Category: Trading Articles

Apple's 'sell the news' trade was preempted

It's been a month now since the last chorus of crash calls made the rounds simultaneously to a short term retrace in the markets. As Charles Dow would have called it though - just noise. Now, a hundred points higher and with 2000 being the focal point of late, the market's unsustainable angle of ascent has transpired without anything more than a couple of faint signals that it would even attempt to retrace. Yesterday it finally gave off a signal and for reasons you wouldn't expect - the Apple sell the news trade was preempted. Holders were forced to sell early creating volume off the top and 2bar reversals elsewhere.

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  • Written by LA Little

Category: Trading Articles

Classical TA - $Compq- Bulls looking to break rising wedge topside

Bulls are attempting a topside rising wedge break- see the following 7month daily chart.

Read more: Classical TA - $Compq- Bulls looking to break rising wedge topside

  • Written by Gary Caumont

Category: Trading Articles

Discount Rate overlaid with recessions

Why the Fed may do QE again

Before quantitative easing, the Federal Reserve primarily relied on two policy tools to fight off the effects of contracting and expanding economic forces. One was the Fed funds rate and the other the discount rate. The direct effect of changes to these two instruments (in particular the discount rate) would almost immediately be translated to changes in the prime lending rate of leading banks and thus interest rates in general. This was the primary means of fighting off a recession and cooling down an overheated economy.

Since 2008, the discount rate has hovered at record low territory - just 3/4% while the Fed funds rate is stuck at historic lows of 0 to 1/4%. A historical chart of discount rate policy changes clearly shows the relationship between increases in the discount rate and subsequent recession and decreases in the discount rate and subsequent expansions. Since the Federal Reserve introduced quantitative easing and the massive expansion of its balance sheet though, one has to wonder will the Fed funds and discount rates play any role in fighting off the next recession.

That seems highly unlikely unless this economy rolls along in an expansionary manner for a much longer period than is typical given historical data. 

The current U.S. economic recovery has now entered into its fifth year while the average life cycle of an expansionary cycle is 40 months across all data and 60 months if using the post-war cycle expansions. So unless the Federal Reserve engineers a longer than average expansion, then the discount and Fed funds rate are clearly of little value in policy decisions going forward. That leaves but one alternative - more quantitative easing. Yes, more of the same.

Duration of Economic Expansions

Source: Avondale Asset Management with up-to-date modifications

With literally trillions of dollars on its books already, if recession were to occur anywhere over the next year or two, the Federal Reserve will be forced to expand its balance sheet yet again. If true, one has to wonder whether that set of actions will itself have unintended consequences far beyond what has been witnessed so far. Lest we forget, a considerable portion of economic theory is based on perception and if the perception that the U.S. cannot service its debt ever becomes widespread, 2008 will look like a mild temper tantrum compared to the chaos that would follow.

As for how likely is a recession, domestically that seems unlikely near term but the U.S. does not operate in a closed system and the major economies around the world have been supercharged on debt as well. China, Japan, the U.K. and others have all stimulated and piled on more debt since 2008. The European Union has been the most austere in their ways but the result has been costly as they currently suffer the prospect of a recession.

The bottom line is that without continue stimulus, all of these "robust" pockets of economic activity would most likely resemble the E.U.

As was considered recently, the bond and gold markets seem to be suggesting more QE is expected domestically. With the Federal Reserve schedule to finish up its latest QE binge this October, it's seems ludicrous to expect a new round of balance sheet expansion. Of course, that was what we thought when QE2 was coming to an end only to be quickly revived with the introduction of another round of easing. So, ask yourself, “Has anything of substance really changed?” As Tennessee Ernie Ford once sang, all we are is "another day older and deeper in debt".

So what if some exogenous event were to strike and prevent the U.S. economy from reaching lift off? What if the unthinkable happens and the mature U.S. economic expansion falters requiring additional measures of support? Where will that support come from? It certain won't be provided through traditional measures.

Folks, the Federal Reserve through the leadership of Bernanke, architected what has come to be known as quantitative easing and sold the world on its magical effects. It was a new Economic Era. That architect has moved on though and now those less familiar with the intricacies of that policy and with less confidence in its magical abilities are in charge. Will they have the confidence to QE this economy forever? Will doubts eventually arise as to the efficacy of the operation and what will the implications of those doubts be? These are unchartered waters the world is swimming in. I, nor you know how the history books will judge this grand experiment. What we do know is that seldom is it really different. What we know is that “New Era” typically is not much different from what came before. What we know is that if you and I have to balance our checkbooks - eventually the Fed will have to do the same!

This article was originally published on MarketWatch on Aug 20, 2014 1:29 p.m. ET

  • Written by LA Little

Category: Trading Articles

Remove crash fears by being better informed

Multiple times over the past year I have penned pieces telling you what to look for to know when a crash may occur. These articles have appeared when the airwaves are full of "crash talk" with the most recent one published just a couple short weeks ago when the markets were seemingly cratering. The structure wasn't there then and it certainly isn't apparent now so talk of a potential crash before it is possible is - well - ludicrous for lack of a better term. Fear of a crash is a byproduct of incomplete knowledge and unless you have studied crashes in depth having incomplete knowledge about them is reasonable which, of course, is why the fear spreads and talk of crashes appear on a regular basis.

Read more: Remove crash fears by being better informed

  • Written by LA Little

Category: Trading Articles

Classical TA - $Compq- 115 to 121 trading day center of decline cycles Update 9/4/14

We barely gapped above the 4513.7 target today (4513.9 low, 4527.5 close)- see the following 27month daily chart.

Read more: Classical TA - $Compq- 115 to 121 trading day center of decline cycles Update 9/4/14

  • Written by Gary Caumont