This indicator also diverged at the last two bull market tops. It is now showing a huge divergence that I think is probably indicative of a third cyclical bull market top forming.
Tuesday, July 19, 2011
MONEY FLOW DIVERGENCE
I often keep tabs on the weekly Chakin money flow indicator, especially when I'm expecting an intermediate degree correction. More often than not there will be a divergence in money flow at intermediate tops as smart money exits ahead of a correction.
This indicator also diverged at the last two bull market tops. It is now showing a huge divergence that I think is probably indicative of a third cyclical bull market top forming.
This indicator also diverged at the last two bull market tops. It is now showing a huge divergence that I think is probably indicative of a third cyclical bull market top forming.
Saturday, July 9, 2011
18000 NEW NAILS IN THE COFFIN
As many of you know I believe that we have begun the topping process of this cyclical bull market. In a healthy market an intermediate decline is a profit-taking event after a significant leg up. It should hold well above the prior intermediate bottom. The decline into the June low was not a profit-taking event. The market had not rallied long enough or far enough to warrant an intermediate correction and certainly not one that would test the March lows. The decline in May and June was the first shot over the bow that something is wrong with the fundamentals driving this market.
Now let me be clear because I think many people got the wrong idea from my last article. I don't recommend anyone sell short the market. All I'm saying is it is too late to have retirement funds positioned long at this time.
Now let me be clear because I think many people got the wrong idea from my last article. I don't recommend anyone sell short the market. All I'm saying is it is too late to have retirement funds positioned long at this time.
Asset appreciation is the FED’s stated third mandate. Bernanke is going to fight the bear tooth and nail. There will be continued interventions into the markets. The rules will be changed as we go. Anything and everything will be tried to keep stock and bond markets levitated. That is not the kind of environment conducive to making consistent gains on the short side. That is the kind of environment that can and will whipsaw traders to death.
Even in a market free of intervention the topping process is always volatile and dangerous. But in a market that is being actively managed it is especially dangerous on the short side. Case in point - the June bottom was way too early for a final intermediate bottom.
Even in a market free of intervention the topping process is always volatile and dangerous. But in a market that is being actively managed it is especially dangerous on the short side. Case in point - the June bottom was way too early for a final intermediate bottom.
As I said in my previous articles we should have seen a counter trend bounce to relieve sentiment extremes followed by another leg down into a more lasting bottom. Unfortunately that was not allowed to happen. The powers that be manufactured an explosive rally on the low volume preholiday week in an attempt to create a massive momentum move ahead of the end of QE2 that would be hard to turn around. Needless to say Bernanke didn't want a repeat of last year when QE1 ended.
The Fed can temporarily turn the markets higher but what they cannot do is reverse the economy. I said when QE1 began that no amount of printing or stimulus would stop the underlying cancer in the economy. All it would do is create a brief reprieve which would be followed by an even deeper and more severe recession once the sugar high wore off.
The simple fact is that we cannot cure a problem of too much borrowing and too much spending with more borrowing and more spending. We tried this in the `30's and it caused a 15 year depression. Japan tried it and it led to two lost decades.
The cure is to bite the bullet and allow the deleveraging process to run its course. Yes it will be painful. We've put this off for so long that it isn't just going to be painful it's going to be catastrophic. But the longer we kick the can down the road the worse the endgame becomes. The only ray of sunshine I can offer is that if we let the markets work they will complete the deleveraging process fairly quickly. Within 2 to 3 years the world can be back on a sustainable path of growth. Continue to fight this and we could be stuck in an on-again off-again recession for another 20 years with the final end game collapse so devastating that it will make the Great Depression look like a picnic.
The last two employment reports are clearly showing that the economy is slipping back into recession. I suspect by August the employment report could, and probably will, turn negative. All the manufactured rallies in the world cannot prop up the stock market if the economy is rolling over into another recession. They can postpone the inevitable only so long and ultimately will just make the bear that much more severe.
The Fed's efforts have only extended the topping process, they haven't stopped it.
The simple fact is that we cannot cure a problem of too much borrowing and too much spending with more borrowing and more spending. We tried this in the `30's and it caused a 15 year depression. Japan tried it and it led to two lost decades.
