Planet Yelnick

Peak Rally

Let me go out on a limb and say that the rally is OVER. Today's sharp rise at the open to SP1040 and Dow9630 marks the top, and is sufficient to satisfy the wave count for a minor wave 5 to complete the second zigzag.  If I am wrong, it won't be by much; the next most likely stopping point is Dow10330, the 50% retrace, which is a mere 7% higher.  

We have seen a pattern of a sharp rise in the last two days of a month, and a continuation in the first two of the new month, so perhaps we see a final pop and drop next week.  The sharp drop off the morning peak today, however, casts doubt on that scenario. In general, if the move down is as fast or faster than the move up, it can confirm a change of trend.  More likely if we get any pop in the first few days of Sept, it will represent a last attempt to approach today's highs before the fall, and should not retrace more than 61.8% of the drop today and its possible continuation down Monday.  

Today's flurry of Prechter Prognostication agrees. The STU tonight lays out the detail of the case for a peak. A special EWT today said we have hit their idea range for the retrace (into the wave 4 of the prior 3 down, or SP1040 +/- range; and are close enough to the Dow9654-9794 range).  The monthly EWFF gives additional reasons for the peak: the second zigzag from Jul8 to Aug28 is at 62% of the first from Mar9 to Jun11, a common ratio for an end; and the TRIN (a sentiment index of advances/declines over up/down volume) is now as low as at the Oct9, 2007 peak.  Key levels to watch to confirm the peak are a break below SP1016/Dow9460 (recent minor wave 4 low of Aug27) and SP978/Dow9122 (wave B lows on Aug17).

Another indicator is from these charts, courtesy of Marty Chenard's great StockTiming blog, also reprinted here. He is looking at new daily highs on the NYSE.  The first chart (above) shows 2009, where daily highs started to pop up then faded and are on a decline.  Indeed, overall market volume has dropped for the most of this rally, and the upside volume has dramatically focused on just a few financial stocks, led by the government-backed Fannie and Freddie basket cases!  

The second chart (to the right) shows what a real rally would have looked like; in 2003 daily highs increased and went to very high levels, substantiating a major low was in and a huge rally was ahead. 

As the EWFF points out, with over 30% of volume in five zombie bank stocks, you know this rally is just lipstick on a few pigs.  It got even worse in the past five days. Thin volume on a narrow foundation marks a top. When pigs can fly! then markets will fall.

Yves on Presidential Approval Rankings and Stocks: Are They Linked? UPDATED CHARTS

This is an interesting take on the sinking poll ratings for Obama, as compared with other Presidents. The backdrop is a revolution in macroeconomic thinking that is underway, towards the Behavioralist View, that social mood and behavior drive the macro world, not the machine-like parameters that make up the myriad of macroeconomic models.  Man is not a perfect economic being who responds to Aggregate Demand and Money Supply, but a fairly irascible actor which, en masse, drives the macro world.  Just as Einstein never really leapt beyond the Classical View of physics, even though his Nobel came from his Quantum paper (on light as a particle not a wave), so too Keynes and Friedman never really left Classical Economics, constantly seeking Equilibrium in their great works.  But how is a market efficient in any macro sense, when on one day in Sept 2008 it can be high and the next day fall precipitously?  Or, as it did in 1987, seem to plummet out of the blue?  Where is or was the Equilibrium, and where did it suddenly go?

Yves explores whether the same underlying social mood is somehow driving both the equity markets and Presidential polls.  Enjoy his analysis.  

Peak Sentiment

Wave 2 (or B) rallies like this tend to extremes of investor sentiment.   The STU launches into this tonight. Fascinating stuff. Bullish sentiment in the Daily Sentiment Index on Monday exceeded 89%, higher than at the Oct2007 all time peak! Today the Intelligent Advisors survey got below 20% bears, the first time since Oct2007 as well.  Rather than climb a Wall of Worry, this rally has hit Heights of Hope. Bear markets tend to descend down a slope of hope, and we seemed poised for the slide.  The STU had been warning to look for extremes of sentiment at the end of this rally, and we are there.  

