JNK, a submarine starting to submerge with all hatches open.

Over the past several weeks I have written several times about JNK which is a junk bond ETF.  Junk bonds are those with low credit ratings.  That means high yield.  They would be absolutely worthless if the coupon (interest rate) goes up too high because the issuer would not be able to roll them over at an affordable rate.  As long as Bernanke is juicing the credit markets with stimulus, people have run into the JNK ETF in search of yields that cannot be found on higher rated debt.  Nobody wants to own junk bonds.  They do it because they have to in order to meet the ridiculous, mathematically un-keepable promises of 7% or 8% payouts on insurance annuities.  They also do it in order to try to make up for massive shortfalls in pension plans.  They think that as long as Bernanke is juicing the markets that the junk debt will be able to be rolled over, thus avoiding default.  The only way to keep this game going is to roll the debt over - once that cannot be done at low enough rates (or at all), the game is over and the junk bonds will collapse to worthlessness as they default en masse.  The JNK ETF is how I will be tracking all of this.

In this post on JNK I likened the ETF to a submarine that was getting ready to dive.  I also overlaid 

the chart on top of a picture of an owl because the double top formed by an ending diagonal reminds me of this illuminati symbol of wisdom.  As you can  see from the recent chart below, the ending diagonal did in fact break down as modeled.  In fact, during the selloff yesterday that hit all markets including stocks and metals, the JNK ETF broke an important support like and it did so with gusto.  I do not think that this support can be recaptured. 

 

I think Bernanke's talk of "tapering" has convinced the market that he will eventually try it. The smart money wants to to exit the Ponzi first. 

While the case for JNK ETF collapse is pretty clear, most people will not extend this thinking to the broader markets but the reason to watch JNK is as a fear indicator/fear proxy for the broader markets.  From the JNK chart it seems that the herd has become fearful again as expected.  There will be a stampede for sure.  All of the stock markets are way over valued simply based on the largess of Bernanke.  Nobody is in it because they believe in free market principles or the value of these assets on their own anymore.  Bernanke has ruined the stock and bond markets as a price determination mechanism which they are supposed to be.  Prices are now subsidized with Bernanke bux.  When that stimulus ends, so will broad market participation.  In short, the con has finally exposed itself for what it is and the people have lost faith in the market con.  In addition, people have stopped talking about the foolishness of conspiracy theorists and have themselves become conspiracy believers.  People have lost faith in government.

All of this is interrelated.  As Prechter says, "It's all one market".  My take on that is that it's all one big con.  Prechter puts gold and silver in the same pot and so far gold and silver have led the way down.  But their pullback was predictable (and predicted) by Elliott waves and at least my read of the EW tea leaves says we are finished with 3 of 5 of C and now have one last capitulation smack down in metals before they bottom.  At that point I think people will begin to fear government takeover of the money supply from the central bank a-la-Japan in order to counter all of the plummeting markets.  When that happens you will want to be in gold and silver IMO.  

Central bankers are con men but they are educated con artists.  They know how to run the long con.  Politicians?  Not so much.  They do things to benefit their chances of winning the next election.  They don't care a hoot about what comes after that.  Thus, they are likely to show less restraint than central bankers.  When politicians (or their appointed puppets) get control of the currency supply, the currency is on the road to massive (if not hyper) inflation.

In any case, if JNK doesn't retake that red support-turned -resistance line on the likely back test then it will be the famous "goodbye kiss" and the junky submarine will go under will all the hatches open.  This time there will be no saving it.  Most of its "assets" will show their true value of zero before it stops falling.  It will go sub $5 and perhaps even go to zero or be closed down.  The broader markets like the DJIA, S+P500, NASDAQ, etc. will also collapse.