Stock and Commodity Markets Discounting Deflationary Depression Second Wave

By: Steve_Betts

Yesterday we saw that existing home sales fell 27.2% in July, more than twice the expected drop, and today we see that existing home sales fell 12% in July when the expectation was for no change. Today’s drop was the worst on record. This is the type of behavior you would expect to see during a depression and that is precisely where the economy is headed. The talking heads on TV are in denial but you can hear the doubt creeping into their conversations.

In Europe it now appears that the debt crisis was not resolved by the ECB’s injection of US $1 trillion into the bond market, only postponed. Ireland had its rating lowered today and people are now beginning to realize that Greece will have to default at some point in time. I read a report last week that claims unemployment has reached 75% in some areas of Greece!

According to the experts the market is now “beginning to discount a double-dip recession”, but I have maintained that there never was a recovery in the first place. What the market is now discounting is the second wave down in a deflationary depression. This pressure is show-

ing up in a number of places including the price of oil as it started to break down in the middle of the peak summer driving season. But nowhere is the pressure more pronounced than in the stock market at this point in time.

Yesterday we saw the Dow give up another 133 points as it closed out the session at 10,039 as the selling pressure continues unabated. I have

been watching the Index closely for months and it has now formed a small head-and-shoulders top formation (arrows). As you can see the neckline was violated last week and the Index hasn’t stopped to look back. This is part of a general decline that started with the April 26th high and has been building momentum ever since.  As you can see the

Advance/Decline Line has also completed a head-and-shoulders top, its neckline has been violated, and that is a recent bearish development. Also, in every major index we can see that RSI and MACD have turned down and yet none of them are oversold.
Since the April 26th top the market has been experiencing increased internal stress and one such sign is the number of 90% days, twenty-three all together with thirteen 90% down days and ten 90% up days. That’s something that has never happened before. Aside from the plethora of 90% days, we are seeing a large number of distribution days, five for the Dow during the last two weeks and six for the S & P. Another thing that is on the increase is the number of new lows, hitting 170 yesterday, and will jump much higher if the selling pressure continues to increase. Finally, I’d like to point out that the Point & Figure chart turned bearish with yesterday’s decline and now sports a price target of 9,750. Notice that it too has formed a head-and-shoulders top and the quantity of such tops is sending an ominous message that no one seems to notice.

In conclusion we see the table being set for a crash, this is in spite of the fact that almost no one is calling for a crash, and no one is expecting a crash. The Dow has fallen 7% is two weeks and yet investors remain complacent, at least that’s what the VIX tells me. The

VIX measures fear in the market place and it continues to struggle to break out above the neckline in its upside down head-and-shoulders formation (arrows). Right now the Dow is down another 40 points at 1:10 pm EST and yet the attitude is that it’s a walk in the park. “Lots of cash on the sidelines” so there’s nothing to worry about! No one seems to notice that big money went into bonds and continues to flow into gold and the Swiss Franc even though the US dollar has been rising of late. These are safe haven investments and if there’s nothing to worry about, you have to wonder why they’re on the rise. When the sheep finally come out from under the ether, it will be a case of too little and way too late. For those of you with the means you should be long gold and short the Dow. This combination has produced a 52% return in our portfolio, in just three months, and that emphasizes the point I have been making for longer than I care to remember.

[You can contact us at our new e-mails, info@stockmarketbarometer.net (general inquiries regarding services), team@stockmarketbarometer.net (administrative issues) or analyst@stockmarketbarometer.net (any market related observations).] By Steve Betts

E-mail:  analyst@stockmarketbarometer.net
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