Chart Review by Michael Clark
“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”
-- John Maynard Keynes
SO, IS THIS FINALLY THE 'REAL' CORRECTION?
What a week it was. The Bears gave the Bulls some payback. Obama got a wake-up call. And the banks got a well-deserved scare (and we hope they will get a well-deserved hair cut).
The markets reacted, as one might expect, with selling. Actually, the selling began before the Massachusetts election and before Obama sent a shot across the Goldman Sach's bow. Last week Intel announced surprisingly strong earnings; and the stock started up and then sank. For the past half-year investor behavior had been the reverse: a buying spree for any stock that did not lose as much as it might have — beating 'Street expectations' that had been dumbed down over and over again during a quarter so that the company could report 'surprising' strength. Suddenly, now, even good earnings are being greeted with selling. Then came Massachusetts — wasn't that a Bee Gees' song?
All the lights went out in Massachusetts
Anyway, readers want to know where the markets stand today, after the sell-off this week. My view of it — my 'view', not my gut-feeling — is that we are, so far, merely correcting from an over-extended rally. This rally has been bizarre, to say the least. This has been a 'fear rally' — usually the 'fear' side of the equation is when selling comes in, 'greed' driving the expansion. But fear of systemic failure has driven this rally; and Ben Bernannke has been the captain sailing the 'Boat of Fear', Ben's logic — that more debt will solve the insolvency crisis — has a shadow side, the logic that a collapse in stock prices will result in systemic failure, international chaos, revolution, repression…made him believe that preservation of the status quo was requiired, at any price. A 'make-believe' recovery could be jump-started, perhaps, if the Fed could just stimulate (and simulate) another asset-bubble. After all – that is how his mentor and predecessor, Alan Greenspan, had become the darling of the coctail party crowd, leading member of Time Magazine's 'Committee to Save the World'; and that was how he, himself, had become Time's 'Peson of the Year'.
Logic was thrown out the window. Causality no longer mattered. More debt might cure the problem of too much debt? Maybe? Maybe it was possible? Maybe the world could avoid Judgment Day simply by pretending there was no such thing. Suddenly faith mattered; reason was dismissed as bearishness and pessimism — treason by some. But American patriots have no need to support a policy that is designed to rescue the ruling class from their own greed and misjudgments. Wall Street made this mess — Wall Street and Washington, in their unholy alliance. Wall Street, the geniuses who decided America would be served by air-mailing maunfacturing to Asia, India, Mexico, destroying American Labor for ever as a political force; and Washington, the lawyers getting rich from this alliance with Wall Street, who let them get away with the 'globalism' scam, and the subsequent impoverishment of America. And, of course, the Fed, the bridge between Wall Street and Washington, the instrument of the policy designed to turn the concept of 'debt' into the concept of 'unlimited riches'.
Anyway, my gut-feeling is that we are at the end of the 'baby expansion', that Massachusetts has been a wake-up call to Obama's hard-liners, and Obama's war on Wall Street will transform Obama from a 'peacemaker' to a new-born Teddy Roosevelt. He really has no other course politically. The Republicans are claiming to be the populists in this picture, painting Big Government as the villian and the cause of America's decline. The Democrats have to respond with iron of their own and reclaim the title of America's populist movement, painting Big Business as the villain, the banks and Wall Street as the guilty party that sank America's 'Party Forever' carnival cruise. (Don't worry about debt. Interest rates are low; and housing prices will go up for ever. Housing is under-priced, afterall. Everybody says so. Alan Greenspan even publicly encouraged Americans to re-finance from AAA prime mortgages to sub-prime and adjustable-rate mortgages. America's leading financial genius was not only keeping interest rates too low for too long, he was also parroting Countrywide Credit in pitching loans that were already undermining America's future. Is the Fed chair supposed to be the leading salesman of America's latest bubble? Or is he/she supposed to be deflating the bubble economy when it passes fromt he expand-by-investment stage into the inflate-by-debt stage?)
Those who read our post last week know that we expected selling to come in. It has become hard to fully trust our indicators since March since there has been so much manipulation in the markets — certainly more than is usually the case. Since the markets have been so manipulated, we're not certain how many 'real buyers' there are out there. In ordinary circumstances, this 'pullback' would proceed orderly to the nearest support level, where it would find some buyers. Then we would begin to know if it is a pulback and a major sell-off. Because of so little volume (investor participation) in this rally, I wonder if there are any buyers out there waiting to get in to the market — or if the Goldman Sachs high-speed computer trading volume was all there was. If no buyers are waiting to get in — and with a sinking recovery in the economy one might wonder why buyers would be waiting to get in — then the markets might fall like a rock.
