The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, May 19th, 2009.

Debt is your worst enemy right now - make no mistake about it. And the reasons for this understanding are plain for all to see, with the most profound being the next round of deleveraging might be just around the corner, meaning worsening asset price deflation would make it impossible for most to ever escape the debt death trap outside of a jubilee, which is the last thing our blood sucking financial institutions want. No, no, no. They are all for usury and kicking the little guy when he's down however, with the most blatant example of this being credit card issuers (banks) jacking interest rates to exorbitant levels not just for those who miss a payment, but for everybody with an outstanding balance. What's worse of course is this is being done in the face of a collapsing economy that greedy bankers are all too aware of, and despite evidence such policy could tip the economy over on its head.

And while it may be true this is now being recognized by officials for the dangerous threat to the economy it could be, and undoubtedly is to the sane, one does need to ask the question, is it too late anyway, even if they cap the loan sharks down at the bank? You see, in an effort to avoid collapse and a de facto jubilee in the process, meaning one need not pay back debts to defunct banks within the context of a shattered monetary system, the industry called on their politician buddies to bail them out last year, which they did led by Henry Paulson. The question now however is at what real cost, and is the fix sustainable with the consumer buckling and unable to pay lower interest, never mind more? Or in other words, does it matter if the banks were made whole in effect, but the consumer is squeezed even more within a deteriorating economy?

Even a weak-minded first year economics student should be able to figure this out, right? So, it makes you wonder why the bank's MBA's who go to school all those years can't put two and two together in this regard. If you asked a loan shark with no formal education I'm sure he could tell you however. He'd say 'it's the greed and not wanting to loose their jobs.' And he would be right. This is of course why a great deal of bad business decisions are made these days, self interest and lack of respect for the public on the part of bankers and politicians alike, working together to preserve their respective empires. As with Rome however, and all the others which have come and gone, the American Empire will also fall, and all of its elite, which will ultimately be marked by an end to the confidence game that is US Dollar ($) domination, and the debt pyramid that has been built on a now rotting corpse of a system filled with corruption and decay.

To be clear then, what we are saying here is the way the system was bailed out last year did not bail out the system at all, with bailouts never working ultimately anyway, but instead just the banks were bailed out to prevent a de facto jubilee, and loss of business by the present day powers that be - politicians included. Furthermore, because of such an improper response to the situation in putting the yoke of burden on an already ravaged and unwitting public, there is a very good chance such narrow-minded and improper policy will end up backfiring on the powers that be sooner than later, which brings us to the realization that if this is likely the case, then an outcome in US equity markets similar to that experienced during the 1929 to 1932 episode becomes more probable. (See the first figure attached here.)

What's more, this means that the sluggish performance of money supply measures is forecasting trouble for the markets and economy, and that the bounces in coincident / lagging indicators should soon follow stocks lower. All we need to see are leading indicators, like the Canadian Dollar (C$), break supports such as the 200-day moving average, and this would signal a possible test of the lows is on. Here, the only way such a test could be avoided is if investor sentiment turned decided bearish on stocks and monetary authorities began to print money with abandon that actually gets to the consumer. If this fiat currency monetary system is to survive the banks can't continue to hoard all the money. The consumer needs a bailout too even though this goes against the grain of bankers and business types who apparently think such a privilege is reserved just for them.

So, it will be interesting to watch how things unfold in coming days now that a new monthly options cycle has begun, meaning stocks have lost this support mechanism for the next few weeks in an extended (5-week) cycle. I see that a favorable election result in India has sparked quite a rally in the Sensex, which in looking at things the other way, will also not hold things back from an options / sentiment related perspective. This is ultimately negative from another perspective in my opinion however, the perspective that strength early in the monthly cycle would prevent a recovery in collapsing US index open interest put / call ratios, with a post expiry update attached here for your review. Here, if stocks go to new highs some time over the next week or so, prior to month's end, then all of the requirements for the cyclical countertrend rally will have been met with an a - b - c sequence complete, opening the door for the larger secular forces to re-exert their influence on the longer-term trend. (i.e. think reaccelerating deleveraging brought about by a shift in betting practices on the part of speculators that causes equity prices to collapse once again.)

Not surprisingly, this is the message many of the long dated charts we follow in the Chart Room are giving us right now. With respect to the S&P 500 (SPX), they are saying after one more push towards the large round number at 1,000, they would be in a vulnerable technical position once again, if not before. In terms of the daily chart pictured below, all we would need to see is an RSI test failure, and subsequent plunge back to the lows such an outcome would involve. Here, it's important you understand that if the SPX were to take out last weeks lows (880ish) decisively, such a development would likely not entail a move down to 850 in further correcting the move off the bottom since March, but something potentially far worse, such as a resumption of the 1929 to 1932 episode that saw the Dow plunge 90% before the larger degree crash was complete. (See Figure 1)

Figure 1

Is this impossible today with all the financial engineering to prevent such an outcome, and Bernanke, whose stated objective is to overt this result, at the helm? You bet it is. In fact the narrow policy measures designed to save the banks at the expense of the public discussed above almost guarantees such an outcome in my opinion. The consumer is two thirds of the economy, and throwing him to the wolves as the powers that be have done is an act of lunacy. There alone, how can an economy survive with a bunch of lunatics in charge? What's more, the lunacy does not stop there, but is pervasive within our society, and can be quantifiably measured by the worsening crash signature in the weekly SPX plot below, where the desire to accumulated expensive stocks by fools has never been greater than at present, and the ability to sustain the trend never more in question with the divergence set against On Balance Volume (OBV) never greater. (See Figure 2)

Figure 2

As you can see both above and below on the monthly plot however, there is more potential room to run in this corrective rally, with the present options / sentiment related timing window a perfect opportunity for such an occurrence, so either way, don't be surprised if stocks remain buoyant a bit longer here. In terms of the moving averages and Fibonacci metrics on the monthly, now that the 233 exponential moving average (EMA) has been bettered to the upside and tested, a move all the way up to 1,000 is now possible. Such a move is not likely in my opinion now with this sudden shift in sentiment, however anything is possible over the next two weeks with options expiry so far away, where I am keeping an open mind to all the possibilities. Naturally, if the put / call ratio profile is predominantly unchanged between now and month's end my opinion as to a positive outcome at options expiry would be quite different of course, which is what we will keep our eye(s) on in continuing to weigh probabilities. (See Figure 3)

Figure 3

And a look at the monthly Dow yields a similar picture, with a worsening crash signature also apparent. The big difference here however is that unlike the SPX, the 200-month moving average MA is already being tested on the Dow, making the probability of a lasting penetration to the upside unlikely given the sentiment backdrop. But hey, what do I know? As soon as one starts thinking such thoughts a whole bunch of new fools show up to prove you wrong, so again, I would caution you from both sentiment and strategy related perspectives, don't be surprised at any outcome in coming weeks, until month's end is passed, along with the potential for a hedge fund sponsored month end 'jam job'. (i.e. window dressing.) This means that anybody putting on short positions here might have to live through a few weeks worth of angst, but in my opinion, by feathering into position throughout this window, it will be worth it in the end as long as a bunch of bears don't show up between now and then, driving put / call ratios back up again. (See Figure 4)

Figure 4

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Good investing all.