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Tuesday, 3 July 2012

Power Corrupts

Am I the only one that thinks all this fuss about LIBOR fixing is strange? Granted it was illegal and was an example of bank corruption, insider trading and so on, but it's been a long time since there was anything with even a faint resemblance to a free market in interest rates, and numerous practices that might once have been considered corrupt and dishonest have long since moved into the banking mainstream. Anyone waiting for the wave of prosecutions that should have followed the subprime fiasco has been waiting a while, and when the banks involved say that they thought that what they were doing had the tacit approval of regulators, that does at least seem possible.

Also the fixing of LIBOR has been blatant for years. I've read about it quite a few times as I recall. Is it really possible that the regulators just noticed? Granted they've won no awards for clear vision in the past, and one could be forgiven for wondering whether they need assistance to dress themselves in the morning, but it does seem hard to believe.

The bankers are really just a reflection of their regulators nowadays. The Fed and others lead by example with their colossal arrogance, their privileges for favored groups, and their fixing of every market they can influence. Small wonder that bankers feel that this sort of behavior is acceptable.

Do you think that's harsh? It isn't. Here's an example. Michael J Burry is the hero of Michael Lewis's outstanding book The Big Short, as it was he (not John Paulson who copied his idea) who first saw the huge subprime crisis coming and shorted it in a big way against widespread incredulity and opposition from his own hedge fund investors. His funds made a lot of money, though he found the process so stressful that he then closed them all down and retired.

In 2010 Burry wrote an op-ed in the New York Times entitled 'I saw the subprime crisis coming, why didn't the Fed'. Within two weeks the IRS had opened audits on all six of his closed funds and shortly thereafter the FBI opened an investigation into his activities. You can read about that here. That this sort of abuse of power can happen in the US without exciting much interest or comment nowadays says everything about the shamefully low standards of conduct of the current masters of the financial system.

On to the markets. There was a small retracement to touch 1355 SPX yesterday, and a higher high later in the day that saw SPX close again above the 100 DMA and just under the upper bollinger band:
I would very much like to see a push upwards here to touch rising (wedge?) resistance on SPX in the 1380 area, though for reasons I'll explain, that looks as though it might not happen, and a retracement here would leave a strong possibility that we are looking at a double-top. If we do retrace from here then my bull/bear dividing line will be in the 1335-40 area and a break below would suggest a test of the June lows:
There's an identical possible rising wedge and resistance trendline target on ES, with the target there in the 1375 ES. I've marked in the strong negative divergence on the 60min RSI, but it's also worth noting that the action over the last day looks like a bullish pennant, so if ES can break over 1360 with any confidence then we might see that upside target reached:
The reason I'm somewhat doubtful about seeing those upside targets met is twofold. Firstly we are just under the upper bollinger band on the daily at the close yesterday, and would need to see some real strength to push through that. I'm skeptical about seeing that this morning on low volume holiday chop, though Thursday morning might deliver it. The second reason is that NYMO has reached 80. I've done a 42 month chart of NYMO showing how hits of 80 or -80 have acted as reversal signals and the performance is impressive. We might well see failure here, though a move up to my trendline targets on negative NYMO divergence is still perfectly possible:
I'm a Sherlock Holmes fan, and one of my favorite Holmes observations was when he commented about the curious incident of the dog in the night time. When the response came that the dog did nothing in the night time, he replied that that was the curious incident. If we have seen a major low, then there is a dog that should be barking here that has so far remained silent, and that dog is TLT, which should have broken down out of the 124 to 127.4 range that I've been posting the last few weeks. It hasn't broken down yet, and it's hard to see too much upside on equities unless it does. If it breaks up that would look distinctly bearish for equities here:
In summary there is a possible double-top here that would look very credible if SPX breaks below 1335. If ES and SPX can make my trendline targets in the 1375 and 1380 areas respectively then that would deliver decent looking bearish rising wedges on both. We may not see much happen in the half-day today as there won't be much volume before the holiday. Everyone have a great July 4th! :-)

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