The cure is to bite the bullet and allow the deleveraging process to run its course. Yes it will be painful. We've put this off for so long that it isn't just going to be painful it's going to be catastrophic. But the longer we kick the can down the road the worse the endgame becomes. The only ray of sunshine I can offer is that if we let the markets work they will complete the deleveraging process fairly quickly. Within 2 to 3 years the world can be back on a sustainable path of growth. Continue to fight this and we could be stuck in an on-again off-again recession for another 20 years with the final end game collapse so devastating that it will make the Great Depression look like a picnic.
The last two employment reports are clearly showing that the economy is slipping back into recession. I suspect by August the employment report could, and probably will, turn negative. All the manufactured rallies in the world cannot prop up the stock market if the economy is rolling over into another recession. They can postpone the inevitable only so long and ultimately will just make the bear that much more severe.
The Fed's efforts have only extended the topping process, they haven't stopped it.
Monday, July 4, 2011
DOLLAR UP OR DOLLAR DOWN
For my call of a new bear market to remain valid one very important assumption has to be true. That assumption is that the dollar put in its three-year cycle low in May. If that assumption is wrong and the dollars three-year cycle low still lies ahead then most asset classes should still have one more leg up to at least marginal new highs.
My assumption that May marked a major cycle bottom was based on:
1. Sentiment had reached multiyear extremes.
2. The May low occurred right in the middle of the normal timing for that major cycle bottom.
3. And QE2 was scheduled to end shortly thereafter.
When QE1 ended last year the deflationary pressures slammed back down on the stock market and economy. There didn't seem to be any reason to expect something different this time (unless quantitative easing really isn't ending).
The next couple of weeks are going to be important. The dollar should form a short term daily cycle low sometime in the next few days. If the bounce out of that low is weak, rolls over quickly, and breaches that pivot then the odds are going to be high that May did not mark the final three-year low. If the dollar still has one more leg down then the deflationary scenario is going to be put on hold while that runs it's course. As a matter of fact it would be more likely that we would see a pronounced inflationary period during this process.
The start of the next bear market will depend on whether May marked the final bottom in the dollar or whether that bottom will come later this year. Either way once that bottom is in it will mark the beginning of the next deflationary period and the next cyclical stock market bear.
My assumption that May marked a major cycle bottom was based on:
1. Sentiment had reached multiyear extremes.
2. The May low occurred right in the middle of the normal timing for that major cycle bottom.
3. And QE2 was scheduled to end shortly thereafter.
When QE1 ended last year the deflationary pressures slammed back down on the stock market and economy. There didn't seem to be any reason to expect something different this time (unless quantitative easing really isn't ending).
The next couple of weeks are going to be important. The dollar should form a short term daily cycle low sometime in the next few days. If the bounce out of that low is weak, rolls over quickly, and breaches that pivot then the odds are going to be high that May did not mark the final three-year low. If the dollar still has one more leg down then the deflationary scenario is going to be put on hold while that runs it's course. As a matter of fact it would be more likely that we would see a pronounced inflationary period during this process.
The start of the next bear market will depend on whether May marked the final bottom in the dollar or whether that bottom will come later this year. Either way once that bottom is in it will mark the beginning of the next deflationary period and the next cyclical stock market bear.
Sunday, July 3, 2011
LOOKING FOR A BREAK
We've been waiting patiently for gold to move down into its intermediate degree correction. Now that the last daily cycle low has been breached we have confirmation that that correction is underway.
I've noted previously that bottoms tend to occur when smart money drives gold below a key technical level triggering stops . Big money needs liquidity to enter large positions. They achieve that by taking out the technical traders stops below a key technical level.
As this progresses over the next couple of weeks I'm fairly confident that the May $1462 pivot will be breached. I expect gold will at least retrace 50% of the recent rally back to the 150 day moving average .
The 150 has contained the last seven pullbacks. It's probably about time that quits working though. What I would really like to see is a test of the winter consolidation zone at around $1425.
