Dr. Copper Slices Below Key Support

If Dr. Copper really is the kind of economic wizard many say it is, stocks are in trouble. Copper has been in a persistent down trend that’s threatening to loose further footing. Here’s a close look at copper and what its performance means (or doesn’t mean) for stocks.

The U.S. Geological Survey estimates that every American born in 2008 will use 1,309 pounds of copper during their lifetime for necessities, lifestyles and health.

Copper is the most widely used metal, that’s why it’s said to be the only asset class to have a Ph. D. in economics.

Many articles have been written about copper’s predictive power for stocks, but before we get there, let’s take a look at what cooper is up to.

The long-term copper chart highlights several support/resistance levels. Most significant at this point is strong support right around 3.

Prices sliced below 3 on Tuesday, but found support at the descending green support line.

This appears to me an important juncture for copper. Further weakness here would open the door for a continued decline with initial support around 2.75.

What does the breakdown in copper prices mean for stocks?

The chart below plots copper against the S&P 500 over the past two years.

Obviously, something is wrong with the idea that copper serves as a crystal ball for the S&P 500. Copper topped in February 2011 and has been in a down trend ever since.

Quite to the contrary the S&P 500 has been in a persistent up trend.

Looking at this chart one wonders how copper earned its reputation as a “Ph. D. of economics.”

This is truly puzzling, especially when looking at the long-term correlation between copper and the S&P 500 (NYSEArca: SPY).

A 1959 – 2013 comparison between copper and the S&P 500 is available here:

Indicator Exposed: ‘Dr. Copper’ is More Quack Than Doctor

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Corporate Profits – Born in the US, Taxed Elsewhere or Nowhere

U. S. corporations do what it takes to please shareholders and increase profits. This includes firing long-time employees, cutting costs, and evading taxes. As profits have soared to all-time highs, corporations have found ways to stiff Uncle Sam.

Corporate U.S. profits are higher than ever before.

U.S. corporations have morphed into efficient money making and tax evading machines.

According to the Bureau of Economic Analysis, U.S. corporations generated profits of $1.7 trillion in 2013.

The black line in the chart below shows profits at an all time high.

One would think that higher corporate profits equals higher taxes, but that’s not so.

The red line of the chart shows that corporate tax payments in 2013 were no higher than in 2005.

It’s become common practice to park profits overseas where Uncle Sam’s long, greedy fingers can’t reach.

According to a report from the Citizens for Tax Justice, U.S. companies ‘save’ nearly $100 billion a year in taxes by keeping their cash overseas.

Apple’s subsidiary in Ireland enjoys a tax rate of 2%. According to filings, Apple sent the IRS $6 billion in 2012 taxes. Apple’s 2012 pre-tax profit was $74 billion.

I’m always curious to see if there’s a relationship between profits/taxes and the S&P 500 or Dow Jones.

The second chart plots the S&P 500 against the profit and tax data.

The correlation doesn’t allow for any slam-dunk conclusions. The S&P 500 (NYSEArca: SPY) and Dow Jones (DJI: ^DJI) have been climbing higher along with profits.

One thing is for sure: Less taxes means more cash. In fact, corporations hold more cash today than at any other time in history (Reuters reports a cash pile of $7 trillion).

Many economists and analysts believe that all this cash will soon send stocks soaring.

If the Fed’s $3 trillion spending spree sent the S&P 500 175% higher, how much can $7 trillion do to stocks?

This article will tell you everything you need to know about the (U.S.) corporate cash pile and its possible effect (or not?) on the S&P 500: $7 Trillion Corporate Cash Pile – Will it Set the Stock Market on Fire?

Simon Maierhofer is the publisher of the Profit Radar ReportThe Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

One Indicator Pegs U.S. Economy at Worst Level since 1959

Many economies predict 2014 to be the year of the economic recovery. Some economic indicators and surveys support this view, but this powerful common sense indicator shows the economy at its worst state since 1959.

Money velocity is the frequency at which one dollar changes hands and is used to buy goods and services within a given period of time.

