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QE II Money Printing Not Enough To Save Credit Cycle

Stock-Markets / Credit Crisis 2010 Aug 30, 2010 - 01:49 PM GMT

By: Captain_Hook


Best Financial Markets Analysis ArticleThat should read widely anticipated Quantitative Easing (QE) is not enough to save the economy from a contraction in the larger credit cycle, however titles need to be catchy. And that’s basically what sparked the sell-off in stocks yesterday, reflected in a reversal of high yield bonds, which as you know we have been expecting to lead equities (hot money) lower. We were of course not disappointed in this regard, however sentiment readings still leave scope for increasing volatility (both up and down) over the next week or so, as options expiry approaches on the 20th.

Past this, it’s important to recognize the possibility the intermediate-term trend turned down yesterday (a 90% + down day), which may or may not witness follow through near term. Along these lines Cisco came out with sobering results (and forecast) last night, which could mark a distinct turn for large cap tech moving forward, possibly leading to decelerating growth prospects in the go-go sectors of the US economy, if not contraction(s). Confirmation of this would come with a break lower out of the indicated diamond found in the NASDAQ 100 / Dow Ratio pictured below. (See Figure 1)

Figure 1


This is the only chart I will show you today in recognition of its importance, as when this ratio does break to the downside, which could occur quite soon (within days), stocks will undoubtedly follow. Although impossible to tell with the possibility of flash crashes ever-present, with indicators in the above already at depressed levels, one should not be expecting a great deal of downside moving forward; however without a doubt the risk of a plunge through the large round number at 1,000 on the S&P 500 (SPX) is within the realm of reasonable expectations. In fact, if the head and shoulders pattern in the trade plays out, a move closer to 900 should be the result. The timing associated with such a move should correspond to seasonal lows, which as you may know, puts us at late September, or early October.

On to a brief word on precious metals now. Despite deferential selling associated with broad market(s) weakness yesterday, gold, silver, and their related equities held up quite well, especially considering the cartel has been price capping aggressively of late. The reason for this retention is due to the negative sentiment in the sector, due to broadly based deflation expectations, evidenced in rising open interest put / call ratios (discussed in a previous analysis) across the sector.

Thus, our view on precious metals has not changed despite yesterday’s events. Gold and silver could get squeezed higher into options expiry next week (on the ETF’s and stocks), with the former reaching as high as $1225, and then fall off (assuming sentiment does not become increasingly bearish) with the larger equity complex into the October time frame. (i.e. an April / May top often leads to an October / November bottom.)

(Clearly this view was far too pessimistic. In fact, now, a breakout to the upside in September appears likely for reasons we address in our regular commentaries.)

Unfortunately we cannot carry on past this point, as the remainder of this analysis is reserved for our subscribers. Of course if the above is the kind of analysis you are looking for this is easily remedied by visiting our web site to discover more about how our service can help you in not only this regard, but also in achieving your financial goals. As you will find, our recently reconstructed site includes such improvements as automated subscriptions, improvements to trend identifying / professionally annotated charts, to the more detailed quote pages exclusively designed for independent investors who like to stay on top of things. Here, in addition to improving our advisory service, our aim is to also provide a resource center, one where you have access to well presented 'key' information concerning the markets we cover.

And if you are interested in finding out more about how our advisory service would have kept you on the right side of the equity and precious metals markets these past years, please take some time to review a publicly available and extensive archive located here, where you will find our track record speaks for itself.

Naturally if you have any questions, comments, or criticisms regarding the above, please feel free to drop us a line. We very much enjoy hearing from you on these matters.

Good investing all.

By Captain Hook

Treasure Chests is a market timing service specializing in value-based position trading in the precious metals and equity markets with an orientation geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested in discovering more about how the strategies described above can enhance your wealth should visit our web site at Treasure Chests

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Comments within the text should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities, as we are not registered brokers or advisors. Certain statements included herein may constitute "forward-looking statements" with the meaning of certain securities legislative measures. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the above mentioned companies, and / or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Do your own due diligence.

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