This pullback should be the single best buying opportunity for the rest of the bull market as it is highly unlikely this intermediate cycle low will be violated again before the final blow off top later this decade.
I've noted previously that bottoms tend to occur when smart money drives gold below a key technical level triggering stops . Big money needs liquidity to enter large positions. They achieve that by taking out the technical traders stops below a key technical level.
As this progresses over the next couple of weeks I'm fairly confident that the May $1462 pivot will be breached. I expect gold will at least retrace 50% of the recent rally back to the 150 day moving average .
Click on chart to enlarge
The 150 has contained the last seven pullbacks. It's probably about time that quits working though. What I would really like to see is a test of the winter consolidation zone at around $1425.
This pullback should be the single best buying opportunity for the rest of the bull market as it is highly unlikely this intermediate cycle low will be violated again before the final blow off top later this decade.
Thursday, June 30, 2011
STRIKING SIMILARITIES
It appears that the approval of Greece's austerity measures has finally halted the correction in the stock market. But has it really?
I would suggest that this correction has never been about Greece. The market has known for over a year that Greece would be back looking for more money. Let's face it no one is under any delusions that Greece is going to be able to solve their problems. Greece is going to default, there's no avoiding that. What the EU is trying to avoid is a domino effect of cascading sovereign debt crises.
Last summer the crisis was solely centered around Greece. Does anyone really believe that this is going to stop with Greece this year? I doubt it. I suspect in the next week or two were going to see bond yields spike in Spain or Italy or Portugal, or maybe in all of the PIIGS.
What started as a financial crisis in `08 has now infected sovereign debt as countries around the world have acted to bail out the banking system. I really doubt that this is going to start, and stop, with Greece again this year. As we found out during the real estate bust, there is never only one cockroach.
Striking similarities to last years correction are now starting to pop up. In May of last year the market put in what looked like a final intermediate low. It was followed by a higher low and higher high. The only problem was that the daily cycle was too short for the May bottom to be a final cycle trough as the bottom had occurred on day 13 and a normal daily cycle runs 35 to 45 days.
I also noted on the chart that we saw a large selling on strength day (smart money distribution day) one week from the top. The market then proceeded to move down into a final intermediate low in the normal timing band. I can tell you that many technicians got caught during the May bounce.
Now take a look at the current chart.
This time the market appears to have bottomed on the 15th day of its daily cycle. Again we have a pattern of higher lows and higher highs, convincing technicians that the bottom is in. Also note that we have another large distribution day just like we saw last year.
We have been expecting some kind of counter trend rally all along because sentiment had become too bearish by the middle of June. In order for the market to continue lower we were going to have to see some kind of relief rally to work off the oversold technical and sentiment conditions. The question is, is the rally for real or is it a counter trend move to be followed by another leg down. In bear markets the counter trend moves are very convincing.
I tend to think that this is probably not over yet. If the daily cycle runs a normal duration then we should look for a final bottom somewhere around July 22. However Congress is going to vote on the debt ceiling August 2. It's possible that this daily cycle could stretch just a bit long and bottom on that vote.
Traders should probably be careful about placing too much trust in charts right now. Last year trading the charts suckered investors into the counter trend rally only to drag them down into a final intermediate bottom.
One final note. The market is now nearing the 50% retracement level. This is the same level that turned back the market last year.
Let me caution everyone that while I think we have probably entered a bear market no one has any business shorting the market yet until we get complete confirmation that a bear market has begun. The first confirmation is a penetration of an intermediate cycle low. In our case that would be a move below the March 1249 pivot. The second confirmation would be a Dow theory sell signal. And the final confirmation would be the 50 day exponential moving average moving below the 200 day exponential moving average. Until those three confirmations are complete bears should remain on the sidelines.
I would suggest that this correction has never been about Greece. The market has known for over a year that Greece would be back looking for more money. Let's face it no one is under any delusions that Greece is going to be able to solve their problems. Greece is going to default, there's no avoiding that. What the EU is trying to avoid is a domino effect of cascading sovereign debt crises.
