The recession is over. The recession is over. The recession is…….Let’s just say this; the stock market remains the best leading economic indicator in the world. No matter what bears want to tell you about how lousy things are, the charts don’t lie. We’ve had steady improvement since March and now we are seeing signs with declining inventories, the Case-Schiller readings on home sales and the new Cash for Clunkers program.
When we are not analyzing cycles here I spent a good part of my time poking fun at the fundamental side of this business. For someone who does spend so much of his time dissecting the fundamental case, why would I care about these fundamental issues? We have to differentiate the difference between taking trades and understanding what the market is really telling us. For this magazine, I presented the problem fundamental traders in the cocoa arena would have positioning themselves correctly amid a crop that is grown in the some of the most politically unstable spots in the world Even if you get that right one requires just as much knowledge about weather patterns. So if you are insider in the government of Ghana, for instance. You would also have to track weather patterns successfully. Let’s say you could become an expert in politics and meteorology, when would you have time to trade?
While trading requires precision in understanding the cycles, seeing how the market leads the economy by months does not. If you’ve never read Prechter’s work on Socionomics, I urge you to do so because so much of what goes in the economy has a direct correlation to the oscillations of a rising or declining social mood. I also believe the crowd looks at certain elements of the move and is compelled to act or not act based on certain outcomes. Take the copper chart for instance. We know that copper has been a leading indicator of recessions for years. It cuts the other way as well. The copper chart has been so well defined and one of the best looking charts we’ve seen in recent years. Since it also plays a major role in the economy we’ve commented how important this move has been for months. It has also likely inspired confidence to keep this rally going.
It finally comes to pass that what this column has been discussing on these charts for weeks if not several months is finally showing up in the data. I happen to analyze recessions differently than the government does but there is no doubt conditions have improved. There is no doubt we should finally see a couple of quarters of GDP growth so in that sense I suppose the recession can be over. But when you look at the early success of the Cash for Clunkers program we can see signs of pent up demand after a couple of years in the tank. This is very consistent with all of the readings we’ve seen on our charts over the past few months.
How long this persists, nobody knows. Things are not perfect, far from it. For sustainability, we’ll need to see people going back to work. We’ll get employment numbers this week. The past week saw the US Dollar violate some really good time clusters which is troublesome. It may not be troubling today but just as the charts have foretold the better economic news weeks if not months ahead of time, the Dollar seems to be trying to tell us something different. I’ll be consistent with everything I’ve ever mentioned in this column to say the best thing the Dollar can do is stay in a range to give us the best chance for a sustainable recovery. Last week was the first real sign we may have to deal with a whiff of hyperinflation at some point.
But Monday is the last chance the Dollar has to get off the mat for a few days if not a couple of weeks. We are now at the back end of a rolling 144-46 calendar day window off the March pivot lows. It’s a rolling window because the SPX low was on the 6th of March and technology hit on the 9th.
If the markets are going to pull back, Monday or Tuesday is the time for it to happen. My calculations suggest we are ripe for a change of direction. But we’ve been ripe for some time and it fails to happen. One reason why it might not be happening is the action on the Copper chart which peaked in June with some important time clusters. The fact they were taken out and polarity has flipped is a continued bullish condition. When key time clusters are taken out it is the best show of underlying strength a market can have and is a better indicator than any RSI or ADX reading. But the 265 level represents a Gann 108% increase of price action off the bottom. If Copper is going to take a pause, this is the time and place for it, especially when viewed with cycles from the stock market.
On the other hand, a continuation beyond the 108% reading will tell us that underlying strength is not abating yet.
Finally, the economy is in healing mode and likely very fragile. It will take more time and continued improvement to build a firm foundation. So I’m not ready to say all is well again but things do appear better. I was on the road this weekend and observed planes and airports were jammed packed. It’s been a while since I’ve seen that. The charts do seem to inspire confidence but recognize the difference between what they are telling us and chasing a rally where risk is high. A pullback is overdue and the time cycles suggest the early part of the week is the time for it.
