Market Wrap

Week Ending 7/02/20

The Trend

This week I want to concentrate on the long term trend(s) of the market. It is easy to get caught up in the daily movements and to miss the forest from the trees.

Consequently, most of the charts in this week's report are weekly charts going back three years. By using the same time frame it will be easier to compare one market to the next.

Many markets have recently undergone significant corrections, all of which came after rallies out of the 2009 lows. Some of the rallies were more significant than others: they were stronger in the amount of the losses they retraced. This can be seen by using Fibonacci retracement levels.

General guidelines describe a 38.2% Fib retracement as a "normal" counter-trend rally.

A 50% retracement is obviously stronger, but it doesn't change the primary trend. It is a counter-trend move within the primary trend.

When the 61.8% level is breached, it becomes more likely that the primary trend may be changing. Confirmation by higher highs and higher lows, or lower highs & lower lows is needed.

The S&P chart below shows the index topping out in late 2007 and declining from 2008 until the March 2009 lows. This was the end of the bull market and the start of the bear market.

The rally out of the March 2009 low is a bear market counter-trend rally until proven otherwise. Recently, the market has broken below its Feb. low and is in the process of establishing a lower low. There will be one more rally out of this low before the next phase of the bear market unfolds.

This is true not only of our stock market, but almost every stock market in the world is in the same situation; and many commodities and currencies have similar patterns.

It appears that deflation is presently winning the battle versus inflation. This is reflected in falling interest rates and rising T-bond prices. Most other asset classes have fallen, except for gold, which is the only bull market existent.

"Things" all over the world are being repriced or revalued. The euro is the most recent example. There will be more to follow. Depending on how the central bankers of the world respond, hyperinflation could possibly evolve (devolve); and markets would respond accordingly.

This week's report is going to show many charts in the same time frame: weekly charts going back three years. A few charts will show a bit longer perspective for reasons that will be apparent.

The usual format or layout of the report will not be followed, as I want to provide one chart after the other for easier comparison to make a point:

It looks like deflation and a repricing of many markets is taking place per the same recurring chart patterns.

You will see how gold is the only market bucking the trend. I expect this to continue, although a fairly good correction back to the $1000 level is possible. This has to do with money flows and liquidity issues, which I will discuss in future reports.

First up is the S&P chart, which shows the market topping out in 2007 and falling into the March 2009 low. Stocks then rallied and retraced 62% of the decline. They meant resistance here and reversed direction.

In April the market started falling, breaking below its Feb. low. The primary trend remains down.

Until proven otherwise, the rally off the 2009 low is a bear market counter-trend rally.

China is supposedly leading the world. It reminds me of what was said about Japan 20 years ago. Their market has been going down ever since.

The chart below does not show a healthy stock market. A 38% retracement rally is very weak. Something isn't right.

The secondary reaction low from Feb. has been breached as well. This chart is actually more bearish than the S&P chart above. Just where is China leading us?

Two emotions move the markets: fear and greed. When fear is in the air, risk is shunned and safe havens are sought, hence the recent flight to safety into gold, T-bonds, the dollar and the yen.

Fear also equates with volatility. Investors are driven by emotions and the markets respond by moving violently in one direction and then the other. The VIX index measures volatility.

Notice in May that volatility broke above resistance at 27.5 and the S&P (bottom of chart) started to increase its decline.

Above: Commodities, as measured by the CRB index, have had a weak rally out of the 2009 lows: retracing less than 38% of the decline. Until proven otherwise, this is a bear market counter-trend rally. Below: oil (USO) shows the same weak pattern.

Above: the U.S. dollar is in a bear market and the rally from the 2008 low is a bear market counter-trend rally until proven otherwise. Below: the euro is the mirror image of the dollar.

Above: gold rising to all-time highs since its 2008 lows. Below: gold's bull market since 2001 - the only secular bull market in town.

Above: a comparison of the Dow Industrials to gold - the contest isn't even close. Gold wins by a mile.

The charts above clearly show that the stock and commodity rallies out of their 2009 lows are bear market counter-trend moves - not new bull markets. The only bull market existent is gold.

Both stocks and commodities are presently oversold, and a snap-back rally could happen at any time. I expect one more counter-trend rally of significance to occur before the next phase of the bear market kicks in. The next few years of market action are not what most expect, although there are other analysts calling for the same.

The bottom line is that the primary trend for stocks and commodities is down, which makes investing or speculating in them on the long side risky business. Nonetheless, this does not preclude successful trades.

However, gold is in a bull market, which makes buying into weakness that holds support; and selling into strength to book profits, the best risk to reward trade the market is offering.

Good Luck. Good Trading. Good Health. And that's a Wrap.

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