To The Top of Mt. Everest (by Bob Kudla)

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The market has been climbing relentlessly higher since the March 2009 bottom.  Last week I discussed the drivers of this movement, and this week, I will discuss the four remaining tools/events left to push the market onto new highs.

The price of oil, oil is the lifeblood of our economy, and acts as a tax when it rises, and a regressive tax at that.  Lowering oil prices will provide a growth story to the markets.  It is clear, at least to me, that the price of oil is being elevated in the paper markets, while the fundamentals are supporting lower prices.  If I were a Central Banker that can control the paper markets, and need a cheap boost to growth without using up my spare monetization dollars, I can flood the market with naked short contracts and drive down the price of oil. 

The Saudis today are reducing production, they are doing this because they see a glut coming, and are trying to get ahead of it.  The U.S., Canada, and Iraq all increased production last year, and are on tap to increase it again in 2013.

The relative price of the dollar.  The dollar is at a point where I see declines coming.  The Yen is grossly oversold, and the Euro has been creeping up since the beginning of December.  A falling dollar, with managed energy pricing, will provide a export boost to our multinationals, and the relative value of their profits. 

Money flows from Bonds to Equities.  We are starting to see money flowing from bonds to stocks.  People are seeing the relative yields and are making business decisions to go for those yield.  Plus, the tax debate has ended, and was benign for the top 1%, regarding cap gains and dividends.  The fed is out of short bonds and so yields are rising due to supply and demand.  It won't take much for investors to lose a lot of money in capital losses on a back up, and we could see a flood of money coming out, and only the equity markets are big enough to absorb those dollars.

Deficit numbers are going to look pretty good for March and April.  The kabuki theatre of the fiscal cliff negotiations was designed to scare as many people out of the market as they could, in order to generate cap gain tax revenue(remember my thesis from last week). I think it worked.

So based on my above scenarios, and with the SPY 7% below the all time highs, and a political class that is determined to shape public opinion, I conclude that the highs will be assaulted.  Talk about climbing a wall of disbelief. 

I am waiting for a gold and silver buy signal to reenter, but the large cap miners, I believe have bottomed, and am in NUGT.  If my scenario plays out, we will see a collapse in the Vix, and I can see XIV in the 30's, so watching that instrument very closely.  I hold VXX calls for Feb, hold VXX credit condors, and am in XIV on buy signals, and day trading it daily, opportunistically.

Below are a few charts.

By Bob Kudla