Reading the indicators. Feb 2010.

Of the many things that characterize Bull and Bear markets is this: 1. Bull markets tend to ignore bad news and Bear markets tend to ignore good news. A lot of analysts worried about whether we are in a Bull market or a Bear market rally. You can see why that is important.

Since, March of 2009, the Market rallied faster than expected. Now, the Market dropped over 500 points in the DOW and ignored the good economic news of increased GDP. Even though we know that the 5.7% growth in Q4 is a mirage, the DOW has ignored it. Investors (myself included) are shedding all the stocks they can.

The top graph shows the S&P fund over the last 6 months. We see that volume contracted while the rally went on. This would seem to be a contradiction. One analyst commented on a Canadian station that some large entity was manipulating the S&P during after hours buys. We do see an uptick in volume during the S&P 500 decline, which would indicate that large funds are dumping their aggressive holdings and preparing for a down market.

The cycle theory predicts a crash this year with gold later hitting a new high. What economic events would precipitate such stock action?

The next graph down shows initial unemployment claims and we see an uptick in January. Are we heading for a double dip recession? We will not know for a couple of months. Recent testimony in Congress by the economist appointed bu Democrats forecasts anemic economic growth for years and unemployment to stay above 10%. Other data indicate that lack of economic freedom rends to reduce growth and as we enter Obama's Socialist economy our growth is being reduced.

Besides the boneheaded prescriptions of Obama, there are other indicators that forecasts a downturn economically. The current Price to Earnings ration has shot way up and unless earnings improve, stock prices will come down. With the earnings forecast as flat, investors are dumping stocks. There also appears to be a decennial bias against years ending in zero. Years ending in zero produce drops in stock prices. When each decade's average is plotted, stocks advanced in four decades and retreated in eight.

The Chicago Fed published a graph of 80 or so indicators; here you see the 3 month moving average. When this indicator reaches -.70, we are heading into a recession. When this indicator reaches +.70, it forecasts inflation. The indicator is now -.7, signalling a descent into a double dip recession and a drop in the DOW.

Summary. Given that this is a year ending in zero, the historical average is for a down year on the Stock Market. The Chicago National Activity Index indicates as much. Large players are selling on Wall Street. The cycle theory also indicates inflation coming. The FED will create immense amounts of cash to stave off recession and that will initiate hyperinflation. Before that happens, gold and gold stocks will drop along with other stocks, but at some point gold will resume its upward climb.

And that's the way it looks now.