To illustrate we’ll look at two simplified mock economies:

The Federal Reserve prints $100 to buy Treasuries from banks (NYSEArca: XLF). The bank invests the $100 in stocks.

A consumer withdraws $100 from his bank account to pay his mechanic. The mechanic takes his wife out for a nice dinner and the restaurant uses the money to pay its staff and buy new equipment. After receiving her pay check the waitress goes out and buys a new watch.

The original $100 in the second mock economy changed hands four times (high velocity) and helped support three additional individuals/businesses once  in circulation.

The conclusion is obvious: The higher the velocity, the healthier the economy.

Below is a chart of the U.S. money velocity. The St. Louis Fed money velocity data goes back as far as 1959. Current money velocity is at an all-time low.

This can’t be good for the economy and one would think that low money velocity couldn’t be good for the stock market either. Is that so?

Rather than assume, here are the facts.

The second chart plots the S&P 500 (SNP: ^GSPC) against the money velocity of M2 money stock.

The S&P 500 is charted on a log scale to enhance the major up and downs of the past 55 years.

Low money velocity preceded a bear market in 1973 and lower prices in 1977. Low money velocity was also seen about a year before the 1987 crash, which sent the S&P 500 and Dow Jones spiraling.

But there were other instances that had no effect, or no immediate effect, on the S&P 500 (NYSEArca: SPY) and Dow Jones (NYSEArca: DIA).

The current wave of velocity anemia is as unprecedented as the Fed’s liquidity machinations. Both events are likely connected (for every action there’s a reaction).

At very best, money velocity (and lack thereof) may serve as a very blunt warning signal.

Fortunately, there are better warning signals. One of them is discussed here. In fact, it is so effective, I call it insider trading. How Insider Trading Just Became Legal

Simon Maierhofer is the publisher of the Profit Radar ReportThe Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Hank Paulson Warns of Another Financial Crisis

First the Federal Reserve, now former Treasury Secretary Hank Paulson is warning of a financial ‘firestorm.’ Paulson’s list of worries is long and includes banks, derivatives, shadow banking and Fannie Mae. The dollar stats are truly staggering.

Remember Hank Paulsen? He was the United States Secretary of the Treasury during the financial crisis.

We don’t hear much about him domestically, but he just shared his concerns about another financial crisis with the German finance/economy newspaper Handelsblatt.

Literally translated, Paulson warns of another financial ‘firestorm’ sparked by one of the following factors:

Too big too fail banks, the ballooning derivatives market, hardly regulated but rapidly growing shadow banks, and the growing influence of Fannie Mae and Freddie Mac could trigger another ‘firestorm’ at any moment.

Below are some staggering stats and numbers (source: Handelsblatt newspaper):

Too Big to Fail

The five biggest US banks have amassed $8.3 trillion in assets. That’s $2.5 trillion more than in 2007. The chart below compares the assets the five biggest banks held in 2007 with today. JPMorgan Chase is 74% bigger today than in 2007, BofA 44%, Wells Fargo 177%, and US Bancorp 66%. Only Citigroup has shrunk.

The problem of too big to fail is that any one big bank (NYSEArca: KBE) can light up the entire financial house of cards.

Handelsplatt reports plans of a corporate ‘last will and testament’, where banks have to outline how they can be wound down most efficiently during times of crisis.

Ballooning Derivatives Market

The derivatives market, which sparked the 2007 firestorm, has grown from $586 trillion in 2007 to almost $633 trillion today and is largely unregulated.

Regulators would like to funnel derivatives transactions through clearinghouses in an effort to increase transparency. Clearinghouses are also supposed to take the hit if any of the involved parties bites the dust. This, however only shifts the risk, it doesn’t eliminate it.

Shadow Banks

With assets of $67 trillion (growing rapidly), the shadow banking sector is already half as big as the ‘regulated’ (if you can call it that) banking sector.

Unlike regulated banks, shadow banks (hedge funds, private equity funds, money market fund) are not subject to capital requirements. This is attractive if you’re greedy. That’s why many players leave the regulated market place in favor of more convenient shadow banking.

