IT’S A DEPRESSION!

This past weekend, visiting our local Chapters book store, we were struck with the large display up front of books telling us about the new depression, how we got there and how to survive it, books about the Great Depression and a host of others. Bemused by the entire display, we decided to purchase I.O.U.S.A. One Nation. Under Stress. In Debt (Addison Wiggin and Kate Incontrera, John Wiley & Sons, 2008). I.O.U.S.A. is also the name of a documentary film that was recently shown both in Canada and the USA and was nominated for the Grand Jury Prize at the 2008 Sundance Film Festival. The book comes from the folks who bring us The Daily Reckoning.

It should come as no surprise that there are those out there who believe we are headed into another Great Depression. It is also no surprise that there is an even larger body that are in denial of the collapse that has taken place and there are those still issuing rosy forecasts of a short painful downturn followed by a quick robust rebound.

Our original thoughts on this collapse were that it will be a long drawn out affair but not necessarily a full blown depression. That might still be the case but there are now growing signs that this could indeed turn into a depression irrespective of the attempts of the monetary and fiscal authorities to bail us out with massive spending plans and interest rates plunging to zero. There has been a number of write ups of late from what we would refer to as mainstream economists citing numbers that would support more the likelihood of a possible depression.

S&P 500 STRATEGY: STAND ASIDE (for definitions of terms see end of report)

• For the third consecutive week the S&P 500 closed lower.
• Despite the lower close the S&P 500 twice reversed back to the upside after being down
  earlier in the day. One could construe this as somewhat positive.
• Despite the (finally) inauguration of Barack Obama the market greeted the new President
  with a large raspberry.
• Despite testing the 800 area the zone has thus far held thus telling us this is an area of
  support.
• Resistance is at 840 and then 880.
• Above 880 the final major resistance is at 900/920.
• 920 defines what might be the neckline of a multi month head and shoulders pattern.
• A solid breakout over that level and if the H&S pattern is correct we could project up to
  1200. Remember the H&S pattern is a potential pattern.
• A breakdown under 800 would suggest we could fall to 660/700 and see new lows below
  the 741 November lows.
• Recall that in 2002 the market made a series of three lows – July 2002, October 2002 and
  March 2003. This time the time frame is tighter October, November and now January but there are some similarities. The crash low was October just as the July 2002 lows was the crash low even if the following low did go lower .
• Indicators have been rising since the July low which was also the high for the VIX
  indicator.
• The weekly MACD has crossed to the upside and the recent pullback has not as yet
  pulled it back under.
• The commercial COT for the S&P at 47% is mildly bearish.
• The S&P 500 is at critical support. A further failure here could potentially send us to new lows. A recovery of resistance at 840 and 880 would be very positive and above 900 we could be poised to breakout for our much anticipated first quarter or so rebound.

TSX INDICES

It was a bad week for the markets. The TSX Composite fell 3.3% and 10 of the 14 sub indices closed to the downside. The TSX Financial Index saw slight new lows and lost 9.8%. The big performer was the Golds with a big 10.4% jump and they have officially given us an intermediate buy signal. Let’s hope it can hold. Golds are leading the way as the only sector to be in.

Despite the pullback the TSX Composite managed to have the MACD indicator stay positive. We got a crossover a couple of weeks ago and it is holding. If we turn up again it will be quite positive.

The other positive sectors were Materials (no surprise given that the Golds are a major component), Information Technology (usually an early leader), and Consumer Staples (again no surprise as the food stuffs are the staples of a recession).

All other sectors were down and the Energy sector continues to have difficulties. They fell 12.2% a nasty drop. Still the patterns on the energy sector continue to look positive. [read more...]

S&P 500 STRATEGY: STAND ASIDE (for definitions of terms see end of report)

• The S&P 500 closed down on the week breaking support at 860. Next strong support can be seen at 815 although clearly we have support here at 840 as well.
• Keeping the index down has been the banks who are all making new lows. The banking system is effectively bankrupt and Bank of America (BAC) looking like it could be the next one to go.
• But the rest of the market continues to make higher lows so overall while the banks are
  very weak the rest of the market is exhibiting strength.
• Monday is a holiday (Martin Luther King Day) and Tuesday is the inauguration. The
  market will be focused elsewhere.
• And the focus elsewhere is positive as the feel good of the inauguration (finally marking
  the end of the Bush era thankfully) will overwhelm the huge negative of the sinking banking system. Expect the market to rise on Tuesday and probably continue this for upwards of a week or so.
• Key is that 840 support continues to hold but more importantly if we do break lower than
  815 is absolutely essential to hold.
• Breaking back above 900 will be positive and above 940 we are on our way higher.
• We also could be forming a huge head and shoulders bottom pattern. Targets on the possible pattern are our own targets of 1050/1100. Remember this is a potential pattern.
• The VIX indicator continues to act well coming down from its double top. It has targets down to close to 20.

TSX INDICES

The TSX Composite closed down 1.8 per cent on the week. We did, however, close above the opening levels so in some respects it felt like an up week. As to the sub indices it was a mixed week. 7 closed up including Consumer Discretionary, Consumer Staples, Information Technology, Gold, Healthcare, Materials and Telecommunications. And of course 7 closed down including Energy, Financials, Industrials, Real Estate, Income Trusts, Utilities, and Metals & Mining. The prime drivers taking the TSX down were the Financials and Energy. The TSX Venture Exchange also closed down on the week losing just over 4 per cent.

