This morning, I woke up from a dream that Jimmy Carter was still President. Maybe I was subconsciously triggered by yesterday’s gas lines and the rising inflation. Does anyone remember “wrap-around” mortgages? How about Ted Kopple and day “_____” of the Iran Hostage Crisis? And then there was the beginning of the end on Sunday, August 15, 1971. President Nixon announced that the United States was abandoning the Gold Standard on that hot, Sunday, summer evening:
“The third indispensable element in building the new prosperity is closely related to creating new jobs and halting inflation. We must protect the position of the American dollar as a pillar of monetary stability around the world.
In the past seven years, there has been an average of one international monetary crisis every year …
I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.
Now, what is this action—which is very technical—what does it mean for you?
Let me lay to rest the bugaboo of what is called devaluation.
If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today.
The effect of this action, in other words, will be to stabilize the dollar.”
Well, it eventually took a Fed Funds rate of 18% to stabilize that dollar, tricky Dick! And Jimmy Carter, though I disagreed with his politics, never stood a chance. He is a very decent man. But Nixon, having laid the groundwork, dealt President Carter a lousy hand. And to think, the world was panicking over the Vietnam War deficit spending. Weimar Germany, the Great Depression, and the world war that followed were still very real experiences to that generation. What would that crowd think of our debt now? Perhaps death is kinder than we know, laying that generation to rest before these times. One thing is for sure, as far as we know, there has never been a complaint from the grave.
Sometimes, it is simply the luck of the draw as to the timing of a presidency. Land on the wrong cycle, and your fate is cast. But when all of this is said and done, August 15, 1971, will mark the beginning of this country’s end – at least as we knew it. With the current debt, deficits, and unfunded liabilities, it is difficult to believe that the United States will avoid the downfall of every other fiat currency in history. Perhaps we will all be studying Mandarin soon.
Today’s Plan
We have overnight inventory balanced in the S&P 500 futures. We will be opening towards the top of the overnight range, with prices having explored slightly lower levels from yesterday’s close. Treasuries were flat overnight and have yet to respond with a routine, correction-based flight to quality. Treasuries seem to be pacing the S&P 500 index, a somewhat unusual correlation.
With opening inventory balanced and prices opening inside of yesterday’s range, there is little to guide us at the open. On the daily chart, prices are close to 3 ATRs from the mean and sitting just a hair below the 50-day line. Price also sits on the intermediate trendline and on top of a gap from April 5th. All of this (plus short covering) should lead to a meaningful bounce here. If so, any recovery should lull less experienced investors into complacency. You know, “don’t worry, everything is fine, dear.” If we don’t bounce this morning, carry that forward as another chink in the armor.
In a failure to bounce, we enter the April 5th gap and volume air pocket down to 4014. Given the S&P 500’s affinity for hopping in 50-point increments, it is a short step to 4000. The market could bounce there. If not, additional support lies in the 3925 to 3975 range – with 3950 (the next 50-point increment) as a good target. The 21-week line, also critical support, sits at 3940.
I am a bit torn in my outlook this morning. The put/call ratio spiked yesterday to a level not seen since the November election. The ratio suggests a lot of accumulated shorts, and they are a fickle crowd. It does not take much of a rally for them to panic buy and cover their positions.
On the other hand, the retail crowd may just be waking up to the fact that a precipitous correction is underway. The late arrivals could aggressively sell any rally attempt today – taking us back down the aforementioned ladder.
The likely compromise between the two opposing forces, especially coming off three days of expanded range, would be a balancing/trading range day inside yesterday’s regular session range. Responsive trade later today from the established range would be the likely, best trades.
The new overnight swing low is bearish, at least partially testing the unfilled early April gap. But regular session activity is the only activity that really counts in a gap fill.
Note that the market has started to pay attention to rates again as the recent tech weakness recoiled from higher rates and infected the indexes. Keep a chart of the TNX handy.
As long as prices hold within yesterday’s range, I am a responsive range trader today. Should prices get out of range to the downside, I will target the overnight low first and then look to the full gap fill outlined above.
Good luck today.
A.F. Thornton