A positive; G20 members agreed at the recent summit in St. Petersburg to figure out a way to control shadow banking by 2015. Note the wording. Not to control, but find out how to control.

Fannie Mae & Freddie Mac Are Growing

Not only are Fannie Mae and Freddie Mac government controlled, they are more dominant then ever before. 90% of US mortgages are currently guaranteed by the government.

This means that the government, not the free market, determines the price, terms and conditions of mortgages. The lack of free market forces (such as supply and demand) exposes the mortgage/real estate market to renewed excesses.

Hank Paulson observed that every financial crisis is the result of failed political measures, which lead to economic/financial bubbles.

The whole financial leverage subject is a mind over matter issue. Investors don’t mind until it matters.

Investors at large were blindsided by the 2007 financial debacle. Excess leveraged mattered only after the S&P 500, Dow Jones, and Nasdaq started to tumble and not a moment before.

Bernie Madoff’s investors got bamboozled for years before it mattered. The scam was there all along, but it didn’t blow up until Wall Street got hit.

Bear markets are the best auditors. They reveal things first. The media follows thereafter.

When will the above excesses start to matter again?

The Financial Select Sector SPDR ETF (NYSEArca: XLF) sports a pretty clear pattern and a specific break down point that – once triggered – should get investors (and the media’s) attention and lead to much lower prices and a more critical examination of banking/financial excesses.

A detailed analysis of the financial sector can be found here: The XLF Financial ETF Chart Looks Ominously Bearish

Simon Maierhofer is the publisher of the Profit Radar Report.

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Trusted German Newspaper Asks: “Will the Financial System Collapse?”

A reputable German newspaper asks the question forgotten by many domestic media sources: With or without tapering, will the financial system collapse? The answer may be surprising to many.

Have you ever gotten tired of the same old financial news coverage dispensed by the likes of CNBC, Fox, Wall Street Journal, Reuters, and other US media outlets?

I’m not saying it’s bad information, but like eating the same meal over and over again, the same slant on financial developments could become a bit stale.

In my last trip to Germany I made a conscious effort to pick up and read a number of reputable German finance/economy magazines.

I’ll write more about interesting tidbits discussed in the German financial media in the coming days, but here’s more detail about a headline that caught my attention?

“Is A Financial Collapse Approaching?” 

This question was featured on the front page of the September 4 edition of the Focus Money magazine.

As a contrarian investor, my first thoughts were that prominently discussing the odds of a financial collapse minimizes the chances of just such an event. But this changed after I read the article.

Focus magazine asked legendary emerging markets investor Mark Mobius for his feedback on various investment themes. The MIT educated Mobius is 77 years old and heads the emerging markets team for Franklin Templeton.

Tapering Yes – Collapse No

Mobius expects Bernanke to start tapering, but says that this will have virtually no effect on stocks (NYSEArca: VTI) as liquidity remains in the system (although he admits QE’s role in driving up stock prices).

Mobius asserts that banks (NYSEArca: KBE) have cleaned up their balance sheets and will funnel more money in the real economy. “The fear of tapering is overdone – it will barely affect stocks,” he says.

Mobius believes that QE by the Bank of Japan will be successful and ultimately affect world markets (NYSEArca: EFA). In fact, liquidity provided by the BOJ will make up for the liquidity withdrawn by the Federal Reserve.

Time to Buy US Stocks?

Focus magazine: “As an emerging markets (NYSEArca: EEM) specialist, would you recommend buying US stocks?”

Mobius: “Diversification is important and investors shouldn’t put all their eggs in one basket, but it’s certainly a good idea to buy US stocks.”

A Bear in Bull’s Clothing

The financial collapse headline and Mobius’ views struck a cord with me as I see the odds of a major market top forming around current prices greater than 50%.

After reading the Focus Money article it became clear that – according to Mobius – there is no risk of a financial collapse. From a contrarian point of view that’s more bearish than bullish.

Mobius has strong opinions about other emerging markets issues, such as:

1) China’s government completely (as in 100%) controls its banks and has the ability to successfully implement any and all financial policies.

