Apocalypse Avoided, For Now

I have become increasingly concerned about the markets and the economy, largely because of the poor behavior of economically sensitive commodity prices. If the current commodity weakness were to persist, then conditions may be setting up for a repeat of the Great Bear of 2008.

In a subsequent post, I set out some goals for the bulls to achieve in order to stave off a “deflation” signal on my Inflation-Deflation Timer model which would signal the kind of waterfall decline that the markets saw in 2008. I pointed to copper prices and the relative price behavior of the Morgan Stanley Cyclical Index (CYC) against the market.

In the last week, the bulls did manage to rally the markets and achieve a stalemate with the bears, which is a victory of sorts. Take a look at the price of Dr. Copper, which rallied up through the downtrend line but ended the week lower. This may be a signal of underlying strength and a sideways pattern rather than a continuation of the downtrend. Nevertheless, a “dark cross” is imminent in copper prices indicating the development of an intermediate term downtrend.

A similar picture was seen in the relative chart of CYC vs. SPX. CYC rallied through the downtrend line but weakened again which points to a possible sideways consolidation pattern.

There is naught but confusion in the markets at the moment; we have had the oddity of late of both the Dollar and Gold rising simultaneously; doubtless due to the weakness in the Euro. This a.m., commodities are generally speaking up, including oil as the dollar retreats in the face of the news that China will unpeg the Yuan a bit. I don’t look for that to last. Most of the analysts I follow are predicting a Dow rally to 10,800 followed by a sharp downturn to the 8,500 level.

Heard this a.m. on CNBC; the double dip recession is here. The so-called V shaped recovery has stalled and we’re heading down again. With unemployment up again and a 400 billion dollar contraction of consumer credit in the 1st quarter, that should come as no surprise.

There’s nothing but bad news for business in general coming out of Washington; general lack of direction on the gov’t front has lead to a high level of uncertainty going forward which creates a wall of uncertainty the markets can’t long fade. As things economic worsen, the Fed has run out of bullets, long term unemployment will worsen and the “social/cultural” instability is likely become markedly worse throwing further instability into an already chaotic, directionless political scene.

A nation adrift in a sea of economic, and political uncertainty may well erupt into a climate of social unrest and the U.S. where group identity trumps national identification, this can only lead to unsustainable levels of social conflict.

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