S&P 100 - The Repudiation Of The Status Quo's Drivel About An Economic Recovery. Is Appeasement's Day Of Reckoning Nigh?

We showed the S&P 100 chart a little less than two months ago. That post focused on the short term. Let's look at the last fifteen years off of a key data point we haven't talked about since the before the crash of 2008. That would be the very important 1995 price pivot.

The price band we mentioned in the last S&P 100 post is shown in the lower red horizontal line. At the time we remarked of that price band as very important. In this post we have stretched the price band back more than a decade. This band has since been broken to the down side. The green boxes highlight the enormous price congestion around this key price level.

We temporarily regained this price level over the last week but lost it again on Friday. I am extremely pessimistic we will regain and hold this level. Instead markets often break then rally to the break point before breaking again. One of many reasons I am very concerned is because my advance-decline data is rapidly closing in on the March 2009 lows yet price has not followed. Yet. This is telling us more and more "up" days are being driven by derivatives such as futures, options and leveraged ETFs. Hold that thought because it is very important.

Back in the days when the world's greatest traders roamed the earth, including the likes of W.D. Gann and Jesse Livermore, there were a few select men who had an ability to read the tape and decipher what the market was telling them. With the advent of Frankenstein finance and the rise of the machines (computers), tape reading has become a lost art. While I am not one of the greatest traders of all time, I actually do read the tape and combine it with a depth of understanding of markets, monetary policy and economic fundamentals that is substantially more fact-based than those who rely on opinions, theory and ideology.

Remember, as we have written numerous times, market technicals or quantitative analysis is really nothing more than a self-fulfilling prophecy of fundamentals. This is why technicals and quantitative analysis often fails or data unexpectedly starts reacting with different results. In other words most quantitative analysts don't have a strong grasp of changing fundamentals. And, in fact, it is really the qualitative ability of the individual to interpret that is best able to determine reality.

Financial markets are deteriorating because the economy continues to deteriorate. Remember the incessant blather about green shoots? As we have said countless times, there is no recovery. There is no economic double dip. There is only a continuation of the crisis. The data that truly matters to an economic recovery has not once pointed to an end to this crisis. Mathematics don't lie. Only people do.

We wrote quite a few times since the March of 2009 lows that the equity market would eventually consist of a handful of firms batting shares back and forth as fundamentals and Wall Street's Frankenstein merge to drive more and more counterparties and liquidity out of the market. And because the remaining players would be employing the same strategies, the equity market would become one indistinguishable risk pool. In other words, there truly would be no counterparty for Wall Street's Frankenstein just as there was no counterparty during the 2008 crash. What we saw in that dynamic was the only eventual counterparty for Wall Street's stupidity was We the People, as society had to bail out another of the endlessly corrupt Wall Street schemes.

No one else has written of this market dynamic, especially not our financial overlord Timmy Geithner, but it is indeed very real and unavoidable unless fundamentals change. The Federal Reserve and the government are killing the economy with their policies. Policies we are told will help us weather this storm. There are answers to this crisis but as we wrote years ago, the Federal Reserve and the government are engaged in the wrong policies. As is almost always the case, the generals are fighting the last war. (Interestingly, or should I say hilariously, the new financial reform bill gives Geithner and a panel of equally incompetent bureaucrats new powers to act on our behalf when they see possible risks in our financial system. You know, like Timmy was supposed to do before the 2008 collapse in his prior role as chief regulator of Wall Street.)

The dynamic of more and more counterparties being forced out of the market, as described above, is starting to show its hand in the action in today's equity markets. The Wall Street Journal just remarked days ago that the stock market is more closely correlated to the S&P 500 than at any time since the crash of 1987. This high correlation to the S&P is exactly the type of measurable outcome we would expect from the dynamic we described as an eventuality back in 2009. Wall Street's Frankenstein is essentially the lone remaining liquidity of any relevance as economic factors and trading mechanics usurp liquidity. That's a far cry from the lies perpetuated on Wall Street that their Frankenstein monster actually increases liquidity. (ie, As we written many times, trading is a zero sum game and in this type of economic and market environment, losers (counterparties) must eventually fold as in a game of poker. Without the capital of counterparties being replinished, the pot (liquidity) becomes smaller and smaller as do the number of players (counterparties) as more and more are forced out of the game.)

Because the vast majority of Wall Street's equity market liquidity products (derivatives) are S&P 500 based, this high market correlation is telling us that almost all buying is now being driven by S&P 500-based derivatives; ETFs, levered ETFs, futures contracts, options, etc. ie, The dynamic we wrote of where a handful of firms would be batting shares back and forth is now becoming a reality. And that means the vast majority of liquidity is taking the same trade because Wall Street firms all employ the same basic algorithms. In other words, the equity market has likely become or is in the process of becoming an indistinguishable risk pool.

Because of these factors, I believe it is highly plausible, if not a near certainty, that will we experience another outright equity market crash yet this year. Forget about the new circuit breakers. Ask the Russians how that worked out for them. Forget about endless money with zero interest rate policies. It isn't working and if Bernanke understood what was wrong with the economy, he would understand why it isn't working. What we are most likely witnessing is the continual drop off of counterparties with a concentration of participants on the same side of the trade and this may be the gasoline necessary to cause another serious financial market crises. We have seen this dynamic before, be that mortgage-backed securities, the crash of 1987, the Great Depression, the collapse of China's equity markets and on and on. And if stocks crash, so too will bonds and gold. (Again) While it may seem improbable to anticipate market activity more than a year in advance of it happening, (As remarked above, we first wrote of this in 2009) we did do exactly that more than a year in advance of the 2008 crash where we laid out the dynamics which would drive the crisis in the posts on The Game. We shall have to watch to see how events unfold again this time. ie, If we will witness another crash by the end of the year.