2) The most attractive place to invest is Africa, in particular Nigeria.

I don’t agree with Mr. Mobius’ outlook, but he does offer a perspective not available to many US investors.

Another somewhat shocking forecast is featured in Germany’s Handelsblatt, the German economy and finance newspaper.

The front page of an August edition touts another gold rush caused by China.

For more information read: According to Reputable German Newspaper, New Gold Rush Lies Ahead

Simon Maierhofer is the publisher of the Profit Radar Report.

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Surprising New Fed Study – Is it Preparing Americans for a Market Crash?

This study by the Federal Reserve of San Francisco will have you scratching your head. The claims made defy common logic and are in direct conflict with a study published by the Federal Reserve of New York. Nevertheless, it might just be a brilliant setup for bearish future ‘events.’

The latest study by the Federal Reserve Bank of San Francisco (FRBSF) draws unexpected conclusions that almost make you believe a disgruntled Fed employee did it. But be assured, it’s an official study published on the FRBSF website.

The Federal Reserve study analyzes and quantifies the effect of large-scale asset purchases (LSAPs), also known as quantitative easing (QE) and lower interest rates, on the economy and inflation.

The results are uncharacteristically frank and seemingly self-defeating, but the intent of this study may just be brilliant (more below).

The study is about 5 pages long and can be summarized roughly by a few paragraphs.

The final conclusion is that: “Asset purchase programs like QE2 appear to have, at best, moderate effects on economic growth and inflation.”

How moderate? “A program like QE2 stimulates GDP growth only about half as much as a 0.25 percentage point interest rate cut.”

How much does a 0.25% rate cut boost the economy? “GDP growth increases about 0.26 percentage point and inflation rises about 0.04 percentage point.”

In other words: “QE2 added about 0.13 percentage point to real GDP growth in late 2010 and 0.03 percentage point to inflation.” (see chart)

Furthermore, the study states that: “Forward guidance (referring to the low interest rate policy) is essential for quantitative easing to be effective.”

In other words, QE only works in conjunction with a low interest rate policy. The federal funds rate, the rate banks charge each other to borrow money deposited at the Fed, is already near zero. The 10-year Treasury yield (Chicago Options: ^TNX) is just coming off an all-time low.

It is no longer possible to ‘supercharge’ QE with ZIRP.

A Brilliant Move?

A few days ago, the Federal Reserve came out with a report stating that leveraged ETFs may sink the market. View related article about leveraged ETFs at fault for market crash here.

Now the Fed is basically saying that QE didn’t do squat. The converse logic of the Fed’s report is that QE is not to blame should stocks tank (after all, if QE didn’t drive up stocks, tapering can’t sink stocks). The Fed is basically saying ‘if stocks tank it’s not because we spiked stocks and are now taking the punchbowl away.’

This is ironic, because even the Geico caveman knows that various QEs buoyed the S&P 500 (SNP: ^GSPC) and Dow Jones (DJI: ^DJI) to new all-time highs. Even economically sensitive sectors like consumer discretionary (NYSEArca: XLY) trade in never before seen spheres.

Did the Federal Reserve ever admit to manipulating the stock market higher?

Sometimes in cryptic terms without any direct admission of guilt, but there is one exception.

An official report by the Federal Reserve of New York actually puts a shocking number on how much above fair value the Fed’s QE drove the S&P 500.

A detailed analysis of the report can be found here: New York Fed Research Reveals That FOMC Drove S&P 55% Above Fair Value

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF

 

Indicator Exposed: ‘Dr. Copper’ is More Quack Than Doctor

Myth or fact? Because of its use in many industry sectors, copper is a reliable indicator for the global economy and the stock market. The rationale makes sense, that’s why copper is said to have a Ph.D. in economics, but two charts oust copper as a quack.

Copper is said to be the only asset class to have a Ph.D. in economics because of its alleged ability to predict turning points in the global economy and stock market.