How do the indexes look? They've all turned down. Some don't look good at all. China's Hang Seng is a mess. The Spanish index too. Looking at the indexes should make one wonder about the idea that investing in foreign markets is a form of diversification. China, Europe, England, America, Taiwan, Japan, South Korea, Russia, India, Singapore, South America…all these indexes are falling together. In fact, precious metals and industrial metals are also falling. The only instrument now climbing is US TBonds.
The DJIA is breaking out of a long rally, but is still above support 9678.95. We aren't technically bearish until the trends break support and fail to take out overhead resistance. We'll know more in a couple of weeks.
Dow Jones Transports are still in a bullish pattern, trading well above the next level of downside support 3546.48. This index is short-term oversold already — but it wil definitely go lower.
FCHI — CAC Index — France. A hefty decline on Friday. Still a builish pattern, with support at 3610.81. Note the accuracy of the bottom pane — M5//M5 Avg Differential Plus (Close) ALT2 — flat during the September to November pullback — generally up since early November. A 'real' sell-off will show a negative M5/M5 Avg reading AND negative trend readings (red lines, pane one and pane four).
The FTSE Index, Great Britain, is breaking down more quickly to the 5103.78 support level. One wonders how any investor would find value in Great Britain, Japan, America, Greece, Portugal, Spain, Ireland, Italy indexes since it is clear that the future for these countries is deflation, austerity, less government spending, and more corporate cost-cutting and debt-reduction…not much expansion on the horizon, with perhaps default a likely consequence of irresponsible governance.
GDAXI — German DAX — Index. Descending rapidly toward 5605.43 support; a second support level exists at 5549.18; a major support level at 5312.64. A weaker Euro won't fix all of Germany's problems. An end to massive international quantatative easing will no doubt result in more problems for Germany's export economy, especially as we see new impulses of protectionism coming in everywhere over the earth.
HGX, American Housing Index: Took out short-term support at 102.71; aiming at more major support level: 95.79. Not much to get excited about in American housing. Too much inventory. If there were no liar-loans and cheater-loans and guaranteed future-default loans we would have had no housing bubble. Now Americans are losing jobs and losing income and there is political pressure, finally, to do away with the only loans that will qualify Americans for mortgages. Housing prices MUST come down — and this will create more defaults and more foreclosures and more inventory — or housing will remain unaffordable for most Americans. More liar-loans and look-the-other-way loans will only create another housing meltdown.
HSI, Hang Seng, Chinese Index. This was supposed to be the China Index for non-speculative issues, the more stable index. But it's a pretty ugly picture at the moment: lower lows and lower highs, downtrending, now breaking support and threatening a second level of support: 20323. I guess investors kow that the recovery in the Chinese economy is government-sponsored and is threatened by China's threat to cut off cheap loans mandated by the central government from Chinese banks. A lot of money has changed hands recently. Time will tell if these loans were prudent business loans or crony loans that won't be paid back. With much money going into housing — in many cases housing that will not be occupied — one wonders how these loans will generate income for loan repayment. Many articles have been written about China's 'bubble economy' ready to burst; many rebuttals have followed.
The SSEC, Shanghai, Index is sitting right on intemediate support. If it takes out this support, then it should fall back to August support at 2640, with a post-crash low of 1665 being a next major target.
Gold Stock, HUI Index, have not held up much better than other indexes. In fact, gold stocks have been in decline since the US Dollar began its recovery. Gold, itself, as judged by the Gold ETF IAU, has held up somewhat better; but IAU is now at support it doesn't want to fail 105.38, especially after failing the last test of overhead resistance.
Is the US Dollar rally for real? It appears to be — although the UUP has hit overhead resistance and seems to be pausing in its upward trajectory. Short-Term it might come down. But short-term trends have turned positive. But if the Dollar is rising, then shouldn't the TBond market be falling and yields rising? The more dollars we have in circulation, the weaker the dollar should be. But the decline in TBonds has ended — yields are coming down. The TBT (Ultrashort 20+ TBond ETF) has rallied but now is coming down. It has broken short-term support; and it now approaches support at 46.69. If this level breaks, then it should erase all of its gain since December 2009. The TYO and the TYX show exactly the same picture. The TBond market has buyers. Is this the Fed still throwing money in to the wind; or is it stock investors selling ans shifting money into treasuries? If treasury investors are betting on a double-dip recession, with implied higher bond rates, then the move out of stocks into bonds would make sense. But does the dollar rising make sense given this scenario? That is not so clear. Lower rates — higher bond prices — suggests a weaker dollar, which suggests higher gold prices. We are at any interesting transition here, with many different currents of thought all running together in a bit of a whirlpool of ideas.
