I want to cover two important topics today. First, let's take a look at the latest Super Chart signals. Second, we'll touch on the unfolding worldwide commodity panic.
My last two columns gave you a technical and a fundamental perspective at what is going on in the stock market.
Super Chart Within One Point of Reversing Signal
Today, however, I want to go back to my column of Feb. 8. I told you that at the close of the week of Feb. 8, my Super Chart had generated a sell signal. The previous buy signal had been registered at the end of the week of June 20, 2003.
I told you that I was somewhat surprised by the sell signal, but I had learned over many years not to question my Super Chart. In fact, a week later, I wrote that something just didn't look right with the signal. In the week between the two columns, I had studied the many indicators that chart the direction of the economy and they were not even whispering "down" to me. Something just looked wrong about it all.
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I reminded you that the huge decline in 1987 looked much like this one. There was a huge decline that year, but it did not seem to impact Main Street — the lives of everyday Americans. I even went so far as to tell you that this 2008 signal may turn out to be a bogus signal, much like the 1987 one was. The sell off in 1987 was enough to break supports, but not enough to stop economic activity. The Super Chart signal was reversed, and I suffered an 11 percent loss from a chart that had never given me more than a 6 percent loss — not in 22 years at that point.
Because of this reversal, I set in place a rule that if a sell signal retraced up more than 5 percent, I would exit to the sidelines. I have not had to use this rule for 21 years.
But last Friday, we closed within one point of my stop out price at 1,398 on the S&P cash index. I still don't have a close above that level. But, with the events of the past week, I may very soon. We shall see.
At this point, it has been 12 weeks since that Feb. 8 column, and I would have expected to see much lower stock prices by now. But that has not happened. While the talk of recession and depression has sold newspapers, that just hasn't happened, either. And, so far, the economic charts have continued to strengthen, not weaken.
Now, does that mean we are about to see a big rally? I don't know yet. But, I do expect a reversal in the next 70-90 days of my Super Chart bear market.
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Instead, you can expect that inflationary fears will be most prevalent. Watch for this big word to be in headlines and on every talk show. Will it be hyperinflation like in the 1970s? Not likely. This time the cards are not stacked against us like they were in those days. And we have hands at the Fed that are far wiser and more studied about how to handle these things. A bit of a blip, sure, but I don't believe we will see a runaway inflation problem.
Commodities Due for Correction?
This brings me to the second topic I want to cover today. Simply put, we are in a worldwide commodity "blow-off." What is a blow-off? It is when the charts move higher, but in a very steep slope up.
For a perfect view of one, I have attached the 1995-2001 Nasdaq chart. This truly is a blow-off chart. It is also often called a parabolic curve chart. Either name means that it is an unsustainable move, and it will break and will break hard when it let's go to the downside. Again, look at the Nasdaq. Frightening, I say.
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When will this blow-off let go? If I knew that I would be shorting all the right stocks and indices and buying puts with my last dollar. But, I don't know. I can only tell you the charts show blow-off and the outcome is almost 100 percent predictable — a big break is coming.
Go back to 1999 and read the reports from all kinds of analysts. Some said we were in a new era of economic activity and that this big move up was about to prove it. We were to go higher and higher for a long time. But, I know charts and that had big trouble written all over it, just like many of the commodity charts today.
Economic activity repeats itself over and over through time and the charts show this repeating action again and again. Believe the charts. They don't lie, nor can they be fudged with hyperbole. Don't get dragged into the very top of this panic to buy. You will regret it, unless, of course, you know just when to get out. Lots of luck.
These blow-offs are predictable and always very visible. Why has no one in a position of power, and aware of this dangerous chart, done anything to slow this madness of buying? We have seen food prices go out of sight, not to mention oil.
I will tell you as one who has been in this business for a long, long time — the reason for this runaway buying and huge price spikes is not the dollar, not the ethanol legislation, not China nor India competing for commodities or any other reason. No, the fault lies squarely in the hands of the commodity market officials. They have, for reasons only they know, allowed the market to get out of control. There has been a huge rush of money — a lot of it hedge funds — that have chased commodity prices beyond what reality could ever support.
[Editor's Note: Financial Intelligence Report Stock Picks Soaring. Up 53% to 63%! ]
All of this could be very easily tamped down by a few simple exchange rule changes. The commodity markets exist primarily for what are called "commercial" traders. It provides a way for farmers, miners, food processors, meat packers and a host of others to "hedge" — for farmers to assure buyers exist at a price the farmer wants at harvest time or that supplies are available when the processors need them to produce goods.
I won't go into all the details of how this works, but these commercials must identify themselves to the exchange as commercial accounts before they trade on the exchange.
Now, the commercials rely on a second group called the speculators to accomplish their hedging activity. The speculators are willing to take on the risk of price variations until the commodity contracts "mature," or products are actually delivered. They exist for no other reason.
What has happened in the past 12-18 months is that the speculators have raided the hen house. The tail is wagging the dog, so to speak. They have come with huge amounts of money and taken over the exchanges. The number of contracts that just the commercial accounts would open in a normal season has multiplied to a huge abnormal number as speculators are chasing the price increases of other speculators. They are not responding to the normal supply and demand pressures to which they should be responding. This abnormal trading activity is wildly driving prices up, far beyond what any average market pressures would justify.
How does one retake control of the exchanges? It is quite simple, really. The exchanges must limit the number of speculator-generated contracts in "open interest," as they call it.
I would suggest a limit of two to three times the commercial contract levels. But whatever the multiple, it should be one that reduces the ability of big money to run the exchanges. This will end the over-speculation at once.
Will it happen? I doubt it. Money is also power to do what it wants. Speculators will cry foul and demand an "open market" — meaning get out and let us run things here — be maintained. But, yielding to that demand will eventually lead to the same result as did the Nasdaq buying panic of 1997-2000 and the marketing of subprime instruments.
But, I do find it very disconcerting that knowledgeable men like Dr. Ben Bernanke, Fed chairman, to name one, do not speak out and urge the exchanges to take steps to mute the parabolic curve dangers on so many commodity charts. He will not like me saying this, but he knows want panics can do more than any powerful official in the world. Now is the time for him to step in, not when the top is reached and the fall imminent.
Dr, Bernanke, do you hear me? I hope so. They respect your voice now, especially since your powerful stand with Bear Stearns. You can do something to prevent another financial crunch that is bearing down on us. Will you at least go public with some concerns about this pending disaster? I hope so.
My expertise is charts and they are yelling at me in big red letters — WARNING! WARNING!
Well, that's enough for today. I should have more on the Super Chart signal soon and I will be sure to get it to you as quickly as it is triggered.
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Do hope your investment week is a good one. In the meantime, you keep in touch. I do! See you next week.
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