Wednesday, August 12, 2009

"All the currencies of the world are tied to nothing of intrinsic value." -- Cato Institute, August, 2009

Russell Comment
-- Sadly, we're working for, and saving with, fantasy concepts (i.e. fiat currencies), units dreamed-up and created by men at institutions that we call central banks.
Every once in a while I have an urge to get away from my basic stock market studies, and do a little thinking. Here are a few items I've been thinking about. During the '90s, consumers were buying housing that they knew very little about and couldn't afford. That's one of the crazy phenomena that got us into the current mess. The collapse of the outrageous, over-priced housing bubble plunged the US and world economies into the worst recession since WW II.

And now, in its frantic efforts to stave off deflation and bring back prosperity, the remedy the US has chosen is to push consumers toward over-spending again. But the consumer's reaction to the current recession is to cut back on debt and to save. "No, no," says the government, "forget saving, forget paying off your debts, you've got to spend more. You've got to save the nation with your spending." The consumer retorts, "But I can't spend more. I've lost my job, and I don't have the money."

"No problem," answers the government, "If you don't have the money to spend, we'll give you the money. Buy a car, and we'll give you a $4500 deal. What's that, you're losing your home? Call us and we'll work it out. In fact, this is a great time to buy a foreclosed home. Why not go for one?"

And the Russell question -- Can government-sponsored spending get us out of a recession that was brought on by consumers over-spending? Can a government push consumers to spend us out of a recession? On the face of it, it sounds illogical and kinda crazy. Any way, that's what I've been wondering about.

The stock market must be having second thoughts as well. Volume has dropped as much as 2 billion a day compared with volume a few months ago. The big money, the rich-man's money, the institutional money, must be sitting on its hands and watching from the sidelines. If the smart money was piling into this market, we'd know it from volume indications.

OK, then what's really propelling this market higher? Remember, every move in the market, large or small, is entitled to a one-third to two-thirds correction. In the past, we've seen any number of corrective bear market rallies that failed to be a prediction of better times. We saw a number of them during the 1966 to 1980 bear market. Again and again the Dow rallied, only to be followed by a decline back to the base which was around the Dow 800 zone. Finally, in 1974 the Dow crashed to 577, which was the bear market's final bottom.

As stated on yesterday's site, bear market rallies tend to be tricky and often deceptive. I think that's what we're dealing with now. Today's market appears to be almost schizophrenic, up one day on good news, down the next day on lousy news.

The chart of the Dow below is up-to-date through yesterday. We see a potential head-and-shoulders pattern that broke slightly below support and then turned higher again. Note that RSI is now in the overbought zone. Note also that MACD is curling over and close to giving a sell signal. Volume has declined dramatically since June. The rally could be close to running out of steam, and if so, I want to see how the market acts on the downside. How well or poorly the market holds up on a correction will tell us a lot.

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