The following is a commentary that originally appeared at Treasure Chests for the benefit of subscribers on Wednesday, March 24th, 2009.
In the spirit of previous undertakings similarly focused on measuring the general sentiment of investors today, and in borrowing the title of a timely piece we penned last fall, we revisit the theme investors remain reticent about 'Giving Up The Ghost' on being bullish about stocks these days. Therein, and largely, they have not changed in their gambling ways, however time has temporarily eroded the bull's convictions, or at least their pocket books, such that betting practices have been altered, which is allowing for the present counter-trend rally in stocks. As you know, this sentiment change has recently been detected in a decided turn higher in most of the index related open interest put / call ratios we follow, which has proven to be the only reliable measure capable of predicting price altering mood swings.
Further to this, we also know that history has a tendency to repeat, if not exactly, at least in rhyming. So it should be of no surprise then, that investors are behaving in similar fashion today compared to the post crash pattern witnessed in the 1937 / 1938 Super-cycle sequence, which can see seen here, supporting the thesis we are currently enthralled in a cyclical correction higher in stocks. This of course means that although current strength in stocks might be substantial, because of a few nasty details like earnings erosion, structural unemployment, and demographics, the system continues to crash in the big picture. Again however, for the next few months, stocks will likely show surprising strength pictured similarly to the historical patterns pictured in the attached above.
And the irony of the situation is denial remains rampant, where in fact in spite of obvious system failure, the main activities bankers and politicians concern themselves with daily still focuses on how they will continue to line their pockets at the expense of the public. It appears they will not give up the ghost in this regard until there toys are taken away, which will be when foreigners actually stop supporting the debt pyramid, and interest rates spiral out of control in spite intensive intervention. In this respect, the day of reckoning is getting closer and closer, with more and more countries calling for increasingly radical measures to replace the dollar ($) as the world's reserve currency.
Once the US loses its ability to issue debt internationally via the $, global credit growth will slow further, and globalization trends will reverse. This will be an increasingly bad time in the larger economy, which will also see the world's stock markets continue to crumble when the proper sentiment allows. At present, stocks are coming off the matt technically however, having been halved (or worse) during the preceding 12 months, which should serve as a big wakeup call for all. As always in circumstances like these though, which will undoubtedly go down in history as the most profound mass mania ever, and the stock market the biggest Ponzi scheme, speculation remains imbedded in behavior until complete collapse extinguishes its last vestiges, which sponsors the bounce. (See Figure 1)
Figure 1
Using the S&P 500 (SPX) as a central measure in this respect, and picturing what can be easily ranked as a Super-cycle Degree move from 1980 to present (a 14-times gain and retrace), we can see in the above that Fibonacci retracement metrics are defining the larger moves on the giveback now (against the primary trend, which is down), suggestive any further strength past this month's highs would telegraph a move to test the large round number at 1,000. And if history is a good guide (see above), this is exactly what should happen, with the present counter-trend move in stocks potentially lasting until November in what would also be a fully traced out seasonal inversion. Once this move has run its course however, the asset deflation / deleveaging trend should reassert itself, with stocks falling through this month's lows. (See Figure 2)
Figure 2
As you can see above, and in switching to the Dow now in targeting ultimate lows, you will notice we have labeled a 'crash zone' in this respect, which should correspond to the Dow / Gold Ratio pushing towards a target of unity, if not lower considering the public has not even begun to buy any real money yet. Nope - they still prefer to speculate in stocks, and the riskier the better is the message being telegraphed by the outperformance tech stocks, as can be seen below in a relatively buoyant Nasdaq right into the bowels of the lows earlier this month. And this strength should continue until the bottom of the indicted channel is tested some time later this year. (See Figure 3)
Figure 3
Make no mistake about it however, and evidenced in the public's unprecedented love for stocks, and all this represents, the deleveraging will continue, and no financial entities past gold and silver as the ultimate alternative currencies will escape the carnage. Not even the mighty JP Morgan (JPM:NYSE) will escape the guillotine, the most loved financial stock and touted symbol of the US banking elite. Like the US, the Fed, and such, JPM is presently viewed as untouchable by the establishment, allowed special privileges and the recipient of unprecedented support. This sentiment is reflected in the rather pronounced 'crash signature' in the trade seen below, where the desire to accumulate resides at what could be considered irrational levels considering the fundamental backdrop. (See Figure 4)
Figure 4
And while JPM is not the only stock in this situation (ex. IBM), again it is the poster child for the US, the Fed, and the global banking model (and larger credit cycle), where once this bubble is popped, and it will be, as Bill Murphy says, 'it's all over', which will be borne out in the $ (eventually tanking), financial assets (tanking), and precious metals (soaring). It will be gold and silver to the moon time as the public finally gives up the ghost in hoping the establishment will continue to provide for their needs. Shortages in just about everything real is anticipated, however it should be noted that this will not save commodity related stocks, so be careful. (See Figure 5)
Figure 5
While Canadian resource stocks, as represented by the TSX Composite Index (TSE), continue to outperform against safe haven buying of the Dow, which can be seen in the ratio above, when the public finally gives up the ghost on stocks in general, correspondingly they will fully embrace the likelihood of deflation, which will trigger a temporary collapse in commodity prices, led by their paper representations. It should be noted that gold and silver would escape this plight in a perfect world however as a flight to the true safety of real money finally ensues. This will also negatively affect precious metals shares for an undeterminable length of time, and in the context of an exchange mechanism if bourses are closed as a result of what is anticipated to be surprising turmoil for the masses.
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Good investing all.