Here’s a quick sneak peek sound bite of what you’re about to read: If Dr. Copper was a surgeon; you wouldn’t want him to operate on you.
Dr. Copper Theory Explained
Copper is used in most economic sectors: Construction, power generation, power transmission, electronic products, industrial machinery, cars, etc.
The average car contains almost 1 mile or 75 pounds of copper. Additionally, copper is an excellent alloy and has become invaluable when combined with zinc to form brass and with tin to form bronze or nickel.
Copper is everywhere, that’s why demand for copper is often considered a leading economic indicator. The rationale makes sense, but is it true?
Copper – From Dr. to Quack
We will let the facts determine how reliable an indicator copper really is.
The charts below plot copper prices against the S&P 500 over the long-term and short-term.
The first chart goes back as far as 1959 and shows copper and the S&P 500 on a log scale. The dotted red lines mark copper highs, the dotted green lines copper lows. Shaded green bars highlight correct signals where falling copper prices predicted trouble for stocks.
It is somewhat difficult to correctly portray 54 years of stock market history on a few square inches, but it’s safe to say that copper, as an indicator, missed the mark more often than a Ph.D. should.
The second chart shows the correlation between copper and the S&P 500 from 2007 until now. The July 2008 copper high came too late to warn of the immediate post-2007 deterioration, but it was just in time to ring the alarm bells before the autumn 2008 meltdown.
The December 2008 copper low was a bit too early for the March 2009 stock market low, but correctly suggested higher prices until February 2011. Copper kept up a decent correlation until early 2012, but has been leading investors in the wrong direction ever since.
Copper’s Silver Lining
Remember that copper’s alleged predictive abilities can be seen as twofold:
1) As precursor for the stock market.
2) As precursor for the global economy.
By en large copper has failed as a leading stock market indicator (especially since 2012), but one can argue that the global economy has been deteriorating just as copper’s post 2011 decline suggested.
If it wasn’t for central banks’ coordinated inflation efforts, copper may have been right on both accounts.
Perhaps copper should be compared to ‘peers’ with an actual Ph.D. in economics – economists. Economists are generally bullish around major highs and bearish around major lows. Based on this benchmark, copper may well deserve its Ph.D.
What’s Next for Copper?
Right now copper is sandwiched between strong support around 3 and resistance at 3.2 – 3.3. Marginally higher prices seem likely. If resistance can be overcome copper may rally further. However, a drop below 3 should unleash much more selling pressure.
Copper ETFs
There are three copper exchange traded products (ETPs):
iPath DJ-UBS Copper ETN (NYSEArca: JJC)
United States Copper Index Fund (NYSEArca: CPER)
iPath Pure Beta Copper ETN (NYSEArca: CUPM)
All three copper ETPs are thinly traded, but JJC has thus far gained the most traction.

 

What’s Next? Bull or Bear Market? Try Gorilla Market

Right or wrong? The QE bull market will last as long as the Federal Reserve keeps QE going. A majority of investors say ‘Yes,’ but a curiously sophisticated experiment and powerful data suggest a surprise outcome.

In 2004 Daniel Simons of the University of Illinois and Christopher Chabris of Harvard University conducted a fascinating experiment.

If you want to be part of the experience take a minute (it literally only takes a minute) and watch this video before you continue reading.

To get the full effect, watch the video first and don’t read ahead.

If you don’t want to watch the video, here’s a quick summary:

Truth in Simplicity

The experiment is quite simple. There are two groups of three people each. One group is wearing black shirts, the other group white shirts.

The three people wearing black shirts are passing one ball to fellow black shirts; the ones wearing white shirts are doing the same. So there are six people, passing two balls.

The assignment is to watch how many times the players wearing white, pass the basketball.

It’s a simple assignment that requires some concentration and a clear mind.

The answer: The white shirts pass the ball 15 times.

But wait, there’s more. Many viewers get the number of passes right, but completely overlook a woman dressed in a gorilla suit. The gorilla walks slowly across the scene, stops to face the camera, and thumps her chest.

Half of the people watching the video did not see the gorilla. After watching the video for a second time, some of them refused to accept that they were looking at the same tape and thought it was a different version of the video.

