“Cave In” Triggers Buying Avalanche

It should really not come as a “shock” to anyone that the Republican controlled Congress “caved” to the demands of the White House at the “11th Hour.” Since the “deal” was stuck last week there have been a plethora of articles trying to put a positive spin on the GOP’s decision. However, the reality is that they were simply “out negotiated” at every turn.  

Let me just say this now – when the debt ceiling debate returns in January/February it will NOT be an issue for the markets. The reason I say this is because of a little known provision inside the bill that effectively removes Congress’ ability to control the “debt ceiling”

Breitbart reported:

“The plan includes a proposal offered by McConnell in the 2011 debt ceiling crisis that allows Congress to disapprove of the debt ceiling increase, which means lawmakers will formally vote on whether to reject a debt ceiling increase until Feb. 7. Obama can veto that legislation if it passes. If Congress fails as expected to gather a two-thirds majority to override the veto, the debt ceiling would be raised.”

What this means is that the Republicans voted on a bill that changes the mechanics of the “debt ceiling” vote to make failure nearly impossible. Instead of needing Congress to approve a debt-ceiling increase, Congress has to override an Obama veto in order to prevent it.  So now it requires a two-thirds vote to trigger a “debt ceiling” fight rather than a 50 percent–plus–one vote previously.

Of course, it also won’t be an issue for the markets as they are now convinced that the Republicans will ALWAYS cave into the pressure from the White House. With the Republican Party fractured, and with the latest vote effectively neutering them, the markets are no longer concerned about another fight in three months. With the Fed fully engaged in QE though at least the first half of 2014 – the 3rd stage of the bull market has likely begun.

Market Breaks Out Of Consolidation

At the end of August I issued the first “official” sell signal of 2013. While this

signal did not result in a sharp market decline it did help navigate some of the

extreme volatility that has occurred since.

However, during that time frame, there have been many headwinds resolved

for the markets:

•  The “Syrian Crisis” has been resolved
•  IRS, NSA, Bengazi, AP, etc. – have all been resolved by being forgotten about.
•  German elections are past with Angela Merkel remaining in control
•  Janet Yellen is “in” at the helm of the Federal Reserve
• The fear of the Fed “Taper” is now gone for quite some time.
• Debt Ceiling/Shut Down is over.
• Corporate earnings are weak but still beating much lowered expectations. (It’s only the “beat “ that matters)

With all of these previous “headwinds” now successfully resolved, combined

with the ongoing impact of monetary interventions ($85 billion/month) at least

through mid-2014, there is little to keep the markets from advancing further

from here. This statement, however, doesn’t mean that I have changed my

mind on the fundamental underpinnings of the markets which are clearly

weak. It simply means that with mounting levels of liquidity, and no real

constraints, the markets have entered into the “vacuum of space” from a

technical basis.

I have notated several things in the chart below that I feel are critically

important to understand.

The chart above is a MONTHLY price chart so the measures of

overbought/sold are critically important. However, BECAUSE it is a monthly

chart it means that it is a very slow moving chart which can take months to

develop.

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