So, one best face the truth and prepare today for the inevitable, a future characterized by a return to a good work ethic, honest money, and a hard earned respect for your fellow man. Of course the present day bourgeois bureaucracy will attempt to maintain their paper empires for as long as possible, plying the mob with bread and circuses. As with all such past instances however, no matter how big the scandal (with those involved thinking themselves untouchable), the perpetrators will go too far, with revolt and change the outcome. And while it could be said that in the end America’s demise was a result of rot from within, it’s important to realize that with reverse globalization the pivot this time around, marked by foreigners increasingly less willing to accept worthless US currency in exchange for goods and resources anymore, it’s likely the painful process of economic / political decentralization will originate from outside, with extremities collapsing back into the center.

Here, despite being rich in natural resources we all need; recently revitalized emerging markets are imploding from collapsing demand, which is a condition that will remain as long as Western economies remain depressed. And Western economies can be expected to remain depressed as long as the credit cycle contraction and deleveraging process continue to depress demand for goods and services, which in turn brings us back to why demand for resources and manufactured goods from emerging markets has collapsed. Of course the shocker for most people will come when in spite of economic malaise the low interest rates America needs to perpetuate the illusion will also be a thing of the past, where emerging markets (most notably China) will be unable to continue investing in Treasuries, which will in turn sever the ties necessary to maintain the Western banking model. It’s the deficits you see. The US is insolvent, and at some point the markets will acknowledge this via a collapse in demand for its paper.

As you can see then, the credit and commerce based loops that keeps the globalization model together are failing, where unless bankers can get aging and already fully exploited Western populations to take on more debt, the party is over. The only question at this point is how fast the decentralization process will take place. Will it come quick, with a rapid deleveraging of the system unraveling the very fabric of modern societal living overnight, or will the decay be slow, interrupted by human intervention in the form of wars, burgeoning bureaucracies, and any other excuse the banking community and politicos can come up with to print more currency. Perhaps now you see why these types feel justified in war, because allowing process to take a more natural course would guarantee an economic Depression, the likes of which not witnessed in multi-generations. This is of course why the Fed has become banker to the world.

In terms of measuring pace in this regard then, it appears appropriate to continue turning to the empirical world to provide us with clues and confirmation in our beliefs, as has been the case these past weeks in rigorous fashion. Here, the understanding is that as long as equity markets remain under pressure, the credit bubble will continue to deflate, and the unwinding of the globalization model will continue to accelerate. Of course a great number of market watchers have been out of late calling a bottom in the stock market, right from just about every little guy you care to mention right to the likes of Richard Russell. And even the great Bob Hoye sees the probability of an interim bottom here based on his panic cycle count, a bottom he sees possibly lasting into the first quarter of next year. And hey, in many respects the markets are oversold and select internals have indeed made some kind of a bottom.

Of course with the present sequence being of Grand Super-Cycle Degree minimally, meaning the cycle scale of what is happening right now, with the generational turn in the credit cycle at center, is a big enough consideration not to take anything for granted in my opinion. This is because in the end, even those who have been correct in identifying such turn points in the past are proven wrong in the end, consumed by the out of control monster a hundred years of unfretted credit expansion will create. You see perceptions are literally ‘blown away’ as a result of all the ballooning experiments in asset markets, where even if one where capable of maintaining an appropriate view of things, the elastic was pulled back so far due to scale the reaction going the other way is both incomprehensible and too painful to contemplate for the vast majority of market participants. This sentiment is expressed well in tech stocks right now, up some six-days in a row and poised for more pain at any time. (See Figure 1)

And as you can see above it’s not just my imagination at work when raising caution about all the ‘bottom calling’ at present, with technicals on the weekly Nasdaq Composite Index (Comp) featured below clearly showing the possibility of lower lows arriving at any time. So, while it’s true the bounce in stocks could run further, possibly extending into April of next year if both the 1929 and 1938 patterns were to repeat, again, with so many market participants knowing about this now, and put / call ratios still low, one does need wonder just how it will be before tech stock investors are chased out their speculative long positions by continued deleveraging. (i.e. see Money Flow Indictor [MFI] above.) What’s more, and unfortunately for the bulls, things don’t improve when we move on to the monthly plot either. (See Figure 2)

By the way, if you are wondering why the damn dollar ($) keeps rising this is your answer, where it’s the equity market and deleveraging trends that are driving safe harbor and losing bet related derivatives buying. You see the more US stocks go down, increased forced redemptions from abroad causes foreign fund managers to buy $’s to meet redemption requests, which creates temporary artificial demand. So, don’t be surprised if the $ pushes to a new high soon, possibly right after the election associated with some sort of a surprise considering Obama and the democrats are viewed as ‘shoe-ins’. And again, although my mind is telling me after a bottom in tech stocks associated with Figure 1 is in place a bounce in the larger equity complex should take place into early next year if history is a good guide, one must wonder just how robust such a bounce will be given the pictures above and below, both being monthly Comp plots. (See Figure 3)

