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Federal folly; Germany tries to defy gravity; Japan gets ready to rock; Gold breaks out to the upside, target now is 558; Stock market crash watch and fascinating commentary by our good friend Garrett Jones.
Hurricane Katrina has now struck and the federal government has embarked on an unprecedented spending spree courtesy of the liberal press. Our hearts and best wishes go out to the poor souls caught in this natural disaster, as Katrina was one of those rare occurrences that happen about every twenty years in some coastal region of the United States. Having been a resident of Florida when hurricane Andrew did its worst (Andrew was a Cat 5 Hurricane), the destruction is unimaginable. However, Florida residents prepared themselves and their property, which allowed Florida to rebuild in a rapid and cost efficient manner. Louisiana did not. Many years of state and local government misappropriation and neglect left this region woefully unprepared for this "natural disaster." Presidents do not create NATURAL DISASTERS; only Mother Nature does these things. Then the liberal press and Democrats who vilify the Bush administration set about blaming the president for the results of this rare event. The race card is being played. Katrina is colorblind, as is Hurricane Rita. The result has been a federal spending spree of obscene proportions. Here is a little math to put this in perspective. Approximately 500,000 people were left homeless, divide this number by the 62 billion initially appropriated to deal with this tragedy and you get a number of $62,500 per family. Washington is talking of upping this figure to 200 billion dollars, taking the total to almost $200,000 per family. The government needs to help these people but this is an outrageous number. Contrast this to Hurricane Rita, which is about to hit the Houston/Port Arthur area of Texas. The state and municipal governments have successfully evacuated the areas about to be hit and have disaster plans in place. Believe me these were not put together in the last two weeks. They were properly done years ago and ready to go as we are seeing. The damage done in Texas will be far. far less for this storm of the same proportions. Undoubtedly, the government will send in the troops to deal with this second disaster, and the bill may come to another 50 to 100 billion, no doubt approved of by George Bush, he who has never met a spending bill he did not like if it would boost his popularity, sending up a howl for new taxes by the liberal press and democrats nationwide, on our future generations and us. And of course our Washington representatives say there's no pork to be cut from existing spending bills, LOL. They need new taxes. Anybody remotely familiar with the highway and energy bills knows there is over 500 billion dollars of pork barrel earmarks in each bill. The liberals in the US are calling for tax increases and see these catastrophes as an excuse to rob the American people of more of their hard earned dollars. Where in the constitution is the federal government authorized to be the insurer of last resort?
The German elections have come and gone and the result is the status quo. The Germans, in a last minute show of cowardice, have voted to do nothing to reform their woeful economy and welfare state. The conservative party received a paltry 35% of the vote, while the ruling liberal party received 34.2% of the vote, therefore insuring a deadlocked government and virtual gridlock. These people believe they can avoid competing with the rest of the world by pretending it does not exist. Globalization is a fact of life; either sink or swim. They have chosen to sink some more and be eaten up by the rest of the world.
The Japanese, in a show of confidence, voted for change in their economy. Prime Minister Koizumi was reelected in a landslide, handing him a mandate to reform the postal savings system, and continue the reforms necessary to restart their moribund economy. Koizumi was blocked by old-line politicians earlier this year from instituting economic reforms so he dissolved the government and called for elections. A bold move that has paid off, as the people stepped up to the plate and gave him an overwhelming majority to implement economic reforms necessary for economic growth. The Japanese understand that you either compete or be eaten.
The gold market and gold stocks have made an upside breakout, with the metal reaching new 17 year highs of over 475, and breaking out of a quarterly trend channel that goes back over 20 years. Daily Point and figure charts target $558 as an initial target, and the trend channel breakout targets over 700 dollars. The breakout was also seen in gold priced in euros as well. This is of course what should happen when central bankers around the world rob their citizens by inflating the money supply via the printing press. Buy the first pullback.
And now some thought provoking stock market analysis written by Garrett Jones on Friday September 16th.
September 16, 2005
WILL HISTORY REPEAT ITSELF – THIS TIME ... or is the answer in the stars?