Last summer the crisis was solely centered around Greece. Does anyone really believe that this is going to stop with Greece this year? I doubt it. I suspect in the next week or two were going to see bond yields spike in Spain or Italy or Portugal, or maybe in all of the PIIGS.
What started as a financial crisis in `08 has now infected sovereign debt as countries around the world have acted to bail out the banking system. I really doubt that this is going to start, and stop, with Greece again this year. As we found out during the real estate bust, there is never only one cockroach.
Striking similarities to last years correction are now starting to pop up. In May of last year the market put in what looked like a final intermediate low. It was followed by a higher low and higher high. The only problem was that the daily cycle was too short for the May bottom to be a final cycle trough as the bottom had occurred on day 13 and a normal daily cycle runs 35 to 45 days.
I also noted on the chart that we saw a large selling on strength day (smart money distribution day) one week from the top. The market then proceeded to move down into a final intermediate low in the normal timing band. I can tell you that many technicians got caught during the May bounce.
Now take a look at the current chart.
This time the market appears to have bottomed on the 15th day of its daily cycle. Again we have a pattern of higher lows and higher highs, convincing technicians that the bottom is in. Also note that we have another large distribution day just like we saw last year.
We have been expecting some kind of counter trend rally all along because sentiment had become too bearish by the middle of June. In order for the market to continue lower we were going to have to see some kind of relief rally to work off the oversold technical and sentiment conditions. The question is, is the rally for real or is it a counter trend move to be followed by another leg down. In bear markets the counter trend moves are very convincing.
I tend to think that this is probably not over yet. If the daily cycle runs a normal duration then we should look for a final bottom somewhere around July 22. However Congress is going to vote on the debt ceiling August 2. It's possible that this daily cycle could stretch just a bit long and bottom on that vote.
Traders should probably be careful about placing too much trust in charts right now. Last year trading the charts suckered investors into the counter trend rally only to drag them down into a final intermediate bottom.
One final note. The market is now nearing the 50% retracement level. This is the same level that turned back the market last year.
Tuesday, June 28, 2011
Sunday, June 26, 2011
SIGN OF THE BEAR
Today I am going to teach you a little about cycles.
First a little background information. I'm going to be discussing almost exclusively the intermediate degree cycle. Now to start let me correct some misconceptions. Cycles are virtually worthless for timing tops. Cycles are measured from trough to trough. All we can really do with cycle theory is develop timing bands for bottoms, tops can occur at any time.
Next I want to go over the concept of left and right translated cycles as it is pertinent to what is happening in the stock market.
Now in order to understand how a cycle is translated you first have to determine the average duration of the cycle. In our case we are going to focus on the intermediate degree cycle in the stock market. That cycle averages 20 to 25 weeks trough to trough. The median being 22 weeks. If we divide 22 weeks by 2 we come up with 11 weeks. That is an important number. It is the dividing line between a left translated cycle and a right translated cycle.
Any cycle that tops on week 12 or later constitutes a right translated cycle. Right translated cycles are the hallmark of bull markets. Let me explain.
In a healthy bull market an intermediate degree correction is a profit-taking event, and that's all it is. The media will find some scary reason for why the market is correcting but the real truth is that the market has just rallied long enough and far enough and is due a corrective move to consolidate the gains. There is one exception, which I will go over in a minute. Healthy bull markets are composed of multiple right translated intermediate cycles.
Left translated cycles, on the other hand, are the hallmark of markets that are in trouble. A left translated cycle is a sign that the fundamentals of the market are broken, or in the process of breaking. A left translated cycle is not a profit-taking event. A left translated cycle is a sign that institutional money is selling into the rally.
Next I'm going to show you the 2002 to 2007 bull market. The intermediate cycle troughs are marked with blue arrows.
In the chart below you can clearly see that every intermediate cycle, with one exception, rallied more than 12 weeks. This is a sign of a healthy bull market. The rallies are moving to new highs. When the intermediate rallies mature they top late in the cycle followed by a profit-taking event that holds well above the prior intermediate trough.
The one exception, and I have marked it with the blue box, is that sometimes an intermediate cycle will top in a left translated manner and make a lower low after the second leg up in a new bull market. This is just a sign of a market that needs to consolidate a huge move out of a bear market bottom.
