Summary - Jun 22, 2007
The BSI turned up again delaying a sizeable correction as the Dow is the most overbought in 10 years - be cautious.
Short term Harmonics are suggesting a decline into late August after the seasonally bullish July 4th holiday period.
With the shallow 4 year cycle low in 2006 and the rise in volatility we should continue to be vigilant for a delayed 4 year
cycle low like we saw in the 1986-87 cycle.
The Yield Curve is acting a lot like it did in 2000, and we continue to be overdue
for a correction larger than we have seen but there is no guarantee it will occur shortly.
Charts courtesy of StockCharts.com
Charts courtesy of StockCharts.com
Dow most overbought of the last 10 years
Charts courtesy of StockCharts.com
Charts courtesy of StockCharts.com
The 4 year cycle low is well known and not to be ignored
A warning comes to us from the reliable 4 year cycle lows as shown in this chart of the SPX since 1948. Only a few of
the 4 year cycle lows have been minor, and it could be argued that the 1987 crash was the delayed effect of the suppressed 1986
cycle low. With Global Equities on the rise since the last cycle low in 2002 and a correction overdue, we must be very cautious
even into 2007 until Equities correct significantly. Also take note that years ending in 3 and 7 are 75% more likely to have a
serious decline than any other years. The Baltic Dry index of shipping rates clearly shows the 4 year cycle in 1994, 98, 2002
and 2006 and showed the weak 2000 peak that preceded the large 2002 cycle low.
Charts courtesy of DecisionPoint.com
Charts courtesy of DecisionPoint.com
The Yield Curve Inversion and the Fed pause add up to caution
Contrary to popular belief, Equities have already achieved most of their gains when the Fed stops raising Rates, especially when
the Yield Curve is near inversion like now. This can be seen in the corrections in Equities after the Fed paused in 1981, 1989,
2001 and now probably 2006. The reverse also applies, it is best to buy Equities after the Fed ends an aggressive Rate easing
campaign that takes the Yield Curve well below the average 1-3% spread, like in 1982, 1987, 1992 and 2003. It appears the Yield
Curve is inverting even more like it did in 2000, possibly taking Global Equities even higher, and raising the risk of a recession
and downturn in Equities ahead.
Charts courtesy of StockCharts.com
Charts courtesy of StockCharts.com
Economic Dashboard: Bonds, Inflation and Capital flows
The rapid economic expansion since 2003 has caused the Yield curve (white line) to rise rapidly to levels last seen in 1989 and 2000
just before economic contractions began. The contraction that started in 1989 was mild since the relative position of the US Dollar
versus US Interest Rates (red line) was favorable and Inflation expections (blue line) were recovering. The next economic expansion
that ended in 2000 was fueled by an exceptional "Goldilock" combination of slowly rising Yield curve (white line) and declining
Inflation expectations (blue line) mostly from a rising US Dollar from foreign Capital Inflows (red line). The contraction that
followed the expansion of 2000 was severe, but not enough to significantly slow foreign Capital Inflows (red line) which kept
long-term Rates low and started a sharp recovery into 2007 mostly from mortgages. According to the Yield Curve (white line) we are
near the end of this economic expansion, and with high Inflation expectations like in 1987, and high Capital Inflows like in 2000,
this coming contraction could be severe as well.
Bond Market Cash Flows - A strong economy causes the Yield curve to flatten (white line to rise) as earnings grow and extra
cash flows to the Bond market, causing rates to drop and fueling the economic growth even more. As the Economy overheats and
Inflation rises, the Fed raises rates causing the Yield curve to invert and the process to reverse with cash flowing out of the bond
market to replace declining revenues from the economic contraction, causing rates to rise and aggravating the contraction even more.
Inflation Expectations - When Gold is stronger than Commodities (blue line declining), we have high Inflation expectations
that should cause the Fed to raise rates to slow economic growth and keep inflation under control.
Capital Inflows - When the US Dollar is stronger than Rates (red line rising) it is suggestive of foreign inflows and
supportive of US Assets.
Charts courtesy of StockCharts.com
Charts courtesy of StockCharts.com