Yesterday I was speaking with Peter Eliades of Stockmarket Cycles (www.stockmarketcycles.com) about the market and we got to talking about my analog with 1987. That got us to revisit some research done by Steve Peutz (pronounced Pits) that I have been aware of for quite some time. It deals with a "setup" that is 1) coming up soon, 2) occurred with eight of the major crashes in history and 3) goes along with my analog – so far. Those 8 crashes are the following: 1637 Tulip Mania; 1719 Mississippi Bubble; 1720 South Seas Bubble; 1929 US Stock Market Crash; 1977 Soybean Crash; 1980 Precious Metals Crash; 1987 US Stock Market Crash; and the 1990 Tokyo Market Crash. This is significant enough to get my attention.
Puetz attempted to discover if eclipses and market crashes were somehow related. He emphasized it was not his intent that full moons close to solar eclipses cause market crashes. However, it is his belief that a full moon in general and a lunar (eclipse) full moon close to solar eclipses, in particular, seem to be the triggering device that allows for the rapid transformation of investor psychology from manic greed to paranoia. He asks 'What are the odds that eight of the greatest market crashes in the world's history would accidentally fall within a time period of six days before to three days after a full moon that occurred within six weeks of a solar eclipse?' His answer is that for all eight crashes to accidentally fall within the required intervals would be .23 raised to the eighth power -- less than one chance in 127,000."
Puetz used eight previous crashes in various markets from the Holland Tulip Mania in 1637 through the Tokyo crash in 1990. He noted that market crashes tend to be lumped near the full moons that are also lunar eclipses. In fact, he states, the greatest number of crashes start after the first full moon after a solar eclipse when that full moon is also a lunar eclipse. Once the panic starts, Puetz notes, it generally lasts from two to four weeks. The tendency has been for the markets to peak a few days ahead of the full moon, move flat to slightly lower --waiting for the full moon to pass. Then on the day of the full moon or slightly after, the brunt of the crash hits the marketplace."
Here are some important points to remember: 1) Most market crashes occurred after a four to five week decline followed by a one to two week upward retracement. 2) Next came a lunar eclipse that was followed by a two to four week crash. The lunar eclipse was either in that time period or the cycle immediately before or afterward (within one cycle of the lunar eclipse). All lunar eclipses occur at a full moon. Not all of the crashes, however, coincided exactly with eclipses. 3) A lunar eclipse is a special type of full moon. It is a full moon that is exactly 180 degrees opposite to the sun in a perfect straight line with the earth in between. Other full moons can be close to a straight line but can be several degrees off.
The "actions" of humans have a strong correlation with full moons. The Foundation for the Study of Cycles has documented a significant correlation between the number of hospital emergencies, police arrests, child births, etc. with a full moon. The full moon has been linked to crime, suicide, mental illness, disasters, accidents, birthrates, fertility, and even werewolves, among other things. The simple point is that full moons seem to have an unmistakable effect on the actions of humans. During crash periods, they seem to assist in the process of changing investor psychology from manic greed to paranoia.
An example of a lunar eclipse triggering a stock market crash occurred in October of 1987 when a lunar eclipse on October 7th was followed by a 9 trading day collapse in U.S. stock prices that culminated in an all-out crash on October 19th of that year when the DJIA fell over 20% in a single day. This makes for a very interesting situation when you look at the comparison of the current 2005 chart with 1987. The current analog with 1987 is almost in lock step as 5 of the 6 turning dates have been to the exact day. Today many of the major indices rallied off their 50-day moving average. This could be the breaking of the analog and the beginning of another rally – or it could be a one-day fake out. Let's keep looking.
In 2005 there are two solar eclipses and two associated lunar eclipses: there was a solar eclipse on April 8th that was followed by a lunar eclipse on April 24th and in October there will be a solar eclipse on the 3rd followed by a lunar eclipse on the 17th.
There is, of course, no guarantee that the analog will continue to follow 1987. However, it is following well at the moment and a full moon is due on Sunday. As stated earlier, the crash can occur within one cycle of the lunar eclipse. So, it could happen now. Looking at the put/call ratio information (on p. 4), we are at an extreme. Normally, the purchase of a lot of puts vs. calls is bullish, however, the OEX put/call ratio is a 'smart money' indicator which means they usually are corrected – they are loaded with puts now. If you look at the second chart on page 4, it has projection lines in red and blue. The current projection indicates a decline through the end of this month. Therefore, there are a lot of things implying that a break in the market could occur. On the same chart, you can also see the solar and lunar eclipses in the circled arrows. The April eclipse declined from solar eclipse to lunar eclipse – it did not continue after the lunar eclipse i.e. no crash. If the immediate decline I am expecting does not materialize, then it has another shot in October. We'll just have to see how things unfold. Who knows, we may get two for one – or, maybe, neither. Nonetheless, it is information that should not be ignored.
