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It
has been my theory that this year we would see one of the worst performances
by the stock market since 2008. However that has always been dependent on
Bernanke not being able to break the dollar's rally out of its three year
cycle low. As of this morning the dollar has printed a failed daily cycle.
More often than not a failed daily cycle is an indication that an
intermediate degree decline has begun.
 
I
have begged and pleaded with people not too short the stock market over the
last several weeks. For one it's very hard to make money on the short side
for the simple reason that markets move down differently than they move up.
Now I'm going to give you another reason not to short the stock market.
If
the dollar has begun an intermediate degree decline then we should see it
continue generally lower for the next 7 to 10 weeks. If this turns out to be
the case then we are not going to see any meaningful declines in the stock
market during this period. As a matter of fact the risk is great that the
stock market could enter a runaway type rally if the dollar has begun the
move down into an intermediate degree bottom.
As
you can see in the chart below the last runaway move in 2006 lasted almost 7
months.
Runaway
moves are characterized by randomly spaced corrections, all of similar magnitude
and duration. As you can see in the chart above the corrective magnitude in
this particular runaway move was about 20-30 points.
Keep
in mind we don't have confirmation that a runaway move has begun yet. We
would need to see how the first correction unfolds. If it is mild and brief,
followed by the market moving back to new highs, then the odds would escalate
that a runaway move has in fact begun.
Another
big clue will come when the dollar bounces out of its daily cycle low, which
is now due at any time, and if that bounce fails to make new highs before
rolling over. If that happens it will reverse the
pattern of higher highs and higher lows and confirm that an intermediate
decline has indeed begun.
The
scary part is that this may also signal the top of the three year cycle. If
so then we are looking at an extremely left translated three year cycle that
should generate huge inflationary pressures by the time the next three year
cycle low is due in the fall of 2014.
It
has been my expectation that we would see another deflationary period in 2012
before the cancer infected the global currency markets. As of this morning
I'm not so sure that process hasn't already begun and the deflationary period
has been aborted. Bernanke may have broken the dollar rally yesterday.
If
this scenario unfolds it has the possibility of generating the bubble phase
of the gold bull market. I elaborated on this in last night's premium report.
I
am currently still running the one week, $10 introductory offer for the SMT
premium newsletter.
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