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06282013 Alert June 28, 2013

Posted by easterntiger in economic history, economy, financial, markets, stocks.
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The S&P500 has been below 1620 for 27 out of the past 36 days.  To translate this into Dow Industrials terms, the Dow has been below its corresponding level of 15040 for 29 out of the past 37 days.

The significance of 15040 for the Dow Industrials and 1620 for the S&P500 are that these are the points where, today, the 20 day moving averages are falling and meeting the 50 day moving averages.  This is the first time that this has occurred this year.  It also happened in November and May of last year and in early August of 2011.  Each time of those times, the major indexes lost 5 or more percent of their value within 2-3 weeks.  More significantly, with the recent all-time highs coming just a month ago, this is more like the events where these same events occurred in 2007, and less like those events in 2011 and 2012.  (click the image for a zoom-in view)

ToppingPattern

In the three times that it occurred in 2007 from all-time highs, the S&P lost at least 100 points on the first two occasions, then, lost over 200 points on the third occasion that this ‘crossover’ occurred.

For a 2nd opinion, I took this observation yesterday and forwarded a chart to one of my paid advisers to ask his opinion.  This person does this full-time and is well-paid for his advice.

His response was  ‘..yes, it’s a lagging confirmation of a major top..’.  This is his way of saying that the delay of a decline (lagging) is no comfort in the fact that this long-term topping pattern (major top) is certain/inevitable.

Therefore, the ‘flight to safety’ into bonds that had occurred earlier in the year is more likely to resume, raising bond prices and the F fund, while lowering interest rates.  This verysame process had been underway for much of the year, right up until the panic and ripple effect of the Japanese yen reversal and surge raised their interest rates dramatically in May, forcing  our own rates higher here, in spite of the lack of confirmation from inflation or growth patterns to match.  Unfortunately, the recent decline in bond prices has caused a rush to the exits by people exiting bonds, some of the same people who had been piling in earlier in the year.

In spite of FED stimulus, bullishness, euphoria and the usual focus on the best of short-term events and statistics, Hoisington Hunt of Hoistington Investment Management notes that the recent tax increase, while well-intentioned, will put a significant drag on U.S. GDP at the same time that household income has dropped to its lowest point in 20 years.  He also notes that since 2000, the U.S. economy has had its second lowest GDP growth rate of any decade since 1790.

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