Unemployment, Stocks, and the Fed's Emergency Meeting

The unemployment numbers continue to suggest a peak in unemployment last Oct/Nov (see chart, from a veritable unemployment chartfest at The Big Picture). This points to the Fed raising rates in Q4. (History says the Fed tends to raise a year after unemployment peaks, or three years after a recession starts, which both put it in Q4. 

This timing for a rate increase should be bullish for stocks, in a Goldilock's sense: it seems good enough to support he 2010 earnings expectations but not so strong as to pull forward a Fed rate increase. While markets were closed Friday, futures markets had a short opening, and stock futures went up a bit. The financial press pointed towards this and the unemployment report as signaling a recovery ahead. I will comment later this week on that, but for now I wouldn't make too much of this report, since stocks seem to be fully-valued against expected 2010 earnings, and the small futures pop was largely technical (specifically, the S&P seems to have completed a triangle, which is typically followed by a sharp thrust, which we might see continue Monday morning). 

The Fed called for an emergency meeting Monday morning, which likely means they will raise the Discount Rate a second time. They raised it on Feb 18, and the USD strengthened. Monday is a bank holiday in Europe. so reaction may be muted until they Euro banks wake up Tuesday am. (Also, the recent pattern of a Monday Pump up may be delayed to Tuesday, due to this holiday.) 

I have seen it mentioned in the blogosphere that the Fed typically waits until the Discount Rate is 1% higher than the Fed Funds rate, or at 1.25%, before raising the Fed Funds rate. I expect a rise to 1% tomorrow, meaning more time until we hit 1.25%. Question is whether the rapidity of the recent rise of the Discount Rate suggests an earlier end than Q4 to holding the Fed Funds rate low?  At six weeks betwixt & between raises, the next window is end of May for 1.25%, followed by mid-July for over 1.25% - both well before Q4.

Or is something else going on? After ObamaCare passed, the Fed had a hard time with auctioning off Treasuries, and has more to offload this week. Perhaps this emergency meeting will reconsider ending QE so the Fed can prop up the auctions.  

Also, last week the Fed revealed that its Maiden Lane program (where it bought mortgage backed securities - the toxic waste of the housing bubble) has left it holding well over $100B of assets of questionable value. The Maiden Lane III portfolio is only worth 39c on the Dollar. Maiden Lane II is 44c on the Dollar. This means the Fed has assumed an impaired balance sheet, and needs to fix it. It also holds over $1T of mortgage-backed securities (MBS) soaked up in the past year, which include a lot of poor mortgages. One way to fix its balance sheet is to sell off or swap out the toxic debt and MBS, and buy Treasuries to slowly return to its historical quality of reserve assets. Thus rather than explicitly continue QE, it may begin a swap program - but notably at a discount (ie a loss) to what it paid. 

Whichever, the Fed is in a bit of a pickle: it needs to successfully fund the huge deficits, and at the same time exit from extraordinary measures. In effect, the Fed rushed in where a resolution process would have treaded, to shore up the bank balance sheets by swapping out some of their toxic debt and buying the MBS that they would have been loathe to pick up this past year. Now in unloading this stuff it will take the loss the banks would have had to - and given the Fed's ownership, the loss would be spread back onto the major banks. A neat trick, that, if it works. More after the Fed's meeting. 

Comments

[monk]

Yelnick,

How do you see the frustation of elliott bloggers? See Kenny blaming ewi for this.will you comment on this aspect as well?

[MHD]

Well, the futures are off to the usual. Nasdaq 100 up 11.5. Seems like the same old pattern, and the bulls rule this Monday once again. Everything ....up, up, and away!!!

[DG]

How do you see the frustation of elliott bloggers? See Kenny blaming ewi for this.will you comment on this aspect as well?

Wow, I just went over there and that guy is going nuts.

He can't possibly be serious about suing EWI. We all are responsible for ourselves and our decisions.

The irony of it all is that EWI's track record is practically an open book online. Anyone could see that EWI is awful at market timing with even a little bit of research.

Feel bad for a couple of the people in the comments talking about significant losses.

[yelnick]

Monk, main thing I thought of is adding a donations widget! He is right about the time these blogs can consume.

A comment on the anger, from Kenny and many of his peeps: over the years I have found EWI more disciplined than most in their wave counts, and would normally think this anger entirely misplaced. Since August, however, Prechter jumped in twice with a 200% leveraged short call and been caught out. His STU seldom proposes stops/limits; it presumes the subscribers know enough to follow good practice, and offers a separate set of courses/materials to teach that. Caveat Subscribor. Peeps who followed those 200% calls without stops got burned, but perhaps they should not have been shorting without understanding the way to do it. So while the anger is understandable, the proposed lawsuit is not.