These charts visibly show the phases of the moon for September and October.
The April eclipses were not associated with a stock market crash, but it is possible that the current period or October eclipses will be. Stock market seasonality elevates this probability. As is widely recognized, the stock market has a tendency to fall during "the fall" (autumn).
The following is a list of the worst single-day declines by percentage on the Dow Jones Industrials:
October 19, 1987 -22.6% : October 28, 1929 -12.8% : October 29, 1929 -11.7% : November 6, 1929 -9.9% : August 12, 1932 -8.4% : October 26, 1987 -8.0% : July 21, 1933 -7.84% : October 18, 1937 -7.75% : October 27, 1997 -7.16% : October 5, 1932 -7.15% : September 24, 1931 -7.07%
As can be seen in the table above, nine of the eleven largest one day percentage declines in the DJIA occurred in October or one month on either side of it. Will this pattern repeat? It just might, so you want to keep an eye on the 10,000 level in the DJIA. The question of whether lunar and solar cycles affect individual or mass psychology is a subject that has been debated for centuries. Stock traders have long had a saying, "Sell the full moon, buy the new," and it is remarkable how often new and full moons can mark a turn in the market within a day or two. It goes without saying that these potential 'windows of opportunity' are far more effective when they occur at times when there is a backdrop of economic crisis or weakness. Puetz pointed out that "In spite of general optimism about prospects for both the stock market and the economy, a large number of powerfully negative factors are growing with ever increasing intensity. The fact that these factors are being ignored does not mean their negative impact will be minimized in any way. Instead, it virtually guarantees shock when recognition finally hits. A list of these negative factors follows:
- Weakness in retail spending has persisted for over two months. If this weakness continues, it will surely precipitate an economic recession.
- Because production is high and sales are weak, business inventories have accumulated to dangerously high levels. To reduce inventories, business managers will soon have to make the decision to cut production and reduce employment.
- There are growing signs of weakening employment in the previously robust financial sectors of the economy. The next downturn is likely to be far reaching – affecting all sectors of the economy.
- A multitude of bubble markets exist in the US.
- Even though none of the many bubbles have burst, these bubbles are no longer providing the US economy a boost. This is because the interest payments to finance them are now exceeding the benefits from the asset inflation they create.
- Recognition of a looming economic recession has not yet hit the market place. When recognition finally does occur, it will cause panic selling.
- A tremendous liquidity squeeze, as measured by real M2 money supply growth, is strangling spending of all types. This squeeze is more severe than the one in the year 2000, and it's at least as powerful as the 1987 squeeze.
- Leverage of unprecedented proportions exists in all of the bubble markets.
- Short-term, the stock market is overbought.
- All Unified Market Theory components are in sync to the downside until the end of October.
There are numerous things to add to the above list, however, we are all aware of them – debt, deficits, terrorism, energy costs, war costs, Katrina/New Orleans costs, a looming war with Iran, etc.
Here is what the market looks like in the 'big picture'.
There is an obvious rising wedge pattern that has been developing since March of 2003. The market has been in a basically uninterrupted move since that time. It has ominous implications. Looking again at the put/call ratio chart, it is interesting to note that the 10-day moving average of the OEX put/call ratio soared to 1.67, the highest reading in a couple of years. In past years, comparable values were only seen at meaningful tops or with tops of long-term cycles. The implication is the market is 'ripe' for a fall ... if not a crash. So, the "setup" for a 1987 style crash is definitely in place.
There is a very good argument that it isn't wise to have a 'market scenario' – particularly in today's market with interference from the massive amount of hedge funds, specialty index traders, the notorious 'plunge protection team' and heaven only knows what else. The market is definitely NOT trading as it did in the 'good ole days'. Therefore, having a scenario, per se, might be meaningless. I use the scenario approach as a roadmap – as long as things are going along according to the map, then things are OK. Regardless, it is imperative to have a discipline in today's market – maybe more than at any other time in history. Just because the setup for a crash or 'brisk decline' is vividly there does not mean that it has to happen. So, while there is the great opportunity that such a situation provides, there is also the inherent risk of positioning oneself to take advantage of something that may not happen – or that may be postponed.
