... I was modeling to see a big move down today which I was hoping would turn into a unicorn tail bottom. We got the big move down and I began buying at $1.50 but it did not bounce back up hard like I was expecting it to. Since the bottom we do not have 5 waves up yet so I have kept powder dry to buy more if I see the telltale 5 up and then 3 back which marks an EW trend change.
That does not mean I intend to average down. My stops are set at $1.50 which is my buy price. Keep in mind that the disposable fed chief is scheduled to open her useless pie hole again this week so who knows what the worshipful markets will do. There is an alternate count below which is still possible. As you can see, it could possible tank all the way into the 60-70 cent range for a short time thus forming the real unicorn tail. The blue bars are so positioned because in this model the first wave was extended. If green 5 goes below the 60-70 cent range then green 5 will be longer than green 3. I could see Yellen raising rates by a small amount thus leading to a blow off top in the dollar and one final capitulation dip for commodities.
Nobody knows the future for sure and all of this modeling could be wrong but I know one thing for sure: commodities take a lot of time, money, labor and energy to bring to market. The economy needs them dearly and they will never go worthless. The problem with buying and holding UGAZ is that it WILL go nearly worthless by design only to get another reverse split. So timing is everything with these leveraged ETFs. Thus, I am using stops.
Captain,
ReplyDelete"I could see Yellen raising rates by a small amount..."
That runs counter to your logic in arguments that we've had in the past. Your position is that the market sets the interest rate and if the market pushes rates up significantly, the Fed moves in quickly after the fact and raises the overnight rate in response. The 10 year Treasury rate is around 219 basis points. The Fed didn't raise rates when the 10 year Treasury was at 385 basis points in April of 2010, why would they need to raise them at 219?
I think you might be coming over to the dark side..... =)
Cheers!
You're right as long as you ignore the facts. And I don't think we have had arguments in the past. I have presented the data and you have chosen to ignore it. ; )
ReplyDeleteSeriously, fed fund rates have been near 0 for a long time. But TNX bottomed in Jan 2015, moved from 16.80 to 25, back down to 19.00 and now at 22.68. Where was the fed in all of this significant rate action? Fed had nothing to do with it. Also, look at the dollar run since April 2014. With a 25% run up one would have thought that it was caused by more conservative policy by the fed but of course the fed has done nothing during that time.
My statement was meant to point to short term emotional response by the herd, like shooting a gun off in the corral. Sure you are going to get a short term reaction but the herd is going to do what the herd is going to do.
Captain,
ReplyDelete"You're right as long as you ignore the facts. And I don't think we have had arguments in the past. I have presented the data and you have chosen to ignore it. ; )"
Ha! Touche'! Although I would frame it like this. You provided data and gave an interpretation of the data that I didn't find compelling. =)
"Seriously, fed fund rates have been near 0 for a long time. But TNX bottomed in Jan 2015, moved from 16.80 to 25, back down to 19.00 and now at 22.68. Where was the fed in all of this significant rate action? Fed had nothing to do with it."
Right, so in the past I may not have been clear about my position. The Fed has set the short term interest rate at 25 basis points since 2008 and despite a major recession, various bounces and pseudo recoveries has met that target for..... 7 years running. What other market driven entity has mirrored that kind of consistency? You might be able to point to a monopoly situation in which the monopolist is the price setter (which the Fed is in this situation).
The Fed will let the long term rates float to a degree within a range in order to "take the temperature" of the market players and observe perceived threats of inflation. They don't have to do this, but they like to. What is the yield range they're comfortable with? We don't know for sure, but we can look at the historicals of 2008 to present and safely say that range is at least 232 basis points. The Fed in concert with the US Treasury, acts as the monopolist and price setter. Remember that the Fed is perfectly happy to let entities keep their dollars in reserve accounts. If they want rates to go up, they provide more securites to the auction and they allow participants in the auctions the ability to move dollars in their low interest bearing reserve accounts to dollars in a higher interest bearing securities account almost at will. If the Fed/Treasury wants the interest rate to drop to a new target, it will restrict the amount of securities offered and force participants to keep their dollars in a low interest bearing reserve account. That's when the participants will ask for less yield in their bids so they aren't left holding the bag with all of their dollars in reserve accounts.
