CIA Short of $

Charts: Over the summer the All-World index dropped 26%. A bear market begins with a 20% drop. So the bull market that started in March of 2009 is over and a new bear has begun. One sign that this new bear has ended would be the S&P 500 trading above its 200 day moving average for several days in a row with other technical indicators turning bullish. The recent rally met savage resistance at the 200-day line (about 1270) which pushed it back into a technical correction. Therefore the charts are saying we are still in a very young bear market.

This means we have an entirely new set of Fibonacci retracement levels. Yesterday the S&P 500 found support at 1187, this is the 61.8% retracement of the first down leg in the new bear market. Today that support was shattered.

The salient technical factor of today's market is volatility. On an intraday basis this market is the most volatile in 200 years. On a closing basis it is the fifth most volatile ever. Forget the VIXX, it measures implied volatility. Actual volatility is best measured by the Excess Volatility (EV) gauge. EV measures the broad index's chart pattern as a percentage deviation from a straight over a series of 5 day periods. Right now EV is about 110%, a normal market has an EV of 30%. Only five times has it got over 100%. When it gets that high one of two things occur: 1) EV quickly drops to a normal level and a multi-year bull run ensues. 2) It drops to about 50% and several more years of bear market follow, this occurred in the mid-70s and 30s. EV has never stayed at today's levels for very long. Continued volatility is bearish. In other words, the Dow going up 500 points one day after dropping 500 points is bearish. It would be better if it retraced the loss with ten days of 50 point gains.

Fundamentals: If left to itself the private sector would absorb the default of Greek and other European government bonds with Credit Default Swaps (CDS). These are insurance-like structured financial products. CDS are shrouded in mythology, for instance they are wrongly blamed for causing the Great Recession. Recently CDS have been paying off very nicely on corporate debt defaults. There is nothing wrong with CDS. Eurozone governments are attacking private sector CDS. They have designed their bail out plans for Euro debt so CDS will not be triggered and announced that so-called naked CDS will soon be illegal. The boneheaded move to make certain CDS illegal a few weeks ago forced investors to sell Italian debt because they assumed that shortly there would be no way to hedge their exposure. The recent escalation in the sovereign debt crisis is due to this attack on private CDS.

Eurozone governments are saying that they will leverage their Euro debt bail out fund by insuring 20% of all bad debt. By itself this obviously won't work because two markets will quickly spring up: 1) The 80% of Euro debt not insured. 2) The 20% that is insured. To combat the formation of a second market for bad debt the Eurozone governments are saying they will create brand new complicated and bizarre structured financial products like CDS. To do this they would have to go to a company like Goldman Sachs. They have not done this and the new structured products don't yet exist, which is (in a way) a good thing because they would be a disaster.

The point of all this is not to cry in our beer about how stupid the Eurozone is. Rather we must be alert for signs the Eurozone is backtracking and starts saying private sector CDS are okay after all. If this doesn't happen it will be very bad.

Geopolitics: With Obama saying all American troops will be out of Iraq in a couple months the pressure on the CIA and NSA to take over all aspects of the Long War are enormous. We know the top spy agencies are over stretched because of the following incident: Several months ago an off-shoot of Islamic Jihad (Palestinian terror group) built a training camp in Egypt's Sinai peninsula where IJ fighters were trained and equipped to look just like Egyptian soldiers. The fake Egyptian soldiers attacked an Israeli outpost and nearly triggered a war between Israel and Egypt.

The Camp David Accord charges the CIA and NSA with monitoring the Sinai for military camps. They have been doing this for decades, but clearly are stretched so thin they are not doing it any longer. This is just the sort of thing they would abandon if they were being pressed everywhere else on the globe.