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Through the Looking Glass...

WHERE WRONG IS RIGHT AND BAD IS GOOD

In his sequel to the classic children's novel 'Alice in Wonderland', Lewis Carrol takes us into a world of inversion in 'Through the Looking Glass.'  In her surreal state, Alice discovers that everything exists from the perspective of reflection and little makes sense.

If this sounds familiar, then you're either experimenting with hallucinogens or you're a trader.

Friday's Nonfarm Payrolls and Unemployment reports delivered an uninspired picture of job growth during the month of September.  Naturally, the stock market reveled in this news and the S&P rallied 1.4% while moving more than 50 points intraday.

The entire bull-market cycle from 2009 up until August of this year was predicated on the market's addiction to free money... like a child addicted to sugar.  Just like a spoiled child, the market throws a tantrum when it thinks that sugar flow might slow down.  Consequently, bad economic news is good news for a market that wants its fix.

From a technical perspective, Friday's rally moved the S&P above the 20-day moving average and back into the variance gap between the 50-day. Here's what it looks like...


To understand why this is important, see an earlier post called 'The Fill Gap Pattern'

http://tancockstradingblog.blogspot.com/2015/09/the-fill-gap-pattern.html

The index came close to filling this gap a couple of weeks ago but was quickly expelled from the range... now it looks like we might get our consolidation pattern after all.


JANET YELLEN IS MAD AS A HATTER

In 'Alice in Wonderland' the Mad Hatter is stuck in a world where time stands still and it's always tea time... in other words, the party never ends.  Our present day incarnation of the Hatter is Chairwoman Janet Yellen who presides over an insistently dovish Fed.

While the reasoning for maintaining near-zero interest rates is perhaps historically justified, it would seem that the marginal utility to the real economy (read: not the stock market) of this policy has long since deteriorated.  Readings on the health of the real economy like last Friday's jobs report, wage growth or GDP distribution have been stuck in neutral while this policy has been in effect... maybe it's time to try something new.

My argument is that it's time to break with the defined practice of using interest rates as a lever to stimulate employment and inflation as the unintended consequences to the real economy may be impossible to undo.

The Mad Hatter has been portrayed numerous times but perhaps my favorite portrait of this iconic character was by Tom Petty in his video for the 1985 song 'Don't Come Around Here No More.'  The title of that song is rather fitting for a Fed that seems to be sending the same message to interest rates.

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