The U.S. government has spent anywhere from US$3–US$9 trillion dollars so that 20 or so companies could report "blow out results." These results are the combination of transferring debt from them to you and flouting generally accepted accounting practices. Big money has made this all possible. You on the other hand have yet to see a new water plant, sewage line, school, road or electric plant built in your city. Remember Obama standing there just after he was elected promising all of those things? Money for infrastructure! Well you're going to have a long, long wait before any of that comes to pass. If I may paraphrase, hell will freeze over first. All of this is creating uncertainty in the markets and that's why we've seen so much volatility; eleven 90% down days and nine 90% up days since April 26th. Just look at the last eight sessions with four triple digit changes, two up and two down. If you don't like what you see, just go away and come back the next day and it all will have changed. That type of volatility is draining, like chemotherapy, and eventually it saps the life right out of the market and it collapses of its own weight. We are headed toward that end now.
Whenever you have conditions like we see today, it's best to leave the guesswork to everybody else and focus only on what you really know. That's why I kept the preceding chart as simple as possible. So here's what I know:
- The Dow topped at 14,164.53 on October 9, 2007.
- The Dow fell from the October 9th all-time high to 6,469.95 on March 10, 2009 giving back 57.7% of its bull market gains accumulated over 25 years.
- From the March 10th low the Dow rallied up to 11,258 on April 26, 2010 recovering 61.8% of the previously mentioned losses.
- From that April 26th high the Dow has carved out a series of three lower highs (small horizontal black lines) and three lower lows (small horizontal green lines).
- The upper band of the current trading range (descending blue line) has yet to be violated.
- Days with big losses have consistently heavier volume than days with big gains and that has been the case since the October 9, 2007 all-time high.
- The Dow did not confirm the all-time high in the Transports posted on May 26, 2008.
- The Dow did not confirm the April 30, 2010 closing high, and
- The Dow closed below its February lows but the Transports have not closed below their respective February low. This is yet another non-confirmation as you can see below:
Whenever you analyze the market, it's always good to state just what you know and leave any opinions and suppositions to the CNBC crowd. To date I can see that the Dow has not violated the upper band of the descending trend lines that originate with the April 26th closing high while the Transports could be on the verge of doing so today.
I also know that the Transports have a huge divergence with the Baltic Dry Index as you can see below. Compare it with the July decline in the BDI:
July rally in the Transports—it is supposedly common knowledge to say that China is responsible for the former, but that overlooks the fact that the BDI takes in goods shipped all over the world and that includes the United States!
If I want to expand what I know to the U.S. economy as a whole, I see that consumption continues to decline, housing continues to fall, and unemployment continues to be a real problem. I know that the U.S. is a consumption-based economy and that consumption was financed by sucking money from constantly rising housing prices. I also know that real wages are declining and savings is actually increasing in the U.S. Finally, I know the level of debt in the U.S. is truly staggering and continues to increase daily. The only solution on the table is to print money; it's a one size fits all panacea that will eventually kill the patient. Hence the U.S. dollar:
Think of the United States as a very large company and think of the U.S. dollar as its common stock. As you can see the share price has been declining since 2001.
We have seen two significant reactions over the last two years, and the second one has apparently ended. Below I have posted a daily chart of the dollar that shows the break down and change in trend:
This produces a very strange combination of a declining dollar and a deflating economy and must have Bernanke staring at the ceiling in his bedroom at 3 am. I saw him in his testimony yesterday and he tries to hedge his bets but in the end he is forced to take a stand. Recently the dollar broke down out of its rising trading range (black circle) and then broke down through strong support at 83.35. After a brief reaction back up to 83.39, the greenback fell hard today and is trading at 82.56 as I type (1 pm EST). Once strong support at the old historical high of 80.16 is violated it will be clear to all concerned that the end is near and the dollar will become a financial pariah. Without going into detail, that's why gold will not decline for more than a couple more weeks, and will not fall to US$850 as so many are predicting. Gold is experiencing a hiccup; no more and no less. So we have the primary in the Dow and dollar headed down, while the primary trend for gold is headed higher. That's what I know and that's real. Therefore, you neither short the dollar and Dow or you stay out, and you either own gold or you stay out. Finally I know that going against the trend will take you into bankruptcy, and that concludes our lesson for today.
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