Next, let's move into the latter stages of the 2002-2007 bull market.
Again we see the familiar pattern of higher highs and higher lows, and intermediate cycles that are topping deep into their intermediate cycles.
However, in the summer of 07 something happened that was a glaring warning sign that the cyclical bull market was in trouble. And that sign; the summer intermediate cycle dropped all the way down to test the prior cycle low in February. In a healthy bull market that should not happen. As you recall this was right about the time that subprime mortgages began imploding. Smart money could read the writing on the wall, and they began exiting the market.
The deathblow came when the next intermediate cycle topped in an extreme left translated manner on week eight. That was the warning sign that institutional buyers had left the market. At that point the bull had officially died.
Now let's take a look at the current bull market.
Up until last summer this was a healthy bull market. The intermediate cycles were all right translated, and we were making higher highs and higher lows.
Last summer that started to change. To begin with the intermediate cycle topped on week 12, right on the dividing line of right and left translation. The market had managed to rally 16%, so even though time wise it was a bit early for an intermediate decline, in magnitude a 16% rally is enough to trigger a profit-taking event. However, this did not turn into just a normal profit-taking event. The decline moved below the February intermediate cycle low. Alarm bells started to ring and Bernanke he heard it. Thus began QE2 and the markets were pulled back from the brink... temporarily.
I don't think anyone is under any delusions about what has powered this bull market and propped up a deeply flawed economy. Trillions and trillions of freshly printed dollars that's what. But that is now coming to an end. Does anyone really believe that the economy or the stock market can continue to levitate without a constant flood of liquidity? If you do I have some beachfront property I want to sell you here in Las Vegas.
The market doesn't believe either! We now have an extreme left translated intermediate cycle in progress that topped on week eight. Notice how the rally out of the March bottom was only able to make marginal new highs with absolutely no follow-through. That is a sign that institutional traders sold into the breakout. And now we have a market that is on the verge of penetrating a prior intermediate cycle low.
If the March low gets breached we will have the first confirmation that a new bear market has begun. The second confirmation will come if both the industrials and transports close below the March lows. That would constitute a Dow theory sell signal. The last confirmation will come when the 50 day moving average moves below the 200 day moving average and the 200 day moving average turns down.
Next I want to look at the dollar. In a deflationary environment the value of currency rises. As many of you know I have been predicting a major three-year cycle low for the dollar to occur in the spring or early summer of this year. It came during the first week of May.
These major cycle bottoms tend to produce very powerful rallies, often lasting up to a year. Now if we were just coming out of recession and productivity was increasing, or we had a new industry that was creating massive job growth then yes I would expect the market to be able to resist a rising dollar. Actually in that scenario a rising dollar is signaling a healthy economy.
In our current environment however a rising dollar signals deflation!
You can see that during the rally out of the `08 three year cycle low the stock market came under severe pressure. I think it's safe to say that the same thing is going to happen this time as the dollar rallies. Unfortunately, we don't have a new industry to drive job growth, power a sustainable economy, and allow the markets to resist a rising dollar. All we have is commodity inflation created by the Fed in a vain attempt to print prosperity.
I've been warning for months that once the dollar bottomed and started to rally it would signal the end of the bull market and the start of the third leg down in the secular bear market.
At this point I think the only hope the Bulls have is for Bernanke to turn the dollar back down into an extreme left translated three-year cycle. Unfortunately, he has decided to turn off the money spigot (don't worry he will be turning it back on soon, although by then it will be too late).
Let us all hope that Bernanke has at least some modicum of common sense left. To turn the dollar back down into a left translated three-year cycle this early will almost certainly destroy the currency by 2014. Not to mention the dollar will lose reserve currency status. Actually, that is my next big macro prediction. By 2014, the dollar's next three year cycle low, Bernanke will have wrecked the currency, and the dollar will no longer be the world's reserve currency.
So far this bear market is progressing as expected. It started with the tech bubble bursting that transformed into a financial crisis. It has now infected sovereign debt, and will ultimately end in a massive currency crisis.
