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FYI... (btw: I have no affiliation with this service.)
JW
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Our Timing Models show that the month of May
is indicated for Turning Point for both the S&P
and the DOW. Within the month of May both the
S&P and the DOW show a Turning Point Week
accompanied by Panic the week of May 15th.
This means that whatever the DOW and S&P
do going into the week of May 15th, they are likely to
do the opposite coming out of it. A sharp selloff
going into mid-May would be preferable, as it would
suggest a more durable low, and set up a buying
opportunity. In any event, risk in holding stocks
is rising faster than the stock market itself.
Many investors who is not familiar with the concept
of Risk versus Reward are about to get a quick lesson.
The so called "value stocks" in the DOW and S&P
are vulnerable to a coming bond market slide. The
trigger for our bond market slide may come from
overseas.
If the EURO is getting trashed, its because traders
know full well that the ECB cannot afford to defend
the currency and at the same time avoid damaging the
European stock markets. If the ECB tries to keep
up with the FED, matching its every rate hike, they
will only succeed in destroying a nascent recovery
in the European economy and causing utter havoc
in the European bourses. Europeans stocks may
very well come to rival US tech stocks in their ability
to shed value. Now that European inflation reported
for the month of March has surpassed the ECB target
of 2% (March inflation was 2.1% ), the ECB is obliged
to raise rates, according to their mandate to maintain
inflation below 2% level. Will they do it?
If the ECB is dumb, they will raise rates on April 27th
to maintain some vestige of credibility; if they are smart
they will recognize that raising rates is akin to
"pissing in the wind."
No matter what the ECB does on April 27th, European
bonds are apt to slide, because traders can smell
fear just like a dog can smell fear. They know the ECB won't be
able to contain the inflationary spiral coming to Europe.
Since European bonds are going to slide, this means a European
stock market slide is a foregone conclusion.
The point to take home is that inflation is coming back
and no action by the ECB short of a sharp series of
punitive rate hikes is going to stop this trend. And in
case you hadn't noticed, Paul Volker is not running the
ECB.
If I suggested in the last email that
European and Japanese stocks may see more
damage than US stocks before the correction has
run its course, its because we are in a rising rate
environment. In spite of the tech stock bubble,
US stocks are in better position to deal with a rising
rate environment than European and Japanese
stocks. European and especially Japanese
companies depend greatly on US consumer demand.
Any slowdown in the US consumer's voracious demand
for foreign goods is going to impact those companies
strongly. Sure it will hurt US companies too, but
perceptions on currency risk should cause capital
to flow the US, softening the blow to US stocks.
There is also a kind of vicious cycle here
related to commodities and the currency effect.
The USD will rally strongly from here on out and
since commodities are priced in dollars, Europe
and Japan will outpace the US in inflation and
their bond & stocks will reflect a loss of confidence in the
ECB and BOJ to contain inflation. Capital will flow
to the US.
If the ECB cannot keep up with FED rate hikes,
Japan cannot afford to keep short rates at zero
without causing a bond market crash in Japan.
The BOJ is caught between a rock and a hard place.
If they keep rates at zero at the same time the FED
and the ECB continue to raise rates, capital will
become irresistibly attracted to the higher returns achievable
overseas. Why take 2% on a 10 year Japanese
Bond when you can get 6 1/2% going on 7% on a
US 2year note??? Who needs the risk of owning a
10 year JGB with lousy return when you have much
less risk with a US 2 year? In a rising rate environment
the risk on the long end is heightened, which underlines
the risk Japanese investors face in keeping their
capital in Japanese bonds...in a currency that is headed south.
If the Japanese govt feels that capital is getting ready
to flee the country like rats abandoning the ship,
they may very well sink the ship so the rats can't
leave.....meaning the govt may even make statements
or take action to cause the JGB market to fall, causing
yields to rise quickly to the 4% area, so that capital won't flee
Japan.
But this is also problematic. Higher rates will torpedo
the Nikkei, causing utter chaos. As mentioned in last
week's email, New Lows on the Nikkei will cause
quite a number of Japanese banks to fail and bring
about a huge crisis in confidence in the financial markets.
SUBLIMINAL MESSAGE:
" Inflation is not going away. It is only just getting started. "
US STOCK MARKET SLIDE IS NOT OVER
Many have made an implicit bet that the FED will rush
to the rescue if US stocks sell off too drastically. They
figure that Greenspan will stop raising rates and may
even lower rates if their stocks get into any real trouble,
so "buy and hold" has become the preferred strategy
of many investors. These investors may be in for a
rude awakening. Greenspan is apt to let stocks sell
off beyond the breaking point of most investor's pain threshold
before he will consider easing up on his course of rate
hikes, much less consider lowering rates. But Greenspan only
had domestic policy objectives to contend with, there would
not be so much to worry about.
CHAOS IN OVERSEAS MKTS MAY FORCE THE FED'S HAND
If Greenspan is forced into lowering rates because
the global financial markets have come apart (especially
risky is Japan as the Nikkei approaches New Lows)
, it only guarantees that inflation will continue unabated.
Because Japan is incapable of real reform, Central Banks
(including the FED) may be forced into a coordinated
easing of rates to help restore order to the global economy
and ward off real financial chaos.
In spite of this coordinated easing of rates by the world's
central bankers, the rate differential plus the perception
that European & Japanese inflation will outpace the US,
will cause capital to flow to the US which will soften the blow
to US stocks, but sharpen the blow to European and
Japanese stock markets.
Central Bankers are too clever by half.
What a surprise that the SNB is planning to begin sales
of that 1300 ton gold overhang in May. Must be a coincidence.....
.....NOT!
Manipulating the price of gold to paint a picture of low
inflation is not going to solve the very real problem of
inflation. In fact it will guarantee that gold will come
back stronger than ever.
Central Bankers may be arrogant enough to believe
that they are in control of the global economy, but in
fact they are only reacting to forces much larger than
themselves. They are not in control. If they knew a
bit more about the theory of cycles, they would recognize
that fact. But Modern Man views a belief in cycles as
nothing more than superstition....crude, primitive.....
nothing more than casting chicken bones to decide
your fate.
I wonder though, who is casting chicken bones,
those who believe in cycles, or the politicians and
Central Bankers who don't believe in cycles and
don't recognize the limits of their own power.
NASDAQ 100 June Contract
The current reaction rally in Tech stocks
notwithstanding, the Nasdaq is also quite vulnerable as
the bubble has popped. A test of 2281--1846 (June)
cannot be ruled out. I now believe 1846 is the more
realistic target. For a more detailed discussion see
our daily report on the Nasdaq.
For now holding higher amounts in CASH is the
preferred strategy, but be ready to move funds
into Energy stocks and other commodity stocks.
See our daily report on Nymex Crude to know the
level which will confirm the next leg up in Crude.
Soon the Energy sector may just be one the most attractive
places to move funds. There is still some risk
of a test of 20.10--18.93 monthly support on Nymex June contract,
but once Crude starts the next leg of its longer term uptrend,
it will be impressive. Moving to Energy is not merely a
defensive play. (Food & Energy stocks are often viewed
as "defensive" stocks). The market still hasn't recognized
that oil is in a longer term bull mkt that will take oil well over
$40 in the next few years. This also means that alternative
energy stocks are apt to behave like call options on oil.
http://www.pei-intl.com
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