Chairman Bernanke rode into Congress on his white horse today and the markets just “ate it up”.  The man just loves double talk, saying all the right things about the economy while quick to point out that if something doesn’t go to plan then they will be accommodating.  In other words, he has found a way to “have his cake and eat it” and the market is more than happy to go along with it.  If the FED is to tapper, then that means the economy is just fine.  If the economy sours, then they keep buying assets (POMO). 

The FED is viewed as infallible and that has bred a lot of disrespect towards the natural Business Cycle forces.  The market (as it always does near tops) is essentially saying that “this time is different”.  But the kicker is that the economy is getting worse and corporate earnings have flat-lined, despite their heavy hand.  What the market is not pricing in is the FED’s inability to avert what will be an eventual Business Cycle decline down into a recession.  After $3T of asset purchases, all they’ve managed to do is sustain this economy at stall speed, nothing more.  But at the same time they’ve help blow yet another massive bubble as the equity markets have now seriously diverged from underlying fundamentals.       

So thanks to the FED, I have no doubt now that June 24th was a DCL and ICL.  This dramatically alters the Cycle makeup as this is now just Day 16 of the DC.  Still overbought on all time-frames, I expect to see no more than a 40 point drop to the 50dma and a HCL before it's off again.  The current double top showing should have the bears thinking that this is finally the big top.  But I believe otherwise, the market is getting speculative and far too overconfident, and this is what runaways are made of. 

A new Cycle puts us on Week 3, and already the weekly RSI is into the “sell zone”.  Typically it takes 7-8 weeks to get up into that region, so any long term bull here should be praying that this is not a new Investor Cycle, they should wish for 2-4 more weeks lower first.  From a breadth standpoint this is supportive of a new Cycle.  The S&P bullish percent index back to 78%, having dipped to only 70%, far short of where an ICL will typically bottom.  Net new highs are healthy at 687, while 81% of S&P 500 stocks are above the 50dma.  Again none of the indicators ever hit traditional ICL levels, so it’s either a new Cycle starting out at overbought levels, or a big bull trap with a very unusual end to an Investor Cycle.    

If Gold’s Investor Cycle Low were behind us, then this would be one weak and lifeless 1^st Daily Cycle.  Typically the rally after a bloodbath Investor Cycle Low is impressive enough where you just know it’s a 1^st Daily Cycle.  It doesn’t necessarily need to be a V like rally, but in general you should see broad buying day after day and strong daily closes.  By Day 10, a 1^st Daily Cycle has typically gone a long way to recovering much of the previous drop, but here gold has barely made a dent into recovering any. 

So to this point gold has not shown any of the strength that has me thinking this is a 1^st Daily Cycle.  I have been a little patient on the Cycle because the dollar was soaring, so I have waited for the dollar to drop to see if gold released quickly to the upside.  Today was that day for gold and unfortunately the dollar’s plunge did not equate into a broad precious metal sector rally.  Again as I observed over the weekend, silver and the miners were both flat again today.  This indicates that there just isn’t any meaningful interest in this sector yet. 

Yet again we’re told that Friday’s announcement that 195,000 jobs added in May were “solid numbers”.  It’s funny what passes as solid these, this number in any past economic recovery would have been labeled as ordinary.  Even so, behind these “solid gains” were plenty of reasons for concern. The number of people working part-time because they can’t find full-time jobs and the number who want jobs but have given up looking both jumped sharply.  Because of this the U-6 rate jumped half a percent to 14.3%.  This measure is much broader and it marked the biggest jump since 2009 and back to the highest level since February.   

But employment is a lagging indicator and this week we also had a significant drop in the non-manufacturing ISM.  We know that the manufacturing numbers have been weak for some time, so to see a decline in the more significant non-manufacturing (Services) ISM does not bode well for the economy.  Looking at the composite of the two ISM indices (below) we see that both the recent and longer term trends are now down.  Despite the FED’s trillions of liquidity, this business Cycle has clearly topped and is in the process of moving towards the next trough.  That means a guaranteed print at some point below 50 (contraction) followed by an inevitable recession.

Source: Bedspokeinvest.com

According to the National Bureau of Economic Research there have been 33 business Cycles since 1854 with an average Cycle length (trough to trough) of 56.2 months (4 year 8 months).  Since 1945 we’ve seen 11 Cycles for an average length of 69.5 months (5 Year 9 months).   The current business Cycle troughed in June of 2009 making this the 49^th month of this Cycle, so we’re just 7 months away from the average Business Cycle Low.  If we narrow the focus to just post WW2 Cycles, we’re 20 months away from the next Business Cycle Low.  When you consider that most business Cycles spend up to a year contracting, we can appreciate just how far along this business Cycle is.  That means a recession late 2013 and certainly by 2014 is very probable.