With QE2 coming to an end next week I think we are about to enter a very volatile and critical period in all asset markets. For the next three days I am going to offer everyone a five dollar trial subscription.
You will have complete access to the premium website during the trial period, which will include the weekend report with my view of where I think we are headed over the next month along with complete archives back to the beginning of the year and the terminology document, COT spreadsheets, and cycle count charts.
If during the trial period you decide the newsletter is not for you just cancel following the directions on the homepage. Your trial subscription will still remain active for three days.
If you decide you want to continue receiving the SMT premium newsletter your trial subscription will automatically convert to a $25 monthly subscription at the end of the third day.
If you like the newsletter you can also cancel the trial subscription and convert to a more cost-effective biannual or yearly subscription. The directions for converting to a more cost-effective subscription are also on the homepage. (The 15 month special will remain open till Monday evening.)
To sign up for the trial click here. Then click on the subscribe link on the right-hand side of the homepage. You will be linked to the subscriptions options page. Check the five dollar special and then follow the checkout instructions.
First a little background information. I'm going to be discussing almost exclusively the intermediate degree cycle. Now to start let me correct some misconceptions. Cycles are virtually worthless for timing tops. Cycles are measured from trough to trough. All we can really do with cycle theory is develop timing bands for bottoms, tops can occur at any time.
Next I want to go over the concept of left and right translated cycles as it is pertinent to what is happening in the stock market.
Now in order to understand how a cycle is translated you first have to determine the average duration of the cycle. In our case we are going to focus on the intermediate degree cycle in the stock market. That cycle averages 20 to 25 weeks trough to trough. The median being 22 weeks. If we divide 22 weeks by 2 we come up with 11 weeks. That is an important number. It is the dividing line between a left translated cycle and a right translated cycle.
Any cycle that tops on week 12 or later constitutes a right translated cycle. Right translated cycles are the hallmark of bull markets. Let me explain.
In a healthy bull market an intermediate degree correction is a profit-taking event, and that's all it is. The media will find some scary reason for why the market is correcting but the real truth is that the market has just rallied long enough and far enough and is due a corrective move to consolidate the gains. There is one exception, which I will go over in a minute. Healthy bull markets are composed of multiple right translated intermediate cycles.
Left translated cycles, on the other hand, are the hallmark of markets that are in trouble. A left translated cycle is a sign that the fundamentals of the market are broken, or in the process of breaking. A left translated cycle is not a profit-taking event. A left translated cycle is a sign that institutional money is selling into the rally.
Next I'm going to show you the 2002 to 2007 bull market. The intermediate cycle troughs are marked with blue arrows.
In the chart below you can clearly see that every intermediate cycle, with one exception, rallied more than 12 weeks. This is a sign of a healthy bull market. The rallies are moving to new highs. When the intermediate rallies mature they top late in the cycle followed by a profit-taking event that holds well above the prior intermediate trough.
The one exception, and I have marked it with the blue box, is that sometimes an intermediate cycle will top in a left translated manner and make a lower low after the second leg up in a new bull market. This is just a sign of a market that needs to consolidate a huge move out of a bear market bottom.
Next, let's move into the latter stages of the 2002-2007 bull market.
Again we see the familiar pattern of higher highs and higher lows, and intermediate cycles that are topping deep into their intermediate cycles.
However, in the summer of 07 something happened that was a glaring warning sign that the cyclical bull market was in trouble. And that sign; the summer intermediate cycle dropped all the way down to test the prior cycle low in February. In a healthy bull market that should not happen. As you recall this was right about the time that subprime mortgages began imploding. Smart money could read the writing on the wall, and they began exiting the market.
The deathblow came when the next intermediate cycle topped in an extreme left translated manner on week eight. That was the warning sign that institutional buyers had left the market. At that point the bull had officially died.
Now let's take a look at the current bull market.
Up until last summer this was a healthy bull market. The intermediate cycles were all right translated, and we were making higher highs and higher lows.
