Dear Bottarelli Research Reader,
We’re now moving into the next “Fake Crisis” cycle.
These are completely manufactured crises that threaten to tank the market. Because they’re artificial, they’re just as easy to end as they are to start. And when the politicians stand down, the markets skyrocket.
The first cycle was the threat to bomb Syria. Thousands are still dying in Syria, but all the politicians wanted to claim that they somehow forestalled a larger war. When they backed away from the brink, the markets rallied.
Next came the threat to post Larry Summers to the Fed chair. Summers is a loud-mouthed terror – a dove who is pushing free money and bank deregulation one moment, and then a hawk calling for higher rates and new regulations the next. The moment he conceded the nomination, the markets rallied.
Then there was the taper that never happened. For weeks, Fed insiders talked about taking away the punchbowl. Then, they announced that the economy is still too weak to cut back on liquidity – and the markets rallied.
(In retrospect, that last one was really an easy call, as no Fed board has ever withdrawn liquidity until inflation was totally out of control. So, why would they act any different this time around?)
Now, the market is rolling over on the threat of a trillion-dollar government shutdown at the end of this month.
I’ll show you exactly how far down the market might go. But, I have to warn you that Washington can take this threat off the table with the stroke of a pen – and you know exactly what’ll happen if or when they do.
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The Current Situation
On the S&P 500 (SPX) upper chart, price is rolling over after a double-top failure. In a normal market reacting to systemic economics and declared profits and losses, this setup would require the SPX to drop to a support test at 38.2% retracement at 1,581.
But this is not a normal market. It is completely in the thrall of Washington right now, and I suspect that price will drop no lower than 1,662, at which point a miraculous budget compromise will be announced. For now, I rate this as a Short-Term Sell.
Volume is finally returning as large fund managers prepare for the end of the month and quarter. That means we could easily see some profit taking, so as to pretty up clients’ statements. But most of these positions will be re-bought come October 1. So once again, we have a Short-Term Sell.
MACD is rolling into the next sell cycle, and A/D is flat and probably headed for the bottom of its recent range. But neither move looks particularly deep right now, so both yield a Short-Term Sell.
Sum it up and we have a short, manufactured down-stroke, which then sets up a new buying opportunity.
Sure, I’ve hit pretty hard on how artificial this whole deal is, and I’m basing today’s suggested move on that fact. Knowing that, it’s fair to ask how I know this whole deal is man-made.
Check this out…
The Telling Detail
According to CNBC, certain traders in Chicago appear to have had access to the Fed’s decision not to taper ahead of the public announcement.
Nanex’s Eric Hunsader alerted CBNC that some $600 million in trades designed to profit from the news hit the trading floor a few nanoseconds before it was physically possible for the information to reach Chicago.
As a result, someone was in position to sell by the time everyone else was buying. Either these wise guys had a faster-than-light warp drive, or they already had the embargoed text of the Fed’s “shock” announcement in hand.
This is not mere sour grapes – or paranoia – on the part of Hunsader. The Fed has already responded to CNBC’s queries with a statement assuring that “we will be conducting follow-up conversations with news organizations to ensure our procedures are completely understood.”
Even if you don’t have your own time machine or an advance copy of Washington’s press releases, there’s still a way for you to play the next rigged rebound.
How to Play It
Here’s the chart for the massive construction company Jacobs Engineering (JEC – NYSE).
JEC is the 33rd largest recipient of federal dollars. In 2010 (the last year we have decent stats for), JEC took in some $2,059,889,624.46 from the Feds.
Most of the companies ahead of JEC on that list are defense contractors that would be protected from an initial federal shutdown. But as you can see from the chart, rumors of furloughs and fears of canceled contracts have driven JEC to the bottom of its long-term rising trend. Take away this fear and JEC is positioned to run.
The last five times JEC has hit this support level, it followed up with an average 19% gain. Even if you miss 5% of that move waiting for Washington’s announcement, you should still be able to double your money on JEC calls.
The Catch
Sum it all up, and what we have here is a loop of bad news, good news, and more bad news. First, we will see a dip while the Washington-Wall Street axis gins up some profit taking and fresh buy opportunities.
At that point, Washington will try to engineer a rebound. If they don’t screw it up, that should be an entry point. But that last statement, “If they don’t screw it up,” is the dreadful catch right now.
After all, how many times can you take the world to the brink and then step back, just before the cliff crumbles and your foot slips?
The last time they actually pulled the trigger on a move like this was 1996, and it cost the economy some $3.7 billion.
If they actually do it again now — even for just a few days — it could cost a heck of a lot more, especially when you consider that Washington’s money is all that’s keeping the economy — and the stock market — afloat right now. Scary thought indeed.
As always, the charts tell all.
Sincerely,
Adam Lass
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