Good reader question warrants separate post.

In response to my last DJIA update, reader Steven B commented:

"I'm sure you listened to Yellen last week, someone needs to come up with an adjective for dovish that's means EXTREMELY MAXIMIZED dovishness. How much longer/further can the proverbial can be kicked? How long is this road, anyway? What will cause interest rates to rise, and approximately when? Possibly a nice, round, 20000 Dow?"

I think many should have the same thoughts as Mr. B. and so here are my views on these issues.  First  nobody really knows how long the insanity of crowds (the herd) can last.  But the turn will come when least expected and it will have to be very tricky and elusive lest everyone get rich on it (a mathematical impossibility).  Lots of people saw the ending diagonal and reported on it and we also got options expiration (quad witching) which I also mentioned late in the model as a risk item.  The herd saw too many crocs lined up for easy lunch and decided to find a new place to cross the river for the coming southward journey.  We know it is time for that migration to begin because we are getting too many indications like this recent one from today that nobody wants to take on more debt despite record low interest rates in effect.


As for Yellen, I would not put too much stock in anything she says right now.  Bernanke was the master con man and Yellen will be the disposable fed.  Besides, despite the characterization of her being extremely dovish, the tapering continued.  The balance sheet of the fed is full to the brim with crap assets which have no buyers and must thus be "held to maturity" as if that is some kind of a workable strategy.  The fed will get a few measly points of interest on this while the notional value of them collapses in the face of rising interest rates.  So yes, the fed could get repaid all those trillions thus saving face but the purchasing power will have collapsed on the repaid money because of cost push price inflation.  The market is going to test Yellen and then some in the coming months.  I think she will show weakness or the wrong kind of strength and the market will decide not to trust the power of this new lead con man to fool the people any further.  When confidence goes, so will the con game which is the paper asset market.

As for timing, as you know, my last model for DJIA peak went bust (odds, not certainties) and so while I formulate a new one I am away from TVIX and playing JDST for now, probably flipping into JNUG near the close on Monday (assuming a big JNUG swoon that day of course).  It will not surprise me to see TVIX hit the low $2 range before finding a bottom.  These leveraged ETFs tend to do that quite a bit at major turning points.  That observation is not a model, and should not be misconstrued as one.  It just means I would not be surprised or dismayed by it and in fact just the opposite.  I also think it is possible that TVIX might rally first next week before the final swoon, especially if the DJIA ends up just doing a bigger ending diagonal than the last model.  For example, one that I am now looking carefully at is below.  That triangle close on the DJIA is either a 3rd or a C.  I'm wondering if it will turn out to be C of B of 4 as shown below.  Holding that lower line will be key to this model:

As for psych targets, I think DJIA 20k is going to be a good deal too much to hope for from here.  But the fact that you mentioned it means it is probably on many people's minds.  IMO, S+P 2k is more likely to be hit first (only 37 S+P points from here).  Remember, Q1 had 1% negative growth.  This has initially been blamed on bad weather but  I expect it to be revised downward to -2% when the next reading comes out.  I also think Q2 will have a negative headline number growth.  2 quarters of contraction=recession.  Markets will not stand at record highs in a recession!

It is always near the peaks when our "reactive mind" makes us doubt what we know to be correct.  It is what caused many long term bears to throw in the towel in the last 9 months including Dennis Gartman and Hugh Hendry and several others.

Keep in mind that what I am doing is NOT designed for the masses but rather for the very few.  I am trying to pick the exact top and then leverage up heavily short.  I am doing it using chart models, not "fundamental data" since the fundamentals generally lag the charts.  My risk mitigation strategy is simple: if a model goes bust then fold quickly like that annoying poker player who is no fun to play with because he only plays good hands.  The annoyance is amplified by the fact that this person usually walks away from the table with the most of other people's money and on those few times that he does lose, the losses are very small, especially compared to the other gains.

My advice for most people who know a crash is coming but don't want to play it edgy like this is simple: wait for the first big 300-500 point, high volume down day on the DJIA and then begin to short.  That will be the wake up call that tells us that the southward turn has begun.



As for interest rates, I think there are 3 general models for bottoming to choose from, red, blue and black as shown below.  I put it in the form of an ending diagonal to justify at least the possibility of the black case even if it is not my primary model right now.   Red is my primary then blue, then black.  Note: black would imply that the 10 year treasury rate collapses to just 7 or 8 tenths of a percent.  It could happen but it would be the extreme case.  If we see that then you know the game is over.  Rates cannot go below zero after all meaning the only thing to do is go up from there.  Player's will have leveraged up with falling rates if that happens and so the de-leveraging would be shockingly fast from that point.
 

For now, below is my primary model for TNX.  I think interest rates are already in a new bull market that began in June 2012.  Wave 1 up peaked at the start of the year.  Then we got a (early Feb) b (early April) and c (late May).  So I think wave 2 down of TNX finished late May.  That means that the bounce since then should be the start of wave 3 up.   A nice gap up soon would support this case.

The main reason it is primary is that the move since the start of the year looks like a 3 wave retracement back down to the prior 4th (which is right at the 38.2...).  The B wave is a clear triangle as is often the case.  It will be confirmed if we get a higher high than red 1 from here.  The result should be apparent soon enough. 

Anything higher than 28 gives a big push to the red model.  Anything below 24 strongly suggests that blue or black models are playing out. Higher interest rates = lower stock prices and lower interest rates imply higher stock prices.  Get very fearful of being long if you see falling rates and a faltering market.  That would mean that gamblers are so leveraged to the hilt that they cannot take on more debt even if it were nearly free to do so.  That would be a negative divergence for sure.  When correlation is lost, players have lost confidence in the con.