The weakness of EWI is the weakness of all analysts, who need to commit to a POV and then tend to see nothing but confirmatory bias until market reality hits them like a freight train. It is very hard to shake off the need to prove the case, especially as a change of POV will bring out criticism of the prior position and reduce confidence in the new position. This need to prove oneself right is compounded when one has been publicly shown to be wrong.

A lot of money is made in poker right after a big move fails - the immediate emotional reaction of the loser is to get more reckless on the next hand to make it all back and prove that he/she was "right" the prior time anyway.

The irony of this anger happening right now is huge, since I think the Friday EWFF finally got the count figured out after months of confusion (back to mid-August). I will post on this tomorrow.

I had been intrigued by Kenny's expanding ED count, although it suffers from disproportionally (as several readers pointed out): the swings inside the ED dwarf the prior AB waves, and the whole concept of an expanding ED is questionable, essentially based on one chart (which I posted). The new count fits much better, and supports the case for an end around the 62% retrace.

I think Kenny has been doing a really good job, so I hope he gets past this moment and continues his blog. He may learn from the expanding ED concept, as we all should, and improve his wave analysis. I read a lot of ewaver blogs, and rotate through them depending on who seems to be pushing ahead and who seems to be flogging poor counts. The expanding ED caught my attention since it is a bit of a controversial wave form, and it got me to explore it in more depth than I had in the past. I will remain with Kenny to see if he continues, and also to see what he does with his ED count and the theory underneath it.

[Jay]

Sounds like someone's acting like a 2-year old and crying about the REALITY of what can happen when people make an oh-so-egregious error in drinking from the same "Kool-Aid" and suffering devastating capital losses.

And for some to be crying about a lack of "donations" by their "followers" after having missed the biggest stock market rally in a generation is just absurd.

In my opinion when you only allow those to post on your blog who drink from the same "perma-bear" top-picking P3 "Kool-Aid" you are bound to run into trouble. If you come onto these blogs and respectfully disagreed with the current count, or came up with a sound bullish alternative, you got criticized, ridiculed, and it was only a matter of time before you were labeled a "non-believer" and kicked off the blog. It didn't matter what kind of factual evidence you may have presented, the "Kool-Aid" was simply far too strong of a hurdle to overcome.

I'm sorry, but this is a great lesson to everyone who trades the market.
The only problem is that there are people that continue to want to "drink" the Kool-Aid because they don't know how to do anything else. That's why they are followers!

Live and Learn.

[Michael]

"Wow, I just went over there and that guy is going nuts.

He can't possibly be serious about suing EWI. We all are responsible for ourselves and our decisions.

The irony of it all is that EWI's track record is practically an open book online. Anyone could see that EWI is awful at market timing with even a little bit of research." - DG

This is one of the rare times when I'd have to agree with you Darrin.
Agreed 100%.

[marketman]

Yelnick,

Here's an interesting quote from blogger Kenny...

"thinking about taking that EWI shit down first. I have seen nothing but next to worthless shoddy crap from Hochberg lately. and they are to blame partially for all of our losses here including a significant loss drained from one of my accounts. It was not EWT, it was EWI. Wave 2 is supposed to retrace how much according to his own words?

subscribers: remember he was expecting a B wave (possibly a triangle too). now it's a fourth wave of W or Y of (Z) when a double zig zag isn't even allowed for their count. Oh this is supposed to be "expert" counting?

Looks more like both Prechter and Hochberg need some lessons from me!"

[marketman]

I'm sorry, but with quotes like this one (and the one above) you have to seriously question how long someone like this has been in the "game" and trading... Again, it's one thing to write a blog and do some technical analysis based on EWT, but it's a whole another thing to apply such a theory to an actionable trading plan.

"Yet, Prechter himself said I do not go long in counter trend moves while he also said P2 would be the biggest bear rally to date. Why not go long? I did near the bottom but got out, LOL, way too early. Early is an understatement here. It's almost hilarious in a sick way.

In fact, you can ask my peeps, the whole intention for us was to go long at the end of P1."

[zendo]

Besides Prechter, don't forget Neely too, these EW experts are just clowns. Lot of followers defend them because their method are complex and make people think these are science, not witch craft. Well I guess the market finally show EW is just another useless method.

