General Market Update

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I am going to touch on a few fundamental things that I've hit on quite a bit over the past several months, but it is now starting to become very visible. First off the chart above from The Market Ticker blog shows US revolving credit (credit cards, etc) and non-revolving credit (auto loans, student loans, business loans, etc). Notice that both are pointed down now. Also notice that the revolving credit has exploded and not turned down for 4 decades or more until now.

What I've said in the past is that we are in a fundamentally deflationary economic period right now. And that is because the expansion of credit cannot continue. Now I know that most have been worried more about inflation because the Fed is "printing" money. But as I've said before, that logic involves a great deal of ignorance regarding our monetary system. The amount of "money" in terms of physical bills, is tiny compared to the aggregate value of credit. So trying to look at the "printing" or monetization aspect is like trying to predict the temperature by how many people have light bulbs turned on while disregarding the sun (hmmmm that sounds kind of like the logic of global warming too....). The point to realize is that the credit portion of money is greater by a factor of around 100 or 1000 by what I understand. And deflations are deflations of credit. And people by and large don't understand money as credit/debt, and so historically (and still today) most people will be blindsided by deflations. They just don't understand money as a system and all the component parts.

Also, the chart above does not reflect the mortgage component of credit. The mortgage component is ENORMOUS. So when you factor that in, no one should have too much trouble realizing the situation now.

Also, the debt to GDP ratio this past year was in the 350-400% realm which was last seen at the peak prior to the Great Depression. We have essentially the same monetary system now. And debt and excess credit expansion is still the same drain on production and economic activity now.

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Now the fundamental flip side to this is that as outstanding credit contracts, the relative value of the currency increases. So from that perspective, the US dollar will strengthen in relative value as our US debt declines. Another way to think of this is that when people have debt, what do they need to pay it down? Dollars. Or do they? Well, no they don't. In terms of supply and demand you can think of it in that there is a demand for dollars to pay down the debt. That will increase the value/price of the dollar. However, what actually happens is that credit which was outstanding is now paid down, or in many cases it never will be and may default and disappear, and the total amount of credit is thus diminished.

To complicate the equation though, most major currencies "float" against other currencies. So the value is not just intrinsic to our currency, it also depends on how the dynamics of other currencies strengthen or weaken relative to ours. The chart above makes that abundantly evident. Many European countries are now having debt issues come to the forefront and confidence in the Euro is waning. This has increased the relative value of other countries' currency versus the Euro.

The above chart shows the FXE (Euro ETF) at a support area and it is oversold. The blue boxes show that the move down since the bear flag a few weeks ago, is now equal in percent to the initial move down off the highs. From a qualitative/wave form perspective this may be an ABC zig-zag. Based on all that, I think we are likely to see a rebound pretty soon here. I have also drawn a descending pink channel on that chart. Even in the weakest of rebounds, I would expect the price to rise back to that channel line. So this is not a prediction, but just an expectation.

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This is a daily chart of the S&P 500. The decline is now as large as the June-July decline and took less time, providing initial price confirmation of a trend change. Friday's session created a hammer candlestick on heavy volume. I find this to be a pretty reliable short term reversal pattern. On the flip side though, if the market closes below Friday's low, then the market could really tank for a bit. In most charts I can recall, when a reversal that "should" stick doesn't, the market is very weak and can fall very hard and fast to the next support. So my bias right now is for a short term rebound, but if it fails to hold, then lookout below.

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The McClellan Oscillator shows a bullish divergence on the new lows this past week. So this is another suggestion from breadth that the decline is weakening. As noted on the chart, in the event of a rebound, it will be instructive to watch whether the oscillator spikes back up and moves above zero, or if it forms a more complex overlapping structure at or below zero.

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If we step back and look at the weekly chart, however, we see that we may be in the early stages of a new weekly downtrend/decline. So unless the market strengthens substantially to prove this wrong, then I view the intermediate trend as down now.