The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Thursday, July 7th, 2009.
At the risk of sounding a little crazy in knowing the fundamentals are indeed 'that bad', this is a cautionary note to those who are short stocks to expect volatility moving forward, but not the kind you are hoping for. And hey, the technicals in the markets are no hell either. In this regard, quite simply, there's no buying power to legitimately send stocks higher on a lasting basis. To go along with this, the S&P 500 (SPX) is sporting a head and shoulders pattern measuring down to approximately 810. Again though; and in spite of this, if history is a good guide stocks will never get there within the present sequence.
Let me show you why. In the first place, and as you likely know by now, when a consensus of speculators think the market will head in a certain direction it has a tendency to do the opposite, with the reason being they all bet on such an outcome, making it impossible to pay the majority. And again, as you should already know from recent discussion in this regard, increasingly speculators have been betting against stocks of late, especially after eying the head and shoulders pattern mentioned above, making the likelihood of the measured move being traced on low.
And then, as alluded to above, we have the historical pattern comparisons to deal with as well, which also suggest that while stocks could chop sideways to down into fall, the next move of consequence would be higher. Here, we see such an outcome being due to wrong-headed speculators, as discussed above, along with continued acceleration in the debasement of our fiat currency economy, with the US Dollar ($) in the led. With States increasingly also in need of bailouts now, it's not difficult envisioning the Fed accelerating the debasement rate of the $ in the near future, which will of coursed buoy the stock market / equities.
So it appears we in fact have a condition set to support at least a rhyming with history in terms of previous post bubble patterns, which is playing out as we speak. In this regard then, and to reiterate sentiments already expressed above, what should happen now then is stocks will most likely drift sideways to lower in coming weeks and months, only to resolve higher starting sometime in the fall. Such an outcome would be an exact but lagged outcome match when comparing the SPX to the post crash Dow, pictured below. Here, there is still another 20% to tack on to the highs before the larger sequence would be complete. (See Figure 1)
Of course when you considers the amount of currency inflation that will be necessary to bring about such an outcome, anybody with an ounce of understanding concerning the 'big picture' shutters in realizing these gains are paltry by comparison, which makes the final prognosis quite bleak in fact. Antal Fekete touches on aspects of this sentiment in his latest work, where is correctly points out the present fiat currency economy is within its death-throws. If the following charts are correct however, and counterintuitive for those looking for such an outcome, in spite of all this hyperinflation should not be expected to break out anytime soon. (See Figure 2)
In this regard look at the exacting pattern match between the post crash Nikki and NASDAQ bubbles over the past 10 years or so, where now that a more recent divergence has been closed, a conforming prognosis for US stocks can be formulated. And as mentioned above, with the exception of a brief spurt higher later this year in response to increasing bailouts in the States, barring World War III, which is what (WWII) got the economy rolling again in the 40's, equities are anticipated to languish past this, which is not what hyperinflation would bring. (See Figure 3)
Why would this be? Answer: Because we have already been inflated to death depending on how you wish to measure it, where if it were not for all the new issues and share depreciation schemes that regularly dilute the aggregate float(s), the Dow for example would have reached far higher levels long ago, perhaps even those still anticipated by Harry Dent and the likes. This is not to be however. Yes, the $ will fall and equities will be buoyed by this moving forward, but in terms of what to expect in degree, don't be looking for much more than another 20% tacked on to recent highs in the major averages if history is a good guide. (See Figure 4)
And what is profound about this observation is we get the same message when comparing the post crash Nikki of the 90's or the Dow of the 30's. They both suggest that starting sometime in the fall stocks should spike higher one more time, likely in response to the $ getting hammered with all the monetary largesse that will be necessary to get the economy rolling again. Of course the economy will not get rolling again as a result of all this currency being injected into the system because this will only serve to keep the paper economy from catching fire a bit longer. None of this monetary largesse will alter the fundamentals and get tapped out and / or aging consumers rolling again. (See Figure 5)
Now as you can see above in Figure 5, all this could start sooner, or later, as can be seen in Figure 6 below, depending on weather the calendar or trading day comparisons are dominant. No matter to the educated speculator however, which is you in reading these pages. Here, the big message one should take away from all this is in not knowing the outcome other than a squeeze will likely to be seen sometime between now a Christmas, one should refrain from short selling activities, and focus on attempting to find some value in long positions that can be exploited during this period. (See Figure 6)
Unfortunately we cannot carry on past this point, as the remainder of this analysis is reserved for our subscribers. Of course if the above is the kind of analysis you are looking for this is easily remedied by visiting our continually improved web site to discover more about how our service can help you in not only this regard, but also in achieving your financial goals. For your information, our newly reconstructed site includes such improvements as automated subscriptions, improvements to trend identifying / professionally annotated charts, to the more detailed quote pages exclusively designed for independent investors who like to stay on top of things. Here, in addition to improving our advisory service, our aim is to also provide a resource center, one where you have access to well presented 'key' information concerning the markets we cover.
And if you have any questions, comments, or criticisms regarding the above, please feel free to drop us a line. We very much enjoy hearing from you on these matters.
Good investing all.