We wrote last year that the Federal Reserve's endless free liquidity was not going to save the markets. Even with zero interest rate policies. Wall Street and other true believers misunderstand the Fed's monetary response and current economics. That led Wall Street clowns to once again take incredible risks without understanding any legitimate risk management practices.

Wouldn't all of this be more than ironic given our posts comparing the President's appeasement-driven hand-waving of financial reform to Chamberlain's appeasement-driven hand-waving in his signing of the Munich Treaty with Nazi Germany? And another stock market crash soon after the signing of a corrupt financial reform bill would be the exact same corollary to the start of World War II after Chamberlain assured Britain and the world that everything was going to be A-OK. Today our President has proclaimed financial reform a success, a corollary to Chamberlain's remarks of peace in our time. The timeless lesson being when dealing with right or wrong, of virtue or vice, of morality or corruption, of good or evil, there is absolutely no place for appeasement.

"Any appeasement of tyranny is treason to this republic and to the democratic ideal."
--William Allen White

We've banged out some pretty prescient calls on here over the years. Some additional calls have yet to come to pass but they will. People are well too focused on the here and now. There is a time component to this crisis and it is highly unpredictable because events unfold and the status quo reacts. When Citigroup hit 99 cents a share, we said we were no longer bearish on bank stocks because exogenous circumstances would determine their fate. Those exogenous events turned out to be a massive bailout and endless free money to speculate. But, we never, ever said that the financial crisis in the United States had passed. Ever. To the contrary, we wrote just the opposite. And over the last year while we heard incessant babbling that the world was in recovery and yet others were concerned that Wall Street had won, we clearly articulated that neither had the global economy recovered nor had Wall Street won anything. In fact Wall Street had lost the war but that time was needed for that to become evident.

Yes, Wall Street has stolen untold trillions of our money but as we have written dozens of times since 2009's low, the crisis has not passed. Wall Street won the early battles because of the element of surprise. (And these are indeed battles because Wall Street crooksters don't care one iota about the American people.) Wall Street caught their opponent (We the People) off guard in their early successes at extorting money out of us. But just as with Hitler's non-aggression pact with Poland, its subsequent promises not to invade Poland and its ultimate blitzkrieg, Germany won early battles through the element of surprise. But once the mighty arsenal of democracy, the United States and We the People, got its engines turning, it was but a matter of time before Germany would lose. This exact same dynamic is what we have witnessed with our crooked banking system. But, in fact, there is absolutely no way to go back. The game is over. It's time to rebuild a new economic America based on democratic principles.

The future is going to look very different than the past. Those attempting (mostly the status quo) to draw linearity from the past to the future, be it employment, earnings, economic leadership, our banking system, globalization, global finance, our political system or whatnot, are going to be severely caught off guard. Volatility precedes unpredictability for the status quo. That is why we see the endless remarks that no one saw this coming. Well, that is surely true for the incompetent bureaucrats who created this crisis. There are many people who had varying levels of understanding of the doom to come. It's just that they didn't have the microphone. And when they did, they were marginalized as charlatans by the corporatocracy.

This is a seminal moment in history and time is the only missing element. And you are a part of it whether you want to lead, follow or hide in a bunker. This moment in time is literally so profound that I believe they will write of it in history books. Maybe with such vigor as to rival the American Revolution.

I view most of these daily machinations in Washington, including this horrendously corrupt financial reform bill, as a distraction. The financial reform bill, as an example, is a bureaucratic agreement no different than the Munich Agreement, the Poland non-aggression pact or thousands of other examples throughout history. Frankly, they are all political bullshit. They are nothing more than documents of appeasement meant to paper over reality. Similarly, this financial reform bill will more than likely be tossed out in the future as were other documents of appeasement.

Finally, let's back up and take a look at the chart above to close out this post. The chart is confirming many key points we have made on here over the years.

The vast majority of capitalization of American equities is contained within the S&P 100 as are a disproportionate amount of the profits. Before the 2008 crash, the S&P 100 represented about $12 trillion in market capitalization, nearly the same as U.S. GDP. In other words, one hundred companies represent the majority of the capitalization of the all U.S. equities while the other remaining thousands upon thousands of publicly-traded companies are comparatively irrelevant. (Comparatively, not completely.) The global economy and the American economy aren't going anywhere without 100 of the largest companies in the world yet the index has continued to make lower highs and lower lows since the U.S.'s economic collapse sent the market tumbling in 2000. In other words, the top companies in the U.S. have been and continue to be in what has now become a fifteen year bear market as defined by 2009 prices retesting 1996 levels. And now the S&P 100 has been substantially rejected off of the trendline going back to the 1995 price pivot we have discussed on here quite often; an ominous development towards retaking the 1995 pivot's pricing.

We have made remark of the U.S.'s economic collapse post 2000 numerous times even the status quo and many financial commenteurs believes to the contrary given the NBER only recorded a minor recession post 2000. ie, Thinking with your eyes and accepting the endless pablum of the status quo. Additionally, the S&P 100 has already collapsed well below the 2003 market low and is now struggling to stay above it. This is not constructive and it repudiates anyone who believes we are repeating the 1970s and a "flat" market for the next decade. There is nothing flat about the horrific economic events unfolding around the world today. Or of the S&P 100's pricing action.

What Have We Become? In a world of greed and power, our supposed leaders lost their way. Has the beacon of American democracy and freedom vanished? Or has it simply vanished from our leadership? It is time the American people reclaim our freedoms from the ruling elite. Regardless of our political views, our bond is our freedom. We the People are once again charged with restoring America to the mantle of nobility as we have done time and time again. And doing so after the timelessly crooked and incompetent ruling elite have made a complete mockery of democracy and our economy.

The more things change, the more they remain the same.