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The One Buy Signal That Matters Most

Written By Brian Hicks

Posted November 2, 2011

I’ve just read the most amazing article. It was published on one of the more prominent biz-news sites, and it purports to explain why we have already begun the most fabulous recovery in the history of modern finance and economics.

And quite frankly, I can’t decide if it is absolutely dead-on… or totally full of it.

The article quotes half a dozen or so reports out of the White House and the Congressional Budget office, which is reason enough to dismiss them out of hand.

But a lot of the same talking points came up at a recent brain-trust meeting here at Angel, and I actually respect the guys putting them out there.

Millennial Revolt

The arguments start with the presumption that government spending is going to get cut with a chainsaw over the next few years. They start by talking up massive cuts in Social Security, Medicaid, and Medicare.

Now, I happen to know that between 2012 and 2020, spending for same is slated to spike nearly 48% from $2.1 trillion to $3.1 trillion.

This does not bother the predictors in the least…

In fact, they stand this very figure on its head and state that we can’t possibly afford to spend another trillion dollars on the poor, old, and sick.

Most polls find that everyone over fifty thinks these “entitlements” are insurance policies that have already been bought and paid for with a lifetime of weekly payroll deductions.

But our prognosticators have decided that the newest cadre in the work force — the so-called “Millennials,” who would actually have to foot the bill in this Ponzi scheme — will refuse to cover the tab. This revolt will save us billions if not trillions of dollars.

“Done and done,” as they say.

Axe the Pentagon

This is supposedly a non-partisan vision of the future, so next up, they carve up the Pentagon.

(This is actually even simpler than telling every cranky old voter in Florida that their monthly checks have been cut for the betterment of the country.)

The Pentagon’s budget will “decrease out of economic necessity and a less aggressive U.S. role in foreign conflicts.”

Fewer “foreign conflicts” would certainly go a long way toward cutting the budget. At last check, the war in Iraq will hit the $800 billion by its official end come December 30. Afghanistan is over $450 billion, but then again, we haven’t “won” there, so it’s bound to go a good bit higher — especially now that we will have additional in-theater troops available for “surges.”

Currently, the White House and the Senate are wrangling over $26 billion in “details.” Depending on how this squabble turns out, the Pentagon will spend either $513 billion or $539 billion for the next fiscal year.*

*Those are “on book” expenses, mind you. If you knew what sort of  “off-book” and “black budget” shenanigans go down on a regular basis, they’d have to kill you.

Drones and Droids

Last August’s CBO Budget and Economic Outlook has defense spending rising from $708 billion in 2012 to $714 billion in 2014. Then it gets really crazy, with a projected rapid rise to $851 billion in 2020.

But Washington is looking to wipe trillions more off the board via a reduced “boots-on-the-ground” military and the elimination of expensive aircraft carriers, stealthy fighter planes, and mine-proof army vehicles.

Instead, all future combat missions will be fought by cheap robots and drones operated via satellite by pimple-faced 19-year-old Halo-geeks headquartered in a converted mall in Newark, New Jersey.

This will allow the Veterans Administration to focus solely on carpal tunnel injuries.

New Idea: “Mortgage Bonds”

Apparently, the massive savings achieved by the sacrifice of these sacred cows will enable Washington to “implement effective programs,” which will rescue the dead housing market.

As things currently stand, prices are down 50% in most markets and 70% in those warm, sunny places where an awful lot of folks like to live: Florida, California, Las Vegas.

It’s estimated that the whole freakin’ mess has cost the country some $9 trillion. Again, the guesstimators see this not as a problem, but as a massive opportunity to create new wealth by cranking up home values.

The last pass at foreclosure prevention only crammed down rates on some 600,000 mortgages. Now the imagineers are talking about attacking the 11 million mortgages that are still under water with some kind of federal guarantee program.

Who knows, maybe we could divvy up and resell the mortgages as bonds or something?

(Now if THAT horrible old idea doesn’t make you spit coffee out your nose…)

The New Bubble(s)

Reinflate the housing bubble, and suddenly you have a jump in employment and real wages go up. Even better, folks’ money in pocket will be boosted by huge cuts in taxes harvested from all those spending cuts, so now everyone can start buying 75″ flat-screen TVs and massive SUVs again, and retail shoots to the moon.

It goes on and on like this… Every Pollyanna-perfect-world storyline you could possibly imagine has been written into these scenarios — and then doubled, just for good measure.

I’m not saying that none of this COULD happen. Hell, stranger things have gone down in the past week, let alone the next ten years.

I’m just saying that I haven’t seen any of them happening yet.

Tired of Talk

I need something solid — some behavior I can see — before I can sign on to this bull market.

I’m not just talking economics here. If the market goes totally bullish because a million people got up this morning and smoked crack, well, that’s something I’ll learn to live with. I’ll grumble. I’ll bitch. But I’ll go with it. Because it’s real.

But I do need (heck, we ALL need) a decent line in the sand, one indicator that it IS or IS NOT a bull market. So this is what I propose…

A Line in the Sand
WD 110211 DJIA
Here’s a simple daily chart of the Dow Jones Industrial Average (DJIA).

I’ve stripped away all the fancy analytics we technicians love so much: no retracement grids, no price channels, no momentum oscillator, no MACD. That’s all great stuff that I use each and every day. But TODAY, I’m giving you one thin blue line in the sand: the 200-day moving average.

This particular aggregate figure factors out all the little daily twitches and spasms, showing instead the market’s broad, sweeping moves.

When price goes up and over the 200-day average — and stays there — you are most likely looking at a bull market.

I don’t have to like the whys and wherefores. By the simplest definition, that’s a bull, and you should buy into it.

Not a Bull… Yet

But when American blue chip stocks can’t cut that mustard… when they can’t hold on more than a few hours above water without diving right back down again… it’s not.

And you should short the market hard and fast.

Again, I don’t care if it’s because of a bad quarterly report here in the States, some whack job speaking out of turn in Europe, or if everyone just got up on the wrong side of bed this morning…

Economics are great stuff. And they really ought to matter more often than they do. But in the end, actions matter more than stats and statements.

You have to SHOW me before I’ll sign on. Till then…

Good luck and good hunting,

Adam Lass
Editor, Wealth Daily