(Part One wondered why the most important issue facing America today was skirted by the democratic process like a plague over the last year or more: Can America Afford the American Dream is it Means Taking on More Debt and Pretending This is Not an Issue? Is the Federal Reserve Board Helping to Fix America's Problems or Helping to Transfer Political Power to the Banks In America?)
OK. I have been arguing over the last two weeks that stocks are topping, led by tech stocks, and that investors should be selling and even short-selling at this point.
Lets look at the S&P 500 Index, first, to see what it looks like up close and personal. The red line in the chart is my CGTS Indicator. During an advance, CGTS makes higher highs and higher lows. The blue line is what I call M5 Indicator: it is similar to the CGTS Indicator except that it tends to lead a rally and signal a decline early. When the blue line leads the red line up the scale, you almost always have a rally; when the blue line falls early and cuts through the red line, this is a WARNING SIGN. When both blue lines and red lines are making lower lows and lower highs, it is time to sell.
The green line is a short term trend indicator. Most important is the TREND of this indicator, if it is making higher highs and higher lows or lower lows and lower highs. However, it also DOES matter which direction the indicator is travelling.
In the chart below, GSPC (S&P 500) is negative as far as the CGTS Indicator (red line), negative as far as the M5 Indicator (blue line); and negative absolutely in terms of T2.5 (Short Term Trend -- green line) although not yet negative in terms of the trend of this indicators.
The red line and the blue line are both in a free fall and both SHOULD BE topping short-time -- and should start back down again. The second chart shows the indicator that is telling me that stocks are currently OVERBOUGHT short-term.
This chart is the same as the one above except it shows in the bottom pane our short-term momentum indicator M2 ALT which says the short-term 'rally' in GSPC seems to be ending and selling should come this week. All the other momentum indicators in this chart are negative.
Note how the most recent 'rally' in GSPC took the index, after strong selling, from 1403 to only 1431, far short of the 1461 that was needed to take out overhead resistance and turn the direction of prices back up.
Tech stocks led this decline. The NDX is still negative and should head lower.
Those who wish to short the Dow stocks might look at shorting UDOW, the Dow Bullish ETF, which is topping.
The Russell Small Cap Index (RUT) is going down. Note the short-term momentum is overbought and declining.
Gold Stocks (XAU) have resisted selling, but seems to be loosing strength.
XCI, Computer Index: Tech stocks led the decline and XCI still looks terrible. M2 ALT shows how weak the current rally has been.
XOI, Oil and Gas Index: Overbought, set to decline.
Generally speaking, European stocks look better than American. But Germany does not -- GDXI is heading lower.
Japan looks stronger than Korea -- KS11, the Korean Index -- is not overbought but the index is topping.
BKX, Banking Index: bank stocks have held up well during the recent selling but they seem to be breaking down. This week's selling (M2 ALT overbought) should make this top clear to everyone.
Recently, US Dollar strength has been congruent with stock and commodity weakness. The Dollar seems to be bottoming against the Euro. Also, UDN, the US Dollar Bearish ETF, is breaking down, after a pathetic rally. This means the US Dollar should rally -- and stocks should come down more.
These are issues we are currently shorting or watching to short (the first three charts fit this category).
CONTINUING SHORT POSITIONS
So, does this suggest anything about the coming election? Does Wall Street really want a Romney win? It isn't clear. No recent democratic president has been better to Wall Street than Barack Obama. President Obama has done everything the banks told him to do. He has empowered Ben Bernanke to carry out the continued rule of Wall Street Banks in Washington, helping to funnel billions in taxpayer money back toward the banks, while helping to shift the blame for the Financial Meltdown away from Wall Street back toward the government
What does Romney offer Wall Street that Obama does not? The Democrats bent over to Wall Street under Clinton and the power shift from Washington to New York was accomplished then; and has been solidified even more under Obama.
Romney wants to fire Ben Bernanke -- or at least he said the did two months ago, before everything suddenly got quiet about Bernanke on the campaign train. Bernanke has said he will not seek a third term, perhaps as a way of telling Romney he (Bernanke) will step down.
I'm a bit off-target in this discussion anyway. Investors are selling -- Wall Street is not selling. If investors are selling and will continue selling this week, what does that say about the election?
Heavy government spending cuts (Romney's promise) will lead to a Greece-like situation in America, not with the exact same result, but with a depression. Investor selling may have nothing to do with the election, and may not herald the election at all, in fact. what it probably does herald is an understanding that the dis-inflation engineered by Ben Bernanke and Barack Obama is NOT a reinflation tactic but a stalling tactic, and that recreation of growth in the global economy is not going to be easy.
Maybe this selling is just signalling a late but irresistable recognition that the life-style we are living is grinding down and can't be resurrected until we go through the needed and painful stage of Real Deflation, which involves a sobering truth: the Fiscal Cliff is getting closer. And maybe the understanding is that is does not really matter who gets elected on Tuesday. Maybe the understanding is that there is not easy, quick fix to the quicksand we have constructed for ourself as a nation through easy debt -- 'Don't Ask; Don't Tell'.
One cannot spend money one does not have unless the money one borrows increases one's income. Borrowed money must provide investment gains or it becomes quicksand and leads to one's eventual destruction through suffocation.
Borrowing money at the end of an economic growth season is economic suicide. 2001 was the end of an economic growth season, as was 1965 and 1929.
Heavy indebtedness does not take into consideration the cyclical nature of economic growth followed by economic decline -- Boom and Bust. The economy grows for 18 years; then it contracts for 18 years. Our refusal to recognize the existence of this discrete cycle means that we will never be able to understand the dangers of too much debt during prolonged periods of 'guaranteed' economic deflation.
I found this related article on Seeking Alpha today:
- Wednesday, October 31, 11:32 AM Roughly 70% of those surveyed by Institutional Investor expect higher stocks in the wake of a Romney victory, with half of those predicting a substantial rally. With an Obama victory, about three quarters expect anything from no move to a big sell-off. SPY +66% since 1/20/2009.
If these investors are correct -- when is the majority of investors ever correct? -- then the coming (continuing) decline in stocks and commodities suggests that President Obama will be re-elected on Tuesday night.
Michael J. Clark
CGTS, Hanoi, Vietnam