[trendlines]

Easy long money has been made. Expecting rising volatility with a rising market into may. Caution this month, as the good news starts to filter in.

http://trendlines618.blogspot.com/2010/04/s-short-term-good-news-is-usually-bad.html

[David]

very interesting conversation... it all comes down to putting in the hours and going off and doing your own homework... we are all up against people who live and breath this stuff 24 hours a day... in order to beat them, the same amount of work and time is required on charts and analysis... anything less is a waste of time in my opinion

[DG]

Well I guess the market finally show EW is just another useless method.

How are you defining "useless"? Quantitatively, I mean. You scoff at my attempts to quantify the terms of the discussion by actually doing some analysis (I"m still waiting for you to prove your "data fitting" accusation, but I know you never will), yet you use vague and extreme terms like "useless". How does that enable a rational discussion of the pros and cons of trading methods? At least I'm TRYING to discuss the issues in objective terms.

People who expect that EW (or any trading method) is a "holy grail" leading to 100% winning trades or people taking outsized risks based on overconfidence is not a function of the EW methodology, it's a function of personal decision-making.

[Michael]

"we are all up against people who live and breath this stuff 24 hours a day... in order to beat them, the same amount of work and time is required on charts and analysis... anything less is a waste of time in my opinion." - David

I would tend to agree.

However, I would not at all suggest that I am trying to "beat" the pros. I am simply trying to do what any consistently successful trader does, which is to identify and confirm the trend, and climb aboard.

The top and bottom "picking" game is a complete waste of time. The market spends far too much time in the "middle" that it is such a futile and most dangerous exercise to suggest otherwise, and think you can profit off of it in such a manner.

In my opinion, this is where the EW "perma-bears" (and their blogger brethren) get into a lot of trouble. The so-called "squiggle" counts, the denial of an alternative count that runs highly counter to the Primary count, the ridiculous microscopic analysis of the VIX as a predictive indicator, and all of the absurd rationalizations and market-manipulation stories to go along with it. Meanwhile, there is not one single mention of the A/D line breaking out; only a mistaken analysis of volume and how it plays a part (if any) in price behavior.

Price is "everything" to a Trader.
To suggest anything otherwise is the first step into the pit of denial, and the potential to lose a tremendous amount of capital.

If any of these kinds of "bloggers" actually traded for a living, or in an active manner - - - I would suggest that they would have never gotten so "locked" into a bearish count (or bias) over the past 12 months, let alone 6 months.

The learning curve in the financial markets can be rather expensive, especially if you are wrong about your methodology or how you apply it to trading. You MUST be able to objectively listen to what the market is telling you (avoid distractions) and put your Ego aside when you are wrong.

Seems to me that a lot of these E-Wave bloggers have too big of an ego to admit that all of the time and energy that they have invested in their blogs and analysis, has been pretty much rendered useless when it comes to making money.

Just my 2 cents.
:)

[Wave Rust]

What's the right daily count?

There is no one right count, imho, for at least a few years.

Caldaro changes his SC count 10 years after the high. And, now he touts a 'new and improved set of tools...'. Hope new tools work out for him.

EW isn't very predictive but it does work most of the time as a road map for structure.

Neely's rules are interesting but too rigid to use as a forecasting and trade management tool, imho. Too many rules means too much focus on one thing ,,, deep into the weeds in the forest of trees.

EW just is not a stand alone trading or investing system. Never has and never will be.

Most stand alone trading sytems can and do have the potential to make a million dollars. All you have to do is start with a couple of million and dilligently trade somebody else's system.

Biggest weakness of EW practitioners is that most people completely ignore volume, other important technical indicators, design and adjustment of a trading plan, pattern analysis and sequencing, parallel universes (other indices). An example, if I spend an hour each day on analysis of a daily market, I will only spend about 5 to 10 minutes on EW on 3 timeframes.

If a trader uses EW, I think the first rule should be "I will be wrong often." The second rule should be what a trader decides to do about being wrong. The third rule is that as soon as you "know" your count is right, a good trader should prepare to be wrong.

My general EW rule is: The count is what it looks like- 5 up or 3 down. Trade what you see. Fibos and all the other crap are NOT hard and fast ,,, flexibility is the key.

I will say this about EW, all of the best traders I have ever seen, known, traded with, been friends with ,,, they all use EW as a part of their trade arsenal. But just a part.

wave rust

[Wave Rust]

Michael

I think the 2 of us covered that subject :))

wave rust

[Hank Wernicki]

Never put your eggs in one basket ...... suing EWI would be fruitless

So it goes !