Back to stock indexes. As you know, if you have been reading my posts, I think the NDX index is the most important stock index in America, in terms of the story it has been telling since the 2001 Bear Market began. The NDX is caught between an important resistance/support gateway — resistance 2055.82; 1652.44 support — that will help determine if this is a bear trap rally or a bull market rally. NDX declined to 1794, so it is creeping back toward the support level 1652.44, which, if it falls, is very bearish for the market.
Who could love the Madrid Index, SMSI? Spain is arguably the worst economy in the world at the moment — among first tier countries. SMSI has broken two levels of support Is this index approaching a bottom? Is Spain dealing with its debt problem as an adult country would? I think not. It is denying it's sick condition — as are all nations of the world. Stalling for time. Stalling for time works, IF the sickness is also being dealt with at the same time. IF expansion of borrowing, buying, world trade is occurring. But we are in a deflation cycle (18 year-cycle). There is no easy way out of this. And the only wya out it through bankruptcy, default, and the unwinding of debt. I would not want to own Spanish stocks at the moment. But that's me.
SOX, Semiconductor Index. In many ways the rout of Intel started this decline — the Intel chart still looks pretty good, in fact — SOX has a LONG way to fall if it is going down to the next support level, 288.11.
SSMI, Swiss Index. Pretty strong looking index. 6146.09 support.
CRB Volatility Index, VIX. The VIX rallied, as one would expect it to. It has not turned around. It has rallied this way three times since September — but it is still in a down-cycle.
India: EPI, India ETF. Reflects the universal decline. It needs to hold above support at 21.01.
RSX, Russian ETF. What looked like a breakout from a rising triangle (normally very bullish) has now run into trouble. 30.441 support needs to hold.
The Indonesian Index (IDX, Indonesia ETF) looks very similar to the Russian ETF chart. All the world indexes go up together; and they all come down together. Why is this so? It's a very interesting phenomenon. Clearly the world is interconnected today, emotionally, through technology, than it has ever been before. But perhaps there is something more to suggest reasons for this conformation. The 59.51 support-level needs to hold.
Inverse ETF's? QID, Nasdaq ETF, has broken upside support. It has done this seveeral times since March, so this does not mean anything by itself. But it does mean that 1/2 of the bearish equation has turned bullish.
REW, Short Technology ETF. Similar picture as QID, a breaking of upside resistance, which is often the first indication of a reversal of trend.
SRS, Short Real Estate ETF. Has become a bullish pattern, with a higher short and a higher low. This is not a smoking gun. It needs to hold above support — and continue to take out overhead resistance.
So, what is the conclusion? Actually, the market IS NOT programmed. The market always tells us what it is doing, not what it is going to do. But, we aren't following buy signals at the moment. We want to see how the market handles this decline, if panic selling might ensue, should selling continue.
Those who have read my earlier posts know that my own timeline of the business cycle (18 years of expansion of credit followed by 18 years of contracting debt) designates 2010 as the Dusk/Autumn of the Business Cycle — that is, the point where the Night begins to win. The relative Unity-in-Hierarchy of the Day-Cycle gives way to the relative Duality-in-Equality of the Night-Cycle. What this means is that the Class War in favor of the Rich (hierarchy, Day-Cycle) becomes the Class War in favor of the Poor.
Obama's failure in Massachusetts and his subsequent understanding that his only road now is to declare war with Wall Street's banks is right on time, in fact. Polarization of the society in a radical way will follow (see the diagram below, and other Dusk periods, 1974-1983, 1938-1947) through approximately 2019. We are heading into a period of political struggle that we have not known since the 1960s and 70s; and a period of stagnation on Wall Street.
1973: Dow at 1067.
1982: Dow at 788.
1937: Dow at 194.
1946: Dow at 160.
There will be rallies — but an investor needs to religiously take profits, sell the rallies, and be willing to short the markets also.
More information on this system can be found at
A draft of the book Turn Out the Lights can be found at the website below. This book is a description of the metaphysical causes of the economic cycles of expansion (Day) and contraction (Night).
Michael J. Clark's Gate Timing System
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