“That’s nice, but what’s your point Simon?” Good question.

The Invisible 800-Pound Gorilla

The experiment was supposed to illustrate the phenomenon of unintentional blindness, also known as perceptual blindness. This condition prevents people from perceiving things that are in plain sight (such as the bear markets of 2000 and 2008).

Much of the media has zeroed in on one singular cause for higher or lower prices. Sample headlines below:

Reuters: Wall Street climbs as GDP data eases fear of Fed pullback
Reuters: Brightening jobs picture may draw Fed closer to tapering
Reuters: Wall Street slips amid Fed caution

The media is busy ‘counting passes,’ or watching Bernanke’s every word and interpret even the slightest variation of terminology.

The Fed’s action is the only thing that matters, but amidst ‘counting passes,’ many overlook the gorilla.

Gorilla Sightings

It’s believed that a rising QE liquidity tide lifts all boats. This was impressively demonstrated in 2010 and 2011 when various asset classes and commodities reached all-time highs. It only conditionally applies to 2012 and 2013 though.

In 2011 gold and silver rallied to nominal all-time highs. Why?

  1. The Fed pumped money into the system (aka banks) and all that excess liquidity had to be invested somewhere, anywhere, including precious metals.
  2. Fear of inflation. Gold is known is the only real currency and inflation hedge. Silver rode gold’s coattail and became known as the poor-man’s gold. From 2008 – 2011 gold prices nearly tripled and silver went from $8.50 to $50/ounce.

Since its 2011 high, the SPDR Gold Shares ETF (NYSEArca: GLD) has fallen as much as 38.29% and the iShares Silver Trust (NYSEArca: SLV) was down as much as 63.41%.

This doesn’t make (conventional) sense or does it. QE or the fear of inflation didn’t stop in 2011. In fact, QE (and the associated risk of inflation) is stronger than ever. Based on the above rationale, the gold and silvers meltdown is inconceivable and unexplainable.

The QE ‘Crown Jewel’

Initially QE was limited to government bonds or Treasury bonds. In other words, the Federal Reserve would buy Treasuries of various durations from banks and primary dealers with freshly printed money.

The effect was intentionally twofold:

  1. The Fed would pay top dollars to keep Treasury prices artificially inflated and interest rates low.
  2. The banks would have extra money to ‘play’ with and drive up asset prices, a process Mr. Bernanke dubbed the ‘wealth effect.’

With that thought in mind, take a look at the iShares 20+ year Treasury ETF (NYSEArca: TLT) chart above.

From the May peak to June trough TLT tumbled 14.56%, more than twice as much as the S&P 500 (7.52%).

Lessons

The lessons are simple:

  1. QE doesn’t always work and can misfire badly.
  2. We don’t see every gorilla (or looming bear).

All this doesn’t mean that the market will crash tomorrow. In fact, the stock market doesn’t exhibit the tell tale signs of a major top right now and higher highs seem likely.

Unintentional blindness is real and often magnified by the herding effect. The investing crowd (or herd) is convinced that stocks will go up as long as the Fed feeds Wall Street.

The above charts suggests that we shouldn’t follow this assumption blindly.

Will $100+ Oil Be a Problem for the Economy?

It’s summer and there’s usually a big buzz about gas and oil prices this time of the year. But there’s been little talk about oil’s quiet move above $100/barrel. In times past this has stifled the economy. What about this time?

“Higher Oil Prices Threaten Global Economy” – AP, March 10, 2011

This may be a headline of the distant past, but it was written at a time when crude oil traded just above $100/barrel. In fact, on March 10, 2011 crude oil ended the day at 102.58.

Oil above 100 usually captures the media’s attention one way or another. Some outlets consider it a sign of a strengthening economy, others a stone around the neck of car-driving consumers.

Interestingly, this time around, 105 oil hasn’t tickled the media’s reporting need yet.

Regardless of the media, there’s a worthwhile correlation between the S&P 500 and crude oil, and technical analysis suggests that crude oil prices are at an interesting junction.

