Chairman Bernanke rode into Congress on his white horse again 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. 

So as June 24th becomes the new ICL, that makes the 5 week decline into the ICL one of the shallowest ever, retracing just 33%.  The Cycle barely cleared out any of the bullish sentiment of that massive 6 month rally, so it only reinforced the notion that FED sponsored market is invincible, that every dip should be bought.  Over confidence is everywhere as the mere mention of fundamentals is scoffed at as being completely irrelevant to this market. 

So it’s no surprise that this new Week 3 (of expected 20 weeks) is starting out in overbought territory.  All of the characteristics and emotions that I remember from the big 2000 and 2007 tops are now firmly in play here and we could well be looking at an equity market that is about to go on one last big push higher.  I’m thinking that we pullback slightly here (40 points max) and then rip higher for some weeks into what will eventually be a big 4 Year Cycle Top.  Of course timing a top is difficult, picking a price even more so. 

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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.    

Here is the problem for the bulls and why they need a good pullback.  This ICL was also meant to be a yearly low too.  But obviously that does not qualify; Yearly Cycle Lows take speculative and over leveraged traders “to the cleaners”.  June 24^th simply does not qualify! 

The monthly RSI never dropped below 70 or moved off the top of the Bollinger bands.  From a monthly perspective the needles have barely moved off the overbought levels.  So if we keep going, then any new Investor Cycle has 20 weeks ahead of itself, that’s 5 months into the next low.  I doubt this level of increase can continue for much longer.  Without an ICL and YCL here in the next 4 weeks, this will end up being a short lived runaway or blow-off move that will result in an extended 4 Year Cycle Top.

One thing is for certain, after a 1,000 point 150% rally in just 4 years, this cyclical bull market is right near a top.  I don’t care how much Bernanke talks, recessions are inevitable and we’re approaching the timing for the next downturn.  Markets are cyclical and they always turn right around the time where nobody believes they could.  The bears have capitulated. 

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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. 

The bearish performance to date likely indicates that once the Cycle ages (Day 15 area) that it could quickly turn down sold aggressively.  This might well coincide with the dollar coming out of its own DCL late next week.  Up until then though, gold still has a chance to prove me wrong, it’s just on Day 9 and its back above the 10dma.  I believe even in the bearish case that gold should have enough steam to get it to $1,300.  But now is its only chance to shine, the Cycle has days 10 to 15 with potentially a falling dollar to really impress.  If the gains cannot come quickly from this setup, then I’m afraid gold is setting up for yet another big fall.

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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. 

Of all the business Cycles since WW2, in terms of recovery and performance this one is easily the worst business Cycle.  Despite that, the S&P 500 is up 150% from the 2007 lows, making this one of the best performing cyclical bull markets of the last 100 years.  GDP was up just 2.4% (annualized) in the first half of this year, but still the equity markets had their best 6 month start to a year since 1998.  Back in 1998 the bull market was in full steam with the economy growing over 5%, easily justifying the markets run-up as corporates were expanding earnings at a rapid rate.    

The anemic and slowing economy is why we’re witnessing an explosion of negative preannouncements this quarter.  Of the 112 corporate Q2 preannouncements so far, 97 have been negative EPS warnings.  The ratio (6.5) is now at the highest levels since the 2000 peak, having eclipsed the highs of the 2008 recession.  Maybe it is different this time, corporations might be far less afraid to preannounce negative news.  But I doubt it, margins peaked a long time ago and have been under pressure ever since.  Revenue growth is proving to be an extremely difficult challenge as (real) personal incomes and aggregate demand both remain stagnant.  Earnings came under significant pressure in Q1, and the coming bout of Q2 earnings might just be setting up the markets for a significant downside shock.  

The equity markets remain comfortably overvalued and overbought with sentiment still at elevated levels.  With a slowing economy, this stretched and overbought 4 year Cycle is now coming up against additional headwinds of rising rates and $100+ oil.  I believe we're knocking at the door of a major top now, but I don’t believe the markets made a cyclical bull market top with the recent May high.  I believe that will come with a final fall surge out of a summer Investor Cycle Low.  That top will mark the high of this 4 year Cycle and the end of this great cyclical bull market.   

Focusing on the Daily Cycle and the immediate action, the S&P is back up against what is now an established down-trend line drawn from the May high.  Typically during moves towards a Cycle Low these trend-lines act as solid resistance.  Because this Daily Cycle is now on Day 21, the midpoint of an estimated 40 day Cycle, it remains my belief that the S&P is about to be turned down.

But there is some reason for the bears to be concerned now.  The 50dma was regained on Friday and the MACD is showing a bullish cross-over.  More importantly the normally leading Russell index just broke into new highs above 1,000.  The question is, will the larger indices follow its lead or will the Russell move end up being one big bull trap.  An upside trend-line break sure would be a win for the bulls, but it would be a little short of complete confirmation that we’re in a new Cycle.  The ultimate line in the sand is the Day 8 Cycle high set on June 18^th (1,654.19).  Under no circumstances would a final Daily Cycle be making new Cycle highs 20+ days into a Cycle.  If 1,654.19 is taken out then I would say the bulls are firmly back in control, that a new Investor Cycle was printed back on June 24^th (1,560 low), and that a new all-time high above 1,700 will print this summer.

But I stick firmly to my call that a deeper Cycle Low needs to be made.  Call it consolidation of a massive 8 month rally, the need to retrace and backfill such a substantial move has yet to be full-filled.  The standard retracement should see the S&P fall to at least 1,510, but a move to the 1,465-85 range would be in line with a majority of Investor Cycle Low retracements. 

Once the drop gets going, it should be “fast and furious”.  Within just 4 weeks we should see the equity markets shave over 100 more points off the index.  Once a low is formed in August, it will spawn what should be the final rally into October and a big cyclical bull market top. 

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