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June 28, 2010

Bond Warning

I continue to see few signs that stocks are ready to muster any kind of rally. The S&P 500 continues to flail, exhibiting consistent late-day weakness while the NDX has now posted 6 straight losing sessions. The fact that stocks have managed to work off some oversold readings by going nowhere is yet another troublesome sign. In fact, the consistent display of late-day weakness is a bearish sign by itself and portends at least a small blow-off to the downside before the market can find a footing.

Based on cycle analysis detailed in the Member letter, the most probable path I see for the S&P 500 is as follows:

S&P 500 Weekly chart

It's very likely that the 75-week moving average gives way temporarily so that stops just under the psychologically-important SPX 1000 can get blown out. This point should mark an intermediate low for stocks and be followed by a violent rally of 15% or so. I do not, however, expect the market to set a new high. Further evidence that equities are in trouble can be found in previously-observed indicators as well as correlational assets.

Baltic Dry Index

The Baltic Dry Index has now set a lower high as well as a lower low, portending the second dip in economic activity. Of course, "dip" is a favorite term of those vacuous souls who want us to believe this depression will be fleeting. The first down cycle was more like a crater than a dip, and I strongly believe that few people understand the extent of economic damage that remains to be revealed.

30-year Treasury prices

The bond market sniffed out the equity trouble before it unfolded as smart money shifted toward safety. The fact that bonds have not turned lower, but rather set a new high, spells more trouble. At some point bonds and equities will fall together as a currency crisis unfolds. At that point, the flight-to-safety asset of choice will be real money... gold.

Speaking of which, the current gold run is looking tired.

Gold Price Chart

We may see gold dip quickly and then resume its uptrend as traders take preference over a falling equity market. Then again, we may potentially see gold fall right along with equities into the low described above. Ultimately, I expect to see a much higher gold price in the intermediate-term.

I leave you this evening with a rather humorous exposé of the European debt crisis:


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