We remain positive going forward as we are seeing a number of positives forming on the technicals. Remember we believe this is a tradeable intermediate corrective rally only. We believe we have until into March or April before we should see some topping coming in. Targets for the TSX could be as high as the 4 year MA currently near 12,000. This would be a healthy 53 per cent rebound up from the low weekly close. Rebounds of this strength are not unusual in bear markets. Bear markets must capture as much money as possible so you want to suck as many as possible back in.

We are noting that the MACD indicator is turning up and on the verge of crossing over on a number of the sub indices as well as on the TSX Composite. This is probably while we have stand aside below because our signals are based on the weekly intermediate trend investors who are willing to take the chance should be buying in here for this rebound and responding to the daily short term trend. But always prudent to use stops. [read more...]

BONDS IN A BUBBLE?

We keep reading all these articles about how bonds are in a bubble and that any day now the
bubble will burst. Naturally when you see something going straight up, the contrarian in each one of us wants to say “Hey, that’s not right”. Many felt that way in the late 1990s when the NASDAQ was in its bubble with price earnings ratios over 100 and even as high as 200. So out came the short sellers, convinced that they would make a bundle when the bubble burst.

The trouble is that bubble markets can go higher and last longer then the early short sellers can stay solvent. Once they are forced to throw in the towel they contribute to the bubble with massive short covering.

S&P 500 STRATEGY: STAND ASIDE (for definitions of terms see end of report)

• Short term buy signals are in effect.
• The first week of the year is supposed to set the tone for the year. It was a down week. So
  was last year.
• Despite that cheery bit of news this still does not preclude a rebound of some substance in
  the first quarter or so.
• We are holding a tentative uptrend.
• A break of 875 could set up a test of the November 20 lows.
• Next support zone is 860/870 and if that zone holds then the pullback is bullish.
• A rebound back over 920 would be bullish.
• Near term targets still appear to be at least 1100.
• We expect the early part of the week to be somewhat negative but if we hold the above
  zone and take out 920 it will be positive.
• Despite the bad news on Friday of the horrible job numbers the market did not fall out of
  bed.
• This is positive as we are holding against the backdrop of very negative news.
• Indicators continue to rise out of extreme oversold levels. There are still no negative
  divergences.
• We continue to view the market as a buy on pullbacks.
• Despite that we view this up move as corrective only.

TSX INDICES

The TSX Composite is now 7 weeks off of its lows. We managed a 1 per cent up week this past week. We didn’t particularly like the fact that we closed the week lower then where we opened giving the up week a definite down week feel. We may have some downside this coming week but we do view this pullback as a buying opportunity. For the first time since we topped in October 2007 we actually had a close over the 13 week MA another positive development. A way off in the distance near 12,000 is the converging 40 week and 4 year MA. The 40 week MA is poised to cross over the 4 year MA a definite negative development. Still that zone could be magnet in the event of any sustained rebound from the lows.

Eight of fourteen sub indices were up on the week. The down sectors were Consumer Discretionary, Consumer Staples, Materials (dragged down by Golds), Telecommunications, Utilities and Golds. All other sectors were up. Most have given buy signals for the short term trend with only Telecommunications and Consumer Discretionary still in a down mode. Healthcare received a boost from Biovail (BVF). Energy is also showing positive signs despite the ongoing problems with oil and gas themselves. [read more...]

Subscribe to David’s reports and read more about:

• Are bonds in a bubble?
• Most economists don’t even believe bubbles exist.
• If a bubble it is only government bonds participating.
• Cash pays no interest. US Government TBills also pay almost no interest. US Government bonds barely cover the rate of inflation and are vulnerable to falling prices.
• Some really long term charts for bonds.
• The current up cycle in bonds has been going on for 27 years.
• Clear cycle of lows roughly every 6 years. The last one bottomed in 2007 it may also have been 2006.
• In between cycles of either 2 cycles of 3 years or 3 cycles of 2 years.
• If we count from 2006 a cycle low did occur in 2008 on schedule with a double bottom in June and October 2008.
• If it is the 2007 cycle we should count from then we might expect another low later this year.
• If not then bonds have more time to work their way through for a top and the next cycle low is due in 2010.
• We examine the reasons for why interest rates are probably bottoming.
• The Gold/Bond ratio is also in a long term uptrend favouring gold but the recent action in bonds has favoured bonds over gold.
• We expect the long term uptrend in gold favoured over bonds to resume.
• Another reason for owning gold.

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A MOST HORRIBLE YEAR – COULD IT GET WORSE?

We suppose we could have premised this as “Annus Horibilis” but we weren’t sure whether the
Queen would approve. We also couldn’t help but notice a John Mauldin missive that also used
the same title “2008: Annus Horibilis, RIP” John Maudlin January 2, 2009. What can I say? We
are all thinking the same thing.

We were also going to take another week off before returning but couldn’t resist the temptation of
sitting down at the computer and viewing the carnage of 2008 once again. As well just thinking
about it more gives greater insight as to what we missed and hopefully help us do better in the
future. It is not easy being a forecaster because your record is hanging out there for everyone to
see. [read more...]

Subscribe to David’s reports and read more about:

• A Scoop to start the New Year.
• Annus Horribilus – just how bad?
• Gold performs over 1 year, 3 years, 5 years and 10 years. So how come you don’t own any?
• Hope for those in the junior penny mining stocks on the CDNX.
• M1 just keeps growing but worse the velocity of money is falling.
• Cycles of time – 70 years, 60 years and 30 years.

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