Smart Money Tracker – July 4th Weekend
Stocks:
All bear flags broke down for certain today.
Oil Index
French Markets
German Markets
The important event though is that the Dow has now closed below the prior cycle low.
We are now looking at a failed (see terminology doc) daily cycle in progress. This is exactly what I’ve been expecting would happen. I’ll go into more detail on what we can probably expect from a failed cycle in a minute. In yesterday’s report I noted that Lowry’s buying power index had dropped to only 9 points above where it stood at the Mar. 9 bottom. On Wednesday that index dropped again to only 6 points above the record lows and that occurred with the market rallying. Today was likely another 90% down volume day. If buying power hasn’t now moved to new lows it probably soon will. This rally is in serious trouble and all this talk of “green shoots” is wishful thinking.
I’m going to point out a interesting pattern that has developed.
Notice that the rally stalled on the June jobs report even though that report showed a much smaller decline than was expected. At the time the media went crazy with the “green shoots” theory, even though the market did the exact opposite of what it should have done, if in fact, the June report was signaling an end to the depression. Now we get the July report this morning and job losses are starting to move higher again. The stock market gapped down and stayed down all day. I think the intermediate trend broke down for good on the July report this morning.
The next daily and weekly cycle low, a major cycle low, is due sometime in late July or early August. I strongly suspect this cycle will bottom with a terrible jobs report on August 7. The bears will probably load up on shorts expecting a move to new lows and I expect what will happen is that the negativity will exhaust itself on that day putting in our next major low of this bear market. Remember this weekly cycle is right translated and as such not expected to move to new lows.
I’ve noted in the above chart that the half cycle low is due sometime around July 20. At that point we should get some kind of break from the selling pressure. A midpoint consolidation for a week or two is probably the most likely scenario. That would setup a T1 pattern (also see terminology doc) that when it breaks should take the market into the final low in early August.
The thing is, T1 patterns are continuation patterns. So once we start to bounce out of the bottom, which as I’ve diagrammed on the chart should hold above the March lows, we would then test the consolidation zone. That bounce above the March low is going to convince everyone that we have, in fact, seen the lows of this bear market. However as I said T1 patterns are continuation patterns. Once we test the midpoint consolidation the market should then roll over and move to new lows by the next weekly cycle.
Remember the next 4 year cycle low isn’t due until summer or fall of 2010 at the earliest. This bear still has a lot of damage to do before he hibernates and I think the world economy is just starting to get a taste of how bad things are going to get. I’ve pointed out previously, that this is the single most left translated 4 year cycle in history. That alone suggests that this time will likely be worse and maybe much worse than the last Great Depression.
Hope for the best but plan for the worst:
I’m going to warn everyone that now is the time to plan ahead for hard times, maybe really hard times. Realistically the vast majority of us have never seen hard times. I was a teenager in the 70’s so even those desperate times didn’t make a huge impression on me. But that period is probably going to seem like a picnic to what’s in store for us now. I dare say none of us, unless you are 90+ years old, remember what truly desperate times are like but I think we are going to learn.
I look around me and I see most of my friends, despite my warnings (the same ones who didn’t listen to me when I warned of the housing bubble) living in the present just like they’ve done all their life. No thought to the future. No plan for what they would do if they get laid off. Actually most can’t even conceive of what it would be like to not be able to walk in and buy the latest Iphone or go to dinner at a fancy restaurant anytime they want. Heck if one can’t afford it that’s what credit cards are for, right?
Many are bitter because their pay has been cut modestly. Some are contemplating striking if they belong to a union. A few even think they should be getting raises. I have to wonder how many will care about that pay cut or raise when they can’t get a job, any job. At that point one doesn’t worry about buying the latest Iphone, they worry about where their next meal is going to come from.
As the unemployment problem continues to grow we are going to eventually have a large group of potential employees out there who’s sole motivation is to survive. Struggling companies on the verge of bankruptcy will be able to hire these workers for half the salary of disgruntled employees pissed off because they didn’t get a raise. This is how average payroll drops.
Actually payroll must drop or business will collapse. Let’s face it most Americans make way too much money for too little productivity. Take the auto industry for example. Unions have driven up pay scales to the point where US automakers can’t make a profit. Now the market is “fixing” that problem by driving those companies out of business. So all the unions have actually done is guarantee eventual job loss for their members. Well of course that depends on if the government allows the market to work. If not then the government will eventually guarantee the bankruptcy of the nation as they use taxpayer money to keep failed companies alive. Eventually the continual drain from good companies to support failed ones will manage to wreck the good companies also. All these bailouts the government is subsidizing are only going to guarantee the eventual collapse of the whole country either through default on our debt or hyperinflation of the money supply.
The bottom line is that nature is going to force a reckoning on us one way or another. One simply can’t go to the biggest party, get drunker than they ever have before and not expect to suffer a hangover afterward. Obama and Bernanke are trying any and everything to avoid the hangover. Unfortunately more alcohol at this point is only going to lead to the death of the patient. One can die from alcohol poisoning and empires can die from debt poisoning.
Just a quick note on the dollar. For the most part I think we are back in the boat where all anyone can see for the dollar is downside. As I browse the internet all I see are analysts predicting the demise of the dollar. Remember when everyone is thinking the same thing then no one is thinking.
I suspect we probably put in the cycle low for the dollar on Wednesday. We won’t know for sure until we get an official swing low. Instead of seeing the eminent demise of the dollar I see a possible basing pattern forming. If the current cycle holds above the June low then the dollar has the potential for a powerful move higher. Don’t forget the weekly cycle lasts on average 19 weeks and this was only week 5.