[vipul garg]

wave rust,

just bcoz a few ordinary ewavers have a blog or are vocal and further ,more often than not, are wrong , donot make the mistake of puttin every ewaver in the same category.

besides Proprietary trading systems , all other systems and methods are freely available but yet very few of us, use them to our advantage.

[DG]

I think the stats show that almost all traders fail at one point or another. Heck, Livermore went blew out his accounts multiple times and went bankrupt even after decades of trading. I still think failure rates by trading method would make for an interesting study, but a bad trader is going to be a bad trader whether he uses E-wave, candlesticks, indicators, astrology, fundamentals, boxes, data mining, whatever. The only thing that will save a bad trader, in my opinion, is good risk management, including the all-important position-sizing.

Those guys had all of the characteristics of bad traders, especially overtrading (getting down into the squiggles is death for an e-wave trader) and overconfidence. Some of them will learn from the experience and go on to become good traders while others will continue to be bad or leave the game altogether.

[Wave Rust]

vipul,

agree. effective use of EW is a personal matter. especially when a trader relies on their count for trading.

sometimes the structure is very important. most of the time it is obvious what the structure is, such as since the first overlap in 2009. UP.

wave rust

[Forkoholic]

I do respect Bob Prechter, I think he's a great businessman and a brilliant technician, but some forecasters he employs must go, IMHO. What EWI need is innovation and open mind.

Back on Feb 9, I was saying low is good while Yelnick and EWI were screaming we gonna go down
"First signs of a good low appeared today $NYMO set a rising bottoms pattern. "
http://www.lulu.com/content/e-book/february-9th-2010-elliott-wave-forkology-daily-stock-market-update/8584315

You can not sue EWI - they don't do trade recommendations
I mean you can sue anybody of course, but I don't think you would win
It's just educational firm ;-)) Basic indicators like $NYMO would have saved EWI's reputation but for some reason they not using those

Many EW bloggers appear recently who don't know how to use EWP properly
Many people follow those so called "EWP experts" and afterwards EWP gets all the blames. The Theory is good, some practitioners are on the other hand need some brain surgery.

Sometimes it's better to clear you mind, don't listen to mainstream and follow your indicators.

[DG]

effective use of EW is a personal matter. especially when a trader relies on their count for trading.

I know for a fact that vipul is more often right than wrong, so anyone looking for a trader who uses wave theory exclusively (as far as I know) and is a good trader need look no further. He has gone long many times in the past 9 months since Neely's failed top call, despite being a follower of Neely's.

[vipul garg]

thanks DG.

Mr Neely has had a rough patch over the last year ,maybe its markets way of getting a little even after his very accurate calls before that.

inspite of all criticisms, Neely is way above all other wave analysts in public domain and one of the very few who can give a logical long term wave count.

[Michael]

Vipul,

Are you still in EXAS?

I would strongly suggest getting ahold of the recent 18 page research report by John Putnam of Capstone Investments that came out last month.

Its' a great "primer" and summary of what potentially lies ahead.

Should be interesting to see if there is any exciting "news" released on May 1st in New Orleans at the World Endoscopy Conference, which is being held in conjunction with Digestive Disease Week.

[cloudslicer]

Has anyone considered a long energy/short financial sector trade?

To me, going forward financial stocks should have a tough time. Rising interest rates, ARMs, HELIC, the FED of loading their balance sheet ect.

On the other hand energy should outperform in a rising rates environment.

Just an idea.

[Mamma Boom Boom]

>energy should outperform in a rising rates environment.

Just an idea.<

And I think a very bad one. Crude (energy) could blow up at any second.

[cloudslicer]

> And I think a very bad one. Crude (energy) could blow up at any second.

What sector outperforms in a rising interest rate environment?

[Mamma Boom Boom]

>What sector outperforms in a rising interest rate environment?<

Cash

[It's okay to think]

One of the most damning things about this Elliott hoodoo-voodoo is that their predictions are made across many scales and, since their small-scale predictions are so crappy, you are liable to be overwhelmed by a similarly crappy prediction on a much bigger, and therefore important, scale.

[upstart]

Stocks in general perform in a rising rate environment. E.g. 2003-2004, 2005-2007. At least one thing EWI does well is debunk misconceptions, such as believing that rising rates is bearish for stocks.