Uncharted Water!

As most of you are now aware Standard & Poor’s downgraded U.S. Treasury debt rating from AAA to AA! The other two agencies Fitch and Moody’s did not follow through as yet. This has never happened in our 200+ year history of our country. How the markets react to this will be interesting to watch but no one really knows how the rest of the world is going to react to this. Mr. Buffet from his home in Omaha said that government debt was still AAA in his opinion and Standard & Poor’s have made a bad mistake. Japan also downgraded their debt several years ago and although it caused short-term gyrations in the market nothing really came of it. Keep in mind it is a long way from AA to junk bonds. However, if we keep going in the direction we’re going it won’t be long until they will be considered junk. I’ve enclosed a mock front-page cover of Time Magazine showing the 200 day moving average and how it has been broken.

The lunar cycles have been looking very good since February 21st but have not worked over the last two cycles. There are some Astro points coming in on Monday, August 8 and Tuesday, August 9. But the big one to look for is “combust” on August 17th. In addition there are six other aspects around the state that should cause for a major trend change at that point! It is too early to determine whether it will be a high or low at this time. Most of the price objectives have not been met on a short-term basis from the head and shoulders pattern we’ve been talking about for the past several weeks. Markets are grossly oversold and are looking for any positive news to rally around. We must watch this rally very closely because the markets are screaming that they want to go lower in the longer run of things. This market is beginning to look more and more like 2008. There are major cycles occurring in the third week of October of this year that make it one of the more important turning dates and October is typically the strongest month for bottom.

Treasury Bonds

Downgrading in treasury bonds will be interesting to say the least. Martin Armstrong the famous economist from Princeton econometrics says that the bonds have nowhere to go but up. His reasoning is that the world is awash in cash and they have to put it somewhere and since the Bond volume is ten to one to that of stocks, bonds will continue to rally. That certainly doesn’t make any sense to me because bad money chasing bad money is still bad money. Sunday night on August 7th treasury bonds are down about one half after the downgrade. The S&P is down about 30 points i.e. equivalent to 200 points. Where will the flight to quality be next? Must be in gold as it is more than $25 higher Sunday night.

Foreign Currencies

The US Dollar is still trying to hold the 73 level. If there was ever a reason for it to fail it has it now due to the fact of our downgraded treasury debt. Remember if we PAY our debt back with deflated dollars it is still being repaid. It is only the holders of our debt that are damaged. The $64 question here is how China is going to react to the massive amounts of debt they are holding. One thing to me seems obvious, and that is that they will not panic. They have already been planning for this or will plan for it in the future. I do not think this will cause a surprise in the market. But believing the old Chinese adage “may we live in interesting times” is certainly present now. By the way that is a Chinese curse in case you didn’t know.

Precious Metals

Gold appears to have a target of $1700 per ounce. Its step-sister silver is still lagging the market badly and cannot make higher highs on Friday and Sunday night trading. Open interest and volume is not telling us that we are looking at a new swing high in silver for some time. Copper sold off from the 786 level following stocks down last week. Copper held up relatively well during the first few weeks of the decline but the selling of stocks overwhelmed the copper market and down it went. Copper is very oversold but still looks like it has a long way to go to the downside. What’s interesting about the gold and silver market is the fact that the XAU (gold/silver index) is extremely bearish and has come off the 786 retracement with a vengeance. This is a bearish pattern and certainly looks like it has far to go to the downside, however at this time it is very oversold. We will be watching for a rally to get short this index should one develop.

Crude Oil

Once the crude oil market broke the $94 per barrel level it collapsed. Price objectives in the low 70s can easily be seen from the charts. This is a deflationary scenario for the economy. What is amazing is the lack of correlation between crude oil i.e. black gold and the yellow metal, as they usually have a strong correlation due to inflation. This is another indication that we might be looking at deflation as opposed to inflation.

Trade of the week

Given the uncertainty of what’s going to happen this week it is best to wait to see what unfolds the first few days. We are currently long the SDS double short S&P ETF, have a put on the butterfly pattern in IBM for October, and are short Ryder Systems because of the three drive pattern of the transportation index. These are showing profit so I would suggest holding on because they look like they could turn even more profit down the road especially into October.

Technical Corner

This week I featured a chart of the Kondratieff Wave Structure. This explains economic theory over a period of 60 year cycles. As you can see it has been relatively accurate through 2000. Since 2000 our start marker has gone nowhere. We are basically at the same price we were in January of 2000 as we are now. That is zero return. That is not a good sign of economic activity. My personal opinion is that we are getting ready for another leg down in a stock market that will be as bad if not worse than 2008. The Federal Reserve put $2 trillion to stimulate the economy and nothing happened aside from them helping the banks. Unemployment is still very bad and shows no sign of getting any better. The recent volatility in the stock market is also reminiscent of what happened in October of 2008 shortly after the bankruptcy of Lehman Brothers and the fall of Bear Stearns. Remember the market did not bottom until five months later in March of 2009. The banking index and financial index had horrible looking charts and it’s hard to believe that we can have a bull market with charts looking this bad.

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