Last summer that started to change. To begin with the intermediate cycle topped on week 12, right on the dividing line of right and left translation. The market had managed to rally 16%, so even though time wise it was a bit early for an intermediate decline, in magnitude a 16% rally is enough to trigger a profit-taking event. However, this did not turn into just a normal profit-taking event. The decline moved below the February intermediate cycle low. Alarm bells started to ring and Bernanke he heard it. Thus began QE2 and the markets were pulled back from the brink... temporarily.
I don't think anyone is under any delusions about what has powered this bull market and propped up a deeply flawed economy. Trillions and trillions of freshly printed dollars that's what. But that is now coming to an end. Does anyone really believe that the economy or the stock market can continue to levitate without a constant flood of liquidity? If you do I have some beachfront property I want to sell you here in Las Vegas.
The market doesn't believe either! We now have an extreme left translated intermediate cycle in progress that topped on week eight. Notice how the rally out of the March bottom was only able to make marginal new highs with absolutely no follow-through. That is a sign that institutional traders sold into the breakout. And now we have a market that is on the verge of penetrating a prior intermediate cycle low.
If the March low gets breached we will have the first confirmation that a new bear market has begun. The second confirmation will come if both the industrials and transports close below the March lows. That would constitute a Dow theory sell signal. The last confirmation will come when the 50 day moving average moves below the 200 day moving average and the 200 day moving average turns down.
Next I want to look at the dollar. In a deflationary environment the value of currency rises. As many of you know I have been predicting a major three-year cycle low for the dollar to occur in the spring or early summer of this year. It came during the first week of May.
These major cycle bottoms tend to produce very powerful rallies, often lasting up to a year. Now if we were just coming out of recession and productivity was increasing, or we had a new industry that was creating massive job growth then yes I would expect the market to be able to resist a rising dollar. Actually in that scenario a rising dollar is signaling a healthy economy.
In our current environment however a rising dollar signals deflation!
You can see that during the rally out of the `08 three year cycle low the stock market came under severe pressure. I think it's safe to say that the same thing is going to happen this time as the dollar rallies. Unfortunately, we don't have a new industry to drive job growth, power a sustainable economy, and allow the markets to resist a rising dollar. All we have is commodity inflation created by the Fed in a vain attempt to print prosperity.
I've been warning for months that once the dollar bottomed and started to rally it would signal the end of the bull market and the start of the third leg down in the secular bear market.
At this point I think the only hope the Bulls have is for Bernanke to turn the dollar back down into an extreme left translated three-year cycle. Unfortunately, he has decided to turn off the money spigot (don't worry he will be turning it back on soon, although by then it will be too late).
Let us all hope that Bernanke has at least some modicum of common sense left. To turn the dollar back down into a left translated three-year cycle this early will almost certainly destroy the currency by 2014. Not to mention the dollar will lose reserve currency status. Actually, that is my next big macro prediction. By 2014, the dollar's next three year cycle low, Bernanke will have wrecked the currency, and the dollar will no longer be the world's reserve currency.
So far this bear market is progressing as expected. It started with the tech bubble bursting that transformed into a financial crisis. It has now infected sovereign debt, and will ultimately end in a massive currency crisis.
With QE2 coming to an end next week I think we are about to enter a very volatile and critical period in all asset markets. For the next three days I am going to offer everyone a five dollar trial subscription.
You will have complete access to the premium website during the trial period, which will include the weekend report with my view of where I think we are headed over the next month along with complete archives back to the beginning of the year and the terminology document, COT spreadsheets, and cycle count charts.
If during the trial period you decide the newsletter is not for you just cancel following the directions on the homepage. Your trial subscription will still remain active for three days.
If you decide you want to continue receiving the SMT premium newsletter your trial subscription will automatically convert to a $25 monthly subscription at the end of the third day.
If you like the newsletter you can also cancel the trial subscription and convert to a more cost-effective biannual or yearly subscription. The directions for converting to a more cost-effective subscription are also on the homepage. (The 15 month special will remain open till Monday evening.)
To sign up for the trial click here. Then click on the subscribe link on the right-hand side of the homepage. You will be linked to the subscriptions options page. Check the five dollar special and then follow the checkout instructions.
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