashes and recoveries. 

V adds nothing to that knowledge. 

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Holy cow that was fast once it broke above 12968 on the fifth try. If it clears 4/8 at 13125 and then 3/23 high at 13172, then I guess it's time to consider the possibility of 13281 relatively soon. Often turns back a bit the first time up or down to a 4/8 line. I'm out of my long at 13123 for a really lucky and undeserved healthy profit, so my trading week might be done. Because I'm out, I assume the odds of it going to the moon are increased substantially. 🤡 

Seemed like the world was ending last week, but now here we are. The six horsemen of the NAScrapolypse are really green today. Gonna take Mrs. Finger out to lunch just in case the world is in fact ending. I would hate to face it on an empty stomach. Trade safe! 

Screen Shot 2021-03-31 at 9.08.56 AM.png

Screen Shot 2021-03-31 at 9.03.54 AM.png

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