There are many reasons why France is the most visited country in the world. It is literally a cornucopia of visual and gourmet delights, especially in summer, and especially in the South of France along the Med. For years now it has been my great good fortune to host friends and family in France, usually during July when Bastille Day is celebrated, and the weather along the Med is cloudless azure blue skies right out of a Van Gogh painting and low humidity, which almost always guarantees no rainy days during our annual visits.
Our normal format is to travel to an area of France we have never visited during our first week, and then rest and relax in the small fishing village of Marseillan during our second week. Marseillan is located in what used to be called the Languedoc Region of Southwest France, but has in recent years reverted back to its ancient name of L’Occitanie, a region rich in Templier history and lore. Visitors to the area will often see the Templar (English Spelling) Cross symbol prominently displayed, and some of the locals make the case that the ancient order is still active, but invisible underground. The Abbaye de Valmagne still maintains one of these symbols in its garden (picture Shown Above), and the regional airport in Montpellier has recently installed large one on its entrance (picture below).
The Templiers were kinda, sorta an ancient version of American Express, where a traveler, for example to the Holy Land, could deposit gold with the Order des Templiers in France and receive a receipt, and then present their receipt to the Templiers in the Holy Land and have it redeemed in gold, for a fee of course. The Knights des Templiers became enormously wealthy, and as their power grew they attracted the attention of the Pope and the Kings of Europe, whose angst about the Order grew with the Order’s increasing economic and political power. Phillippe le Bel, le roi de France, and the Pope made a coordinated surprise attack on the Templiers on Friday October 13, 1307, and the Order officially ceased operations on March 22, 1312. However, many believe to this day that the Templiers remain a powerful and influential international organization, albeit a secret one, whose invisible hand is constantly at work shaping political and economic policy worldwide.
We are living in a time where the internet has made it possible for conspiracy theories of the most far-fetched kind can gain and maintain a significant following. Those promoting the conspiracy theory de jour can sometimes become quite wealthy selling their false, but well targeted, notions on the net. This kind of promotion can take telling people what they already want to believe to a very sophisticated level by wrapping their pre-existing notions in a thick blanket of fear that they have been the victims of some invisible hand at work.
As I watched the S&P eMini futures June contract attempt to break below support Friday afternoon only to have the decline fail at the previous low, and then instantly rally sharply into the close, the notion of the invisible hand at work rolled across my mind. You see in the stock market there really is an invisible hand, and it is called central banks, which at the moment are terrified that the global economy is challenged by a crisis, which may be on a level greater than that of the Great Recession. And, it is no secret that the Administration, the Congress and the Federal Reserve are openly attempting to ward off a recession becoming another Depression, possibly on a level equal to, or grater than, the Great Depression, which sowed the seeds of World War II.
There are countless valid reasons why the current economic fundamentals should be causing a continuing bear market in stocks, and only one reason why the market remains in rally mode — historically record excess liquidity being provided by the Fed, and funded by debt being added to our nation’s balance sheet at a rate never seen, or contemplated before. A dangerous situation being addressed by a potentially even more dangerous remedy, which is itself incredibly vulnerable to a modest increase in nominal interest rates.
For the time being the invisible hand of the central banks appears to be at work providing a bid under the market strong enough to overpower every attempt by the bears to take charge of this fundamentally challenged stock market. The powers of the Fed, and other central banks, are enormous, but alas are also finite while on the other hand market forces tend toward infinite. Or, to express the same notion another way, Fed sponsored artificial levitation of stock prices can work for a while, but market forces are likely to eventually have their way.
TATY — A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY finished the week at 122, which is an oversold level. TATY continues to suggest that the rally off the March 23 low is likely a counter-trend rally, and possibly a trap for those buying into it. The rally is a bet that the Fed, which has awesome but finite powers, can engineer a new bull market by providing prodigious and unlimited amounts of liquidity in the face of a multitude of economic measures approaching Great Depression type readings. Is the Fed whistling past the grave yard, or do the political insiders know something, which is not yet public information? In an environment of swirling economic theories, which are often conflicting, all I know for sure is that families of both strategic and tactical supply and demand indicators remain at deeply oversold levels. The failure of these indicators to lead the market higher, and their failure to recover to historically normal ranges, suggests outlier conditions remain, which suggests the need for caution over aggressive action on the part of investors.
However, after three weeks of probing the 62% retracement level (Screenshot above) of the decline from the all-time high to the March low, the recovery rally has now broken above the resistance. And, last week’s action appears to have put in place a short term bottom, so I expect the rally to attempt to go higher next week. The stock market continues to disguise its new bull, or developing big bear intentions, so for the time being we shall continue to treat the rally as a counter-trend movement in a developing large bear market. This is a situation, which may have to addressed soon by taking advantage of short term opportunities through the deployment of tactical trading strategies lasting days to weeks, as opposed to strategic investing strategies lasting months to years.
THE BOTTOM LINE
A liquidity driven rally sponsored by the Fed continued this past week taking out resistance at the important Fibonacci 62% retracement level. And, the see-saw market action of the past several days appears to have put in place a short term bottom, which implies another rally attempt over the next several days. However, bullish sentiment has reached record levels by some measures, and the theory of contrary investing suggests when investors are all of the same opinion the current market move is likely nearing an end. This is especially true with counter-trend movements, so although it appears a short term bottom formed last week, the quality of the likely rally going into next week will need to be watched carefully for signs of developing weakness as the rally progresses.
If the stock market rally continues to maintain itself above the important 62% Fibonacci level, or if there are signs that the rally is gaining strength, then we will consider responding with a series of tactical trades in order to take advantage of potentially profitable circumstances. Over time this kind of response will likely provide us with opportunities to profitably build a larger core holding of equities, and/or to protect client wealth from a return to bear market conditions in the form of an accelerating decline. The details of how such trading tactics may be deployed will be covered in an interim update before they are actually employed.
Please stay safe!
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