The first thing one should notice that is annotated on both of the monthly plots above is the presence of the same ‘crash signature’ in the Accumulation / Distribution (A/D) and On-Balance Volume (OBV) Indicator divergence discussed with respect to the Dow last week, which is even more pronounced in tech stocks given crazed speculators attempting to pick a bottom here continue searching for maximum leverage found in the ‘high flyers’ on the Nasdaq. This can of course only be interpreted one way, that being bearish for the larger equity complex until such sentiment is purged from the trade. So you see, this is why it’s so difficult joining the crowd in their bullish aspirations right now, especially with the Comp within a hairs breath of vexing a ‘channel break test’, as can be seen in Figure 2. And as you will remember from previous discussions on the subject, where again, relative strength in tech stocks over the blue chips during periods of contraction in the economy must be considered a ‘contrarian indicator’, with the Comp / Dow Ratio breaking down now as well, one would be foolish being ‘bullish on stocks’ until this condition has worked its way through. (See Figure 4)

And while I could always be wrong about such concerns right now considering how much monetary largesse is being thrown at the situation (the larger credit cycle bust), this and historical patterning (seen above), not the least of which includes seasonal considerations, however until the CBOE Volatility Index (VIX) closes back below 45, anything is possible, don’t kid yourself. Of course this situation could be resolved here in November with an upset in today’s presidential election, where all that needs to happen is for the republicans to regain a foothold in the house to qualify as a ‘surprise’. Or perhaps it’s a landslide that triggers new selling after a little ‘victory dance’, who knows? One thing I do know however, the negative technicals apparent in the Comp above need correcting, and the VIX continues to telegraph this process could commence anytime, even if it’s only a taste into a November low as with 1929 patterning. (See Figure 5)

The patterning associated with precious metals shares is beginning to look more constructive, which is a big plus with regard to the possibility some sort of a bottom in the larger equity complex is upon us, or could be very soon. A quick look at the monthly Philadelphia Gold And Silver Index (XAU) featured below demonstrates this possibility with enough of the important indictors displayed approaching extreme targets. Such is the nature of equity markets in fiat currency systems, where wild swings are the ‘modus operandi’. (See Figure 6)

In terms of ratio related studies, it should be pointed out that precious metals remain in a vulnerable position against the broad measures of stocks, but only marginally so on an intermediate-term basis. This means that considering precious metals should lead the larger sequences, what we should expect is more down soon, followed by an intermediate-term corrective bounce higher in all forms of equities into the first quarter of next year, only to be followed by lower lows afterwards. Lest we forget the Martin Armstrong Pi Cycle is schedule to turn down again at the onset of the second quarter in 2009, right on cue to match a bounce in stocks originating here in November into April, which again, is the 1929 patterning. (See Figure 7)

Exactly what technical evidence am I basing the above suppositions on? Well, if classical technical analysis has any value, then the first thing that should happen in Figure 7 is RSI will touch the channel bottom, and then reverse higher. Then, what should happen is some of the monetary largesse that has been created to bailout the system will find it’s way back into equities once credit conditions are steadied temporarily, which would cause gold to outperform for a period in discounting the possibility of pricing strength overtaking the macro once again. Here, most equity / commodity prices should rise as a result of such a turn, precious metals shares leading the way with gold and silver. (See Figure 8)

Supporting the hypothesis this remains the most likely path for the equity complex moving forward we have the next two ratios, with the first being the Dow against the Nikki, and then against Canadian stocks, as measured by the Toronto Stock Exchange (TSE). Here, in both instances it should be noted money tends to gravitate to the perceived safety of the Dow during troubled times, which is why it has been outperforming of late. In the first case then, what we have is double top resistance to deal with, where if it’s going to happen, it should take several months for conditions to become oversold enough for any follow-through to new highs. So again, the view is that although stocks may falter into mid-November, the larger move going forward should be higher into early 2009, only to be followed by new lows by fall. (See Figure 9)

And what of commodity related stocks then, as best measured by Canadian indexes without a doubt. Wouldn’t you know it, it’s exactly the same story line, one of more shorter-term weakness possible first as Fibonacci resistance is vexed, only to be followed by a test of the recent downtrend line breakout, which although not labeled as such, could be considered a ‘triangle breakout’. To go back down and test such a breakout is standard operating procedure as far as technical analysis is concerned you see, so one must consider such a possibility seriously, if not probable based on historical precedent. (See Figure 10)

Although I would like to continue along these lines further this morning, unfortunately time does not allow. As well, in attempting not to beat a dead horse further, it should be obvious to all what possibly lies ahead if the above charts possess predictive power. Here, to reiterate, we are expecting a possible rout in stocks developing after today’s election that extends into mid-month, followed by an intermediate-term rally across the equity complex possibly lasting all the way into April of next year.

After that, it should become increasingly obvious to all ‘small is better’ in economies and currencies as a result of a new panic cycle emerging next year.

So goes the story, based on the charts above.

See you Thursday.

Captain Hook

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