Saturday, December 3, 2011

MTU Weekend Ed. - Talk and Action (12/2/11 Close)

Latest development
SPX saw its November low over the past week. It's now official that November was an inside month, which should not alter our intermediate term tracking scenarios much (see below). 

Talk is cheap but actions are apparently welcome. Stocks responded to coordinated actions of reduced USD swap line pricing by the FED and new bilateral FX liquidity swap lines among six major central banks. SPX surged 8.75% over the past week from its low to high intraday. Will December be able to escape the October range?

Additional Easing
Speaking of actions, the extra monetary policy accommodations did not come as a surprise. Recall that Hope and Resistance (11/11/11) infers that if history is a guide, the stage is potentially set for another round of (quantitative) easing. Chart 7 in that piece is reproduced here as Chart 1 to the right.

Updated data released by the Fed reveals a continued slow slide in banks' excess reserves at the moment. This past week's policy actions confirmed our assessment that recent reserve withdrawal was a sign of stress rather than healthier underlying demand. It's quite possible that we have not seen the end of additional easing, despite better domestic macroeconomic readings of late.

Theoretically speaking, the U.S. Fed is likely the only central bank that can carry out effective quantitative easing at the moment. (To a lesser extent, IMF could act as a conduit of funneled money.) Japan comes as a distant second and investors should forget about direct and effective ECB quantitative easing at the moment.  From this perspective, it's not surprising that the Fed is "shouldering" some of the international burden.

Intermediate term tracking
We've been formally tracking three intermediate term counts since the beginning of November (see Intermediate Term Count Update 11/4/11).  Chart 2 (bull market), Chart 3 (hope rally over) and Chart 4 (hope rally still in progress) offer updates.

Maximum confusion
Chart 5 above- under the interpretation that the Hope Rally is still in progress - postulates a number of potential triangles that would offer maximum confusion.   Given heightened market volatility in recent months, the utility of these triangles is likely beyond mere entertainment.

Near term outlook
For the near term, it's appropriate to focus on the wave structures of SP500 futures as much of the recent surge came overnight.

At least a pullback is likely in progress as Chart 6 shows. Friday's high is likely

1-blue) the end of an initial impulse from the November low, or
2-red) the end of a double three rebound from the November low, in the form of double zigzag - X - double zigzag, or
3- green) the end of wave b-up of wave (ii)-down of wave [iii]-up of the post-November-low advance, where wave [iii]-up is extending.