In closing, I would like to share some thoughts to see if I am the only one suffering from this dilemma. Let's assume that we just state some things with no political or any other type of bias and see how they 'feel' to us. Having two ground wars with a cost of $200 billion (and counting) dropped on a nation with no savings and historically high debt levels does not seem like a good thing to me. Adding the costs of Katrina/New Orleans to this picture, it would appear that we are looking at another $200 billion. Again, I fail to see the positive in this. Having the likelihood of engaging in another potentially much larger war (with Iran) also doesn't seem attractive. However, the stock market is the best economic indicator ever devised and it seems to think this is all OK (including every other negative than anyone can come up with). Ultimately, the economy always follows the stock market – so, somehow, the stock market knows. History shows that the stock market can change its mind quickly and seemingly without reason. So, we are left with what we started with: everything is setup for a reversal. The timing of this reversal has a high probability based on a number of historic factors currently occurring – specifically between today and the end of November.
It is important to remember that this is not the first time since 1987 that someone has pointed out that the market could fall – and been wrong. The only thing that can be said at this time is that this current time period may be the most likely time for a decline to occur in the past 18 years (since 1987). One could argue that 2000 was a more likely time and I would agree based on valuation in tech stocks, etc., but 2000 did not have the World Trade Center/Pentagon catastrophe; Terrorism; the Afghanistan and Iraq wars; Katrina/New Orleans and the other hurricanes; the debt level; the weakened US dollar, the potential for another war, etc. [By the way, I was on record in an interview with Dave Allman of Elliott Wave International on his Wall Street Uncut show (June 1999) that I saw a top to the bull market after two more rallies (point: I was expecting a top then, too)]. That was then, and this is now – we'll wait and see.
With all of the potential bearishness that I have mentioned, I noticed the following on my indicators as today moved into the close. The S&P weekly is on a buy signal; the S&P daily is on a buy; the S&P monthly has been and still is on a buy; the Dow Industrials are on a buy; the Dow Transports reversed to the upside and are on a buy; the Dow Jones Utilities are in a seemingly unending bull market; the NASDAQ Composite and NASDAQ 100 are about to go into buy signals on the daily charts; the Russell is on a buy; etc. What the heck is wrong with me? Why isn't this the time to mortgage the house and load up on stocks? Probably because everyone already has .........
Let's take one final look at a chart that I think is important. The chart is of the McClelland Oscillator and Summation Index. The Summation Index is in a "hook" pattern similar to the time period leading into March of this year. It has been falling, but recently got a quick turn back up. It did the same thing in February of this year leading into the March decline. The oscillator had a similar positioning, as well. The concern is that the' hook' can pull investors into the market and then turn almost immediately to the downside. In other words, today's action could very easily have been a "one day wonder" happening on options expiration. It wouldn't be the first time that a move on options expiration was a fake out.
It is also important to remember that if it isn't a 'one day wonder', then a legitimate rally may be in process. If this turns out to be the case, then we have to look to October as a very likely time for the rally to end. Mid October would be the most likely time frame, however, we need to be aware that we are very likely to be in a final 5th wave and that a top can be completed at any time. It appears we are in the late stages of a rally that began on April 20th.
Anyway, I hope I have provided you with something to think about over the weekend. Enjoy the full moon!
NOTE: THIS E-MAIL REPRESENTS THE VIEWS OF THE AUTHOR AND IS INTENDED FOR EDUCATIONAL PURPOSES ONLY. THERE IS RISK OF LOSS IN FUTURES TRADING. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.
In conclusion, federal spending is on a runaway course with Greenspan, Congress and the President printing money on unconscionable scale. Ditto for all the western industrialized nations of the world. No spending project is too big or small; they will fund them all, stealing your money thru inflation as seen by price of gold in relation to every fiat currency in the world. The world is afloat on a sea of liquidity courtesy of central bankers of the world. But liquidity can disappear in a heartbeat. The greatest of opportunities are directly ahead; calamity awaits those that fail to see which way the wind is blowing!!!! Have a great day....
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