A look at what is happening in the markets at the moment and if this is just a correction or the start of a longer term down-trend.
Giving money and power to government is like giving whiskey and car keys to teenage boys. – P.J. O’Rouke
As I was about to write my alert, I happened to see the above quote and figured it was just too good not to put in the letter. In many ways, it explains the serious problems we are currently facing. Our illustrious leaders in the U.S. government (and I direct this squarely at both parties) have failed us in the biggest way. They have depreciated our currency; created incredible debt; run up mind boggling deficits; created a derivatives time bomb; got us into two wars that we can?t possibly win (but they cost us dearly in money we can?t afford to pay and precious lives); succeeded in making us the world?s most unpopular country (don?t think for a moment this is not true); caused us to drop from #1 to #24 in education in a relatively short period of time; put us in a Catch 22 with our dependency on fossil fuels (when strong incentives and government funding decades ago would have solved this problem long ago); made decisions based on power, greed and exploitation (as opposed to doing what is right and correct for the benefit of the nation, its people and the economy); and numerous other examples that could fill pages. Remember, we are supposed to be a government ?of the people, by the people, and for the people.? We are no longer any of those things. We have evolved into a government ?of the government, by the government and for the government.?
Every government member was elected to serve. Somehow, it got universally misinterpreted. They have served themselves and forgotten about who they are supposed to serve. They have passed bankruptcy laws that favor the big corporations at the expense of the people. They allowed the big banks to send credit cards to everyone with no responsibility attached to that action. They have allowed a number of ?alphabet? agencies such as the FDA, IRS, and many others to ?appear? to be doing a good job while the reality is that these agencies are highly ineffective and could be doing a significantly better job, in many cases, if they were simply eliminated. They are directly responsible for the problems mentioned in the prior paragraph. The only real successful job our politicians have done is in serving themselves. They have given themselves incredible benefits and retirement packages. They are not part of the shambles we refer to as our Social Security system ? they have their own gold plated system. How can they be so incredibly effective in the area of self interests and so abominably inept in everything else they do?
The main problem with our country is that we lack great leadership in almost every area. Think about it. Try to name a truly great leader in any area. The greatness that made our country was in leadership ? it no longer exists. In the 1920s you could have named great
leaders all day long. You would have had a long list in the 1950s. This is the core of our problems. I mention this because our politician friends do a remarkable job of jawboning the problems, but miss the point completely. THEY are the problem. I?ll leave you with one last hint. Breaking it down to a common denominator, most politicians are attorneys. Here?s a final question for you. ?Who regulates, but isn?t regulated?? Final note: this clever group of people (politicians) has effectively given the populace so much pressure just to meet its monthly mortgage that they have no time to entertain thoughts about who really is at the core of the problem.
Let?s talk about the markets. The stock market made a top in early May and it is very clear that the personality of the market has changed from one of support to one of resistance. Prior to May, the market easily found support and rallied higher. Since that time, it has easily found resistance and fallen lower. This has prompted questions of whether we have entered a bear market and whether a crash may be brewing. It is fascinating to observe just how quickly the outlook can change.
Since the highs in early May, the Dow Industrials have seen declines of 142, 120, 214, 184 and 199 points in just a few weeks time. That exhibits a very serious change in market personality. The 4 year and 25 year cycle lows that are expected to occur late this year. The market action is certainly confirming the likelihood of such an event. In the process, it is alerting some people to the type of action that preceded the 1987 crash. Professor Robert Schiller, in his book Irrational Exuberance, discovered a remarkable cycle. He noticed that if you took the 1853 top and added 76.6 years, it brought you to the September 7, 1929 top. If you add 76.6 years to that top it brings you to May 8, 2006. Using 4000 weeks (+/- 1) there is an incredible correlation to the price patterns of 1929 and 2006. The low of October 15, 2005 is related to the low of February 23, 1929. If there is any validity to this pattern, it would appear that we are entering the crash portion of the pattern. The market made its last low on 4-17, topped out on 5-8, made a low 6-13, and rallied to 6-15. Pretty close so far.
The purpose of the above chart is to show a very interesting similarity with the past. It is not a prediction. The chart below is a monthly chart of the S&P to date.
It shows a five wave rally into an upper channel line and a reversal. The yellow dashed line is my cycle projection date for the 4 year and 25 year cycle lows. I want to be aware of Mr. Schiller?s observation because it could certainly become a reality. My work at this time suggests that we have a rally starting later this week or early next week that runs into about July 10. If that is what happens, I would then expect the market to decline again. The next strong date that I have is at the end of August. I will have to wait until we get closer in time to determine whether it is likely to be a reliable date. I am neither looking nor calling for a crash in this market ? I am certainly aware that one could happen for any number of reasons. In my work, the greatest likelihood for that type of scenario would follow my late August date.
Let?s revisit what is happening with gold. The following chart is a weekly gold chart that exhibits gold?s price action for the past six years. If you expand the chart to 200%, you will see an interesting pattern of seven waves that are then followed by a spike in price. The final spike was of a blow off nature that completed the expansive move in gold from July of last year. The dotted vertical line is when I expect this current decline in gold to complete. I am expecting an A-B-C type of decline where it is likely that we have completed the A wave. I would expect the C wave to complete in August. The circled white area is the price target that could be reached if gold happened to get a sharp sell off to complete the C wave. This could be the result of a strong dollar rally and/or another correction in oil. If neither of these events was to occur, it is reasonable to assume that a C wave decline would be supported by the red trend line and the .382 price retracement level at the $545 level.
In summary, the stock market should make a low late this week or early next week. Any rally will be limited by the change in investor psychology and primarily by continued contraction in long term liquidity.