The Party Is Over

April 12, 2016

The desperation that was evidenced by the GOP's Colorado decision was  just one  of several  symptoms that suggest the authorities are losing control.

After examining the charts, I think we are days/weeks away from a market crash. Here's the reasoning:

Putting prejudice  to one side for the moment, fundamentals ultimately  dictate the market's primary direction. Yes, US unemployment ratio is currently at 5% but may be bottoming out. Yes, US Labor participation rate is currently 63%, having bottomed at 62.4% in September 2015, but it has been in a declining trend.

Yes, at face value the statistics show that the US economy is strong, but the anecdotal evidence is that banks have had a bad first quarter, commodity prices have collapsed (implying reduced demand for end product) and US Producer price index has been trending down since mid-2014.

So, if the US economy is strong, what has been driving this strength?

Prima Facie, the main driver of US animal spirits in the past couple of years was very likely "oil fracking", and the cash that flowed from this - coupled with the multiplier effect - caused consumers to become optimistic. Furthermore, Household debt  as a percentage of GDP fell from 98% in 2009 to under 79.5% in Q3 2015. The mood in the past few years has definitely been more optimistic.

But here's the reality: US Rig Count April 2016 vs April 2015 is down 55%, Although this did not impact on oil production in the short term, relatively short  life expectancies of fracking deposits suggests that the US economy has been going through an Indian Summer. The oil price may have broken up today - a "clue" that fracking production in the US is slowing. Chart target price is $72 on P&F.

If  Real Household Income has been in a falling trend since 2007 and, indeed,  has fallen by around 10% since then,  how could debt have been falling? Where did the money come from to pay down the debt? Could it be that more people employed at lower real salaries have been masking a reduction in per capita consumption? Accommodation sharing, Uber, the shift from hotels to Airbnb and lower import prices, lower oil prices, could have given rise to a temporary surplus in household cash flow and that cash flow was used to pay down debt. 

What else could be driving US employment? Services? Technology?

Nasdaq Index has quadrupled since 2008. The P&F chart is very far away from its trendline. Oscillators on conventional charts suggest that the Index might be trending down and, importantly,  a "gap island reversal" pattern manifested at the "top" (?) in December 2015. Technically speaking, the rally is over and the trend of the $NDX is very  likely down given that the 50 Day MA is below the 200 day MA and is showing falling bottoms.

Oscillators on the Dow Jones Retail Index are also suggesting a downside move is imminent,  and the 50 day MA on the Retail Index chart looks similar to that on the Nasdaq chart. At face value, the VERY STRONG retail performance of the past few years (quadrupled since 2009)  may have ended. Chart link 

As mentioned, deflationary pressures coupled with lower US unemployment might have been stimulating gross retail sales in the US whilst masking falling retail sales per capita. Significantly, China is now unable to maintain its low export prices and the cash flow from oil fracking has come under severe pressure because of both price and volume reductions. The "drivers" of employment and retail sales in the US are ebbing.  

Finally, Apple's Price Charts are looking toppy and the P&F chart shows a potential fall of 50%. As with the Nasdaq Index, the oscillators on Apple's chart are heading south and the price is hitting resistance of 200 day MA. 50 day MA showing falling bottoms and below 200 day MA and MOST IMPORTANTLY the recent price rally failed to cover a downside gap that manifested in December 2015. If Apple is a bell weather stock for technology, we might expect a contraction in the technology sector in general - confirmed by the patterns on the Nasdaq charts.

GOLD

P&F chart shows that if the gold price rises to $1290, we will have a new BULL MARKET in gold. Price could rise to $1800 very quickly.

CONCLUSION

On balance, the toppy technicals are aligning with the weakening fundamentals. This suggests that the overpriced US equity market is very close to a CRASH.

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Brian Bloom

Tea Gardens, NSW, Australia

Gold is the world’s oldest and most known currency.