Then you are also disagreeing with Bob Prechter's interpretation of the data.
ReplyDeleteYour analysis also loses sight of the fact that the central banks around the world have, on many past occasions, "lost control of their bond markets" which is to say, they tried to direct the herd to go in one direction but the herd did not agree. The herd always wins in the end and before this is over your faith in the power of the fed is going to be absolutely destroyed. Don't worry, those who believe the same fed omnipotence story are in the billions. Your herd is large and you will have plenty of company in the let-down.
BTW, smiling friendly while writing all of this, short text can come off as impersonal or worse. This is not intended.
Captain,
ReplyDeleteA few things:
- First, I want to echo the friendly smile sentiment! I respect your opinions and analysis even though we may disagree on a few things. If we ever cross paths someday, drinks are on me.
- Second, I am definitely disagreeing with Bob Prechter's interpretation of the data. He's right on most things, but not everything. =)
- Third, are there cases where a central bank can totally wreck an economy? Sure, but in healthy, industrialized nations it's rare. There are usually other factors at work. Countries in a poorly architected currency structure like those in the EZ don't have real currency sovereignty so they could ultimately (and i think they will) pull the house down around their ears. I'll be the first to point out if the Fed was doing something disastrous. If they raise rates, I think it's a bad idea, but it won't be disastrous. We're already in a recession, and they could make it worse for sure.
- Fourth, the Fed isn't omnipotent. It's a man made banking entity that can set the short term interest rate, and acquire assets in US dollars. At the end of the day, that's ultimately what they are capable of. There are plenty of things that I go against the herd on. The majority of people think that we still operate under some sort of pseudo fixed exchange rates. I don't. Most people (including our nationally elected officials) think that US currency is constrained in nominal terms as opposed to constrained in real terms. I don't. The lost goes on and on! And don't get me wrong, I'm not defending the system... I'm just describing the system from an operational perspective.
Always a pleasure!
Captain,
ReplyDeleteSo can we agree that the Fed rate hike today didn't come as a result of "the market" ripping their face off with rising rates and forcing them to hike? =)
Cheers!
Chance
I think they fear a breakout that occurs without their say so. Again, the data shows that the bottom, at least for now, was Jan 2015 and that was about 100BP ago. If you go back and look at Prechter's long term "fed follws the market" graphs you will see that this is about all they tolerate letting the market lead before they begin to follow in whatever direction the market is going.
ReplyDeleteYellen even tacitly admits it saying that the fed rates are based on data already received. She does not say what is the full data set or what the weighting is but you can bet current treasury rates are a big part of it.
We still do not have confirmation of wave 3 up yet but neither is the economy suddenly strong. In fact, many credible data watchers are saying "recession soon". So why is the fed raising rates now? Because of strong economy or because of worries about being correctly perceived as out of control of the bond markets?
In every con game, job 1 is to protect confidence and rates running away from fed mandates has always been the ultimate confidence killer.
Captain,
ReplyDeleteThe looming overarching unanswered question that has been the 800 pound gorilla in the room in this conversation, and as far back as February (http://economati.blogspot.com/2015/02/on-facts-and-fiction-fed-and-interest.html) is:
"The Fed has set the short term interest rate at 25 basis points since 2008 and despite a major recession, various bounces and pseudo recoveries has met that target for..... 7 years running. What other market driven entity has mirrored that kind of consistency?"
It didn't even budge one basis point up or down... for 7 years.
Lets look at your rates example: In late January 2015 the 10 year rate was 168 basis points. The rate now is 228 basis points. So a rise in 60 basis points. Let's cherry pick an even better time period in 2015. At the end of June, the rate was 298 basis points so a rise in 132 basis points. That's more than enough to get the Fed to jump, but we saw an even bigger jump in 2010 (Early May to late December) of 138 basis points. Seems like the Fed would have had their pants on fire to raise rates in that market climate.
Always a pleasure,
Chance