The chart below plots the S&P 500 against crude oil prices and shows almost everything important there’s to know about oil right now:

  1. Crude oil prices just climbed above red trend line resistance (now support) at 104.
  2. Crude oil prices are also trading above longer-term dashed red trend line resistance at 96.
  3. Crude oil at 110 – 115 has coincided with stock corrections in 2011 and 2012.
  4. Important green trend line support is at 91.

Crude oil cycles don’t really support higher prices right now, but the chart shows very little bearish energy.

As long as crude oil remains above the solid red trend line, prices may reach the 110 – 115 danger zone that led to corrections in 2011 and 2012.

The dashed red and green trend lines will serve as important support in the weeks/months to come.

What About Oil and the Economy?

Oil is the only asset that keeps the Federal Reserve ‘honest.’ Past rounds of QE buoyed all asset classes. With the exception of oil, that’s exactly what Mr. Bernanke wants.

However, rising oil prices – unlike any other asset – are bad for the economy and may force the Fed to taper QE.

Oil is trading above various support levels and may continue higher, but oil’s quiet ascent has escaped the media’s attention. There’s currently no public pressure on Bernanke to curtail evil oil from pick pocketing American saving accounts.

Is it Time to Bury Your Head in the Sand and Hope for the Worst?

Welcome to the new and not just imaginary QE world where weak GDP (only the most followed gauge of economic activity in the U.S.) numbers are applauded and received with cheer by Wall Street. Confused? Oh you shouldn’t be anymore.

Ignorance is bliss. We are all familiar with the bad news is good news phenomenon created by the Fed’s QE.

Bad news is good news because it means either more QE or the same QE over a longer period of time. Many commentaries have been written about today’s backwards state of affairs.

Below is one of the most blatant displays of the new up side down investment paradigm.

For your enjoyment, here is a section from a June 26, 2013 Reuters article under the headline: Wall Street Climbs as GDP Data Eases Fear of Fed Pullback.

“The broad-based advance lifted the S&P 500 above the 1,600 threshold for the first time since last Thursday. Stocks have recently sold off after the Fed said it is moving closer to reducing its monthly bond-buying efforts, but the last two days of buying show some believe the market has overreacted.

The rally followed data showing the U.S. economy grew at an annual rate of 1.8 percent in the first quarter, well below expectations for gross domestic product to grow at a 2.4 percent annual rate.

While the GDP data looks backward and includes the start of cutbacks in federal spending, analysts said it could influence the Fed’s considerations of whether the economy is strong enough for it to begin scaling back its $85 billion a month in bond purchases. Should this contribute to keeping the Fed from moving sooner, it would be seen as supportive for stocks.

Stocks have been closely tied to the central bank’s easy money policy, with the Dow and the S&P 500 hitting a series of record closing highs as investors bet that the bond buying would remain in place, and then dropping dramatically on hints that the stimulus could be reduced before the end of the year.

In a nutshell, GDP – the most watched gauge of the economy’s health – came in 25% lower than expected, but Wall Street applauded because this means more QE.

What about the second-most watched gauge of the economy’s health – unemployment figures?

As per last Friday’s BLS (Bureau of Labor Statistics) release, the U.S. economy added 195,000 jobs in June. The unemployment rate stayed at 7.6%.

Stocks rallied. Why?

Associated Press: Stronger Than Expected Job Growth Raises Hopes for Stronger Economy.

But shouldn’t that be bad news for the stock market?

Reuters: Brightening Jobs Picture May Draw Fed Closer to Tapering

Is anyone confused? If so, just hope for bad economic news to drive up stock prices. If that doesn’t work, keep in mind that good news is good news and bad news is good news (really, any news is good news).

I personally feel that economic news and the medias spin on the news deserves only a very limited portion of my attention span.

I rely on technical analysis. Technical analysis is not flawless, but it is consistent.

Technical indicators told us a week ago that the S&P 500 and Nasdaq-100 will come up and close open chart gaps at 1,629 and 2,960. The gaps have been closed and the market is at a key inflections point. How stocks react here should set the stages for the coming weeks.