I went down to the Crossroads……

Posted on 08/03/2011

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…….fell down on my knees (or right to critical support @ 1250)

I went down to the crossroads, fell down on my knees.

Asked the Lord above for mercy, Save me if you please………..

And I’m standin at the Crossroads, believe I’m sinkin down.

I wish I had more time to articulate why I firmly believe the market is at a CRITICAL juncture, but for the time being I think it’s do or die for the stock market.

Today had the hallmarks of panic and I doubt it will be a short lived one. The potential for a 2-3 day rally turned into a 2-3 hour anemic mini surge ahead of the House vote. Now que up the reelection crushing hangover.

Brief breakdown: we’ve been trading bubbles for a decade. Dot com, Housing, Treasuries, etc. We were “extorted” by “too big to fail” banks who gorged themselves during the boom and came crawling to DC when the derivatives ticking time bomb exploded in 2008. In essence the taxpayer was saddled with an unimaginable amount of risk which the public sector consumed hand over fist between 2002 and 2007.

I realize it’s a fruitless endeavor, but I can’t help but wonder what shape this “recovery” would take if the financial engineers and new age Masters of the Universe who manufactured this mess were sent into receivership where they belonged. Speaking of manufacturing, remember when we actually made things that people needed domestically? What a quaint thought.

I digress. Bottom line, no matter what “school of economics” you matriculate in, there are a few hard and fast truths. The economy is consumer driven. Between 60 and 75% of spending (GDP) is based on the consumer. Organic growth, therefore, is dependent on the realtive health of the consumer (as well as their expectations for the future). Keynesian, Austrian, Libertarian….. dependent (albeit to varying degrees) on the consumer class.

For the past 2 1/2 – 3 years the consumer has moderated. Their “wealth”, predicated in large part on the value of their home, has contracted. Government became the spender of last resort and with a move toward austerity I find it hard to envision a scenario where we do not have a double dip (and NOT the kind you enjoy at Baskin Robbins).

This post doesn’t even scratch the tip of the iceberg, but consider the following (and make sure you’re up to date on your Lexapro):

Food stamp use is at an ALL TIME high. The average length of unemployment is 40 weeks (longest on record). The Labor Participation Rate is at an ALL TIME LOW. Home prices have fallen 11 out of the past 12 months (and the only reason they popped was the artificially created govt. incentive for homebuyers which ended last spring). 4+ MILLION people have given up looking for work and have fallen OFF the roll, which as of last month was (a laughable) 9.2% (just wait for Friday’s number….9.3 – 9.4%? Can anyone say “seasonally adjusted”?).

Wages for those that are fortunate enough to be employed are stagnant but the cost of living (assuming you include the “volatile” food and energy component) continues to go higher. Don’t worry about that though……it’s “transitory”.

The Federal Reserve has painted themselves into an unenviable corner. In their efforts to manufacture (there I go again with that quaint word) a self-sustaining consumer confidence and bolster too big to fail bank’s balance sheets they have failed miserably.

I expect a resounding echo chamber for another round of Quantitative Easing after what should be horrendous Non Farm Payrolls numbers on Friday. The “addict” REALLY NEEDS more “speed”. JUST THIS ONE MORE TIME, but Moody’s and Standard and Poors and the Chinese are calling for an “intervention”. Can you continue to enable?

I feel for you Bernanke, I really do. If 2.7 TRILLION dollars can’t give send this economy into breakaway velocity……? What else have you got up your sleeve?

BASELINE: The equity market REALLY needs to find it’s footing fast. We’re right at 1250 (even sooner than I anticipated) which is your very near term support. After that, watch 1238 which was the Japanese earthquake/tsunami low. After that…….1200 and or QE3. Whichever comes first.

One last prediction: any further “stimulus” will need to be disguised, because, like a movie whose sequel sucks…..you don’t expect a trilogy, but perhaps you just get the same cast together and give it a new name. Voilà ! Hollywood magic brought to you by the Federal Reserve Bank of NY and Ben Bernanke.

BTW: Gold made another all time high. That’s a good thing right?

SUPER aggressive types. Buy S&Ps here (1248 on Sept futures) with a short leash……again 5 point stop. Target 1265. After that, I would be a small (short term) buyer at 1240 with a 1235 stop. Beyond that……..it’s down on the year and 10% off highs….LOOK OUT!!

Five year chart (see much support? Me either)

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Posted in: S&Ps, Trade Ideas