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Happy weekend Slopers! I do love Tennessee in the spring and fall. We hit the 70’s this week, and the Rev was rollin’ with the sunroof open for the first time in months.

Let’s take a look at key fundamental drivers first, before we examine the technicals. At this point I would distinguish the market’s key drivers, in order of importance, as:

• Fed tapering
• Chinese credit collapse
• Russia/Ukraine crisis, possible economic sanctions, and Russian economic retaliation

Even the least cynical among us, would agree that the market’s largest fundamental driver since QE3 started, has been the Federal Reserve’s $85 billion/month bond buying scheme. A large portion of this newly printed money has been finding its way into the stock market, as primary dealers use the cash as collateral to juice markets higher.

However, beginning in December 2013, in Bernanke’s final act as Fed chairman, the Fed began tapering their QE3 program. QE3 now stands at $65 billion/month, and is expected to be reduced to $55 billion at next week’s Fed meeting.

Philadelphia Fed President, Charles Plosser, was even so bold as to state that the pace of tapering may need to be accelerated.

“”We must back away from increasing the degree of policy accommodation in a manner commensurate with an improving economy,” Mr. Plosser told a panel in Paris. “Reducing the pace of asset purchases in measured steps is moving in the right direction, but the pace may leave us well behind the curve if the economy continues to play out according to the FOMC forecasts.”

In 2010 and 2011, as the Fed backed away from QE, the markets responded with 20%+ declines. Tapering is key issue number one.

Let’s take a look at what’s going on in China next. One key area to look at the health of China’s credit bubble is the price of copper. Zero Hedge examined this week how China’s shadow banking system has been using 60-80% of copper imports into China in recent years for the sole purpose of collateral.

Chines Credit Concerns Clobber Copper, Collapse Continues To Lowest Since July 2010

“Magic” Collateral

In discussing the last article it was noted,

“The Chongqing developer ran into financial problems in mid-2013. CITIC Trust tried to auction the collateral but failed to do so because the developer has sold the collateral and also mortgaged it to a few other lenders.”

This is the state of China’s credit bubble. The expansion of their monetary base has dwarfed that of all other major central banks over the past few years. The credit bubble that exists in China today is massive, and has led to the kind of misallocation of capital and resources that we see illustrated here. The credit boom is always followed by a credit bust, and this one is going to be a doozy. Copper breaking under $3 this week was a key tell in the stress facing China’s credit markets. We’ll look at the technicals of copper below.

Finally on the fundamental side, we’ll look at Russia/Ukraine. It has been well documented over the past couple weeks what has gone on in Ukraine, so no need to rehash it here. However, the potential key driver for markets is not military, but the possible economic consequences coming out of the Russia/Ukraine crisis.

On 3/4/14, Russian presidential advisor, Sergei Glazyev, was noted:

“”We hold a decent amount of treasury bonds – more than $200 billion – and if the United States dares to freeze accounts of Russian businesses and citizens, we can no longer view America as a reliable partner,” he said. “We will encourage everybody to dump US Treasury bonds, get rid of dollars as an unreliable currency and leave the US market.”

Zero Hedge then noted of the comments:

“That said, putting Russia’s threat in context, the Federation held $138.6 billion in US Treasuries as of December according to the latest TIC data, making it the 11th largest creditor of the US, which appears to conflict with what the Russian said, making one wonder where there is a disconnect in “data.” This would mean the Fed would need just two months of POMO to gobble up whatever bonds Russia has to sell… The bigger question is if indeed, as some have suggested, China were to ally with Russia, and proceed to follow Russia in its reciprocal isolation of the US, by expanding trade with Russia on non-USD based terms, and also continue selling bonds as it did in December, when as we reported previously it dumped the second largest amount of US paper in history.”

On to the technicals. Looking at SPX first, you’ll know notice the bears had their first attempt to deal a decisive blow in January of this year. January saw a roughly 7.5% decline on SPX, as it broke down out of a rising wedge. SPX found support on 2/5/14 at 1738, and then gave one more middle finger to the bears as yet another rising wedge formed to take the index to new highs. This week, SPX broke down out of this wedge, and began declining again. My short term target for this move is the 1775-1780 area. This would give slightly more than a 61.8 retrace of the most recent wedge, and would also contact the trendline connecting the November 2012 and Feb 2014 lows. Ideally, I would like to see a small 61.8 retrace bounce back off that level, before coming back down to break the larger trendline. Below the February 2014 low opens the door to the first large scale decline since 2011.


Looking at the VIX, you can first notice that VIX failed to make new lows under 12, as the SPX was making new highs in March. The VIX found support at 13.50 in February/March, and showed a nice positive MACD divergence, before moving higher last week. Good things happen for the bears above 21.50 on the VIX.


As we discussed above, copper has become a key indicator of stress in China’s credit bubble. This week copper broke below the key $3 level, which has acted as support for the past 5 years. Copper saw it’s high reached in 2011, since the 2008 collapse, and has been declining since. It saw a nice bear flag breakdown in March of 2013, and then another this past week which was followed by the loss of the $3 level. The technical environment is ripe for substantial copper weakness in the months ahead.


Finally, let’s take a look at the 10 year yield. Of note, since QE3 began, rates have been rising. The 10 year tested the key 3% level at the end of 2013. Simply put, with the Fed tapering and Russia/China possibly selling large quantities of Treasuries, markets must fall to create the environment for buying of Treasuries to accelerate. At the moment, yields find themselves in a range between 2.5% and 3%. A break of either of those levels should yield direction for the intermediate term.


Take it away Adele…