I had been watching a wave count with a strong wave 1 surge, waiting for a 2, which we appear to be in. Given the peak in sentiment, however, a revised count of the STU tonight may fit better.  They have upgraded wave 1 into the full wave C, with the end of what had been wave 1 now representing the minor wave 3 within the bigger C.  The sideways action for the past two days fits better as a wave 4 than a 2; the quick 2 I had been waiting for can be counted as having happened on a fast drop last week on the way up.  

Now, whether this sideways move is a wave 2 flat of a longer and higher wave C, or the wave 4 of C with the end nigh, is an odds-based question.  Corrections are harder to 'cess out than impulses.  Yet I had expected a sharp zigzag 2, and we are in a sloppy flat, more typical of 4 than a 2; and if it continues it is poised to morph into a triangle, which are found in the penultimate position (waves 4 or B), not in waves 2. The wave up also has a characteristic gap-up within wave iii of minor 3 of the revised count, a typical occurrence, giving credence to revision.  

With sentiment at its peak, the psychology of a reversal is upon us.  The economic consensus is a recovery is at hand.  Bernanke is the new Greenspan, the hero who saved us.  Etc.  All that we are missing is some sort of "Mission Accomplished" speech from Obama, and we may get that when he returns from his vacation.  

As the STU says, all we need now is for the pattern to complete.  It would do so with a final sharp mini-surge in a wave 5, either right away or after a little more sideways/triangle correction.  It can get there merely by cresting the recent highs, say by hitting SP1050 and Dow9700.  Of course, it could fly farther and hit my Dow10k by Aug31 bet.  But the odds of that are fading.  

Sentiment on the USD is highly negative still (with Euro positive sentiment around 95%), and the goldbugs are out in force.  The USD has held above its Aug4/7 lows, increasing the confidence that it is in a serious rally towards DX90.  Watch DX77.5 to deconfirm.  Similarly, gold has been in a triangle, which is about to end, leading to a drop towards $700.  

We are now in the area where many peaks have occurred: 1929 (Sep3), 1987(Aug24), 1939, 1969, 1998, and 2000 (where the nominal peak happened in the Spring but the last gasp before the slide was in Sep). Enjoy the slide!

Peak Stimulus

Peak Oil refers to the peak of production of oil (getting it out of the ground), not the peak of oil (in the ground). "Peak Stimulus" refers to the peak of stimulus spending, not the peak of total stimulus.  On that basis, we appear to be at Peak Stimulus.  This is a good as it gets.  This chart courtesy Zerohedge shows this quarter is the peak of stimulus spending.  The analysis from Sprott goes on to outline how this quarter is also the peak of Chinese stimulus; two Chinese banks announcing on July 29 that they would limit loans in the second half of the year was the proximate cause to break the China Bubble.  

The purpose of stimulus is not to put the economy on life support, but to jumpstart the private sector. On this score the worldwide stimulus appears to have failed.  Any slight green shoots are due to seasonal factors (housing) or government life support.  

I have written on this here about the US and here about China.  The amount of US stimulus should have given us a 3% boost to GDP last quarter (see chart): instead it was a bare 0.2%, less than 10% of what was expected.  (The math is that in a $13T economy, a 1% increase is $130B, or $33B on a quarterly basis; hence the $100B of stimulus in Q2 should have caused a 3% rise annualized, just as this chart shows.) Similarly, the Sprott report says that China has injected a whopping 64% of their first-half GDP in 2008 in the first half of 2009.  Instead of showing up in the Chinese economy, even given how China counts GDP more favorably than the West does, it has instead spilled over into stock and commodities speculation, or simply been mal-invested and lost.  

We should be seeing a 4% pop this quarter, and it seems possible that GDP will be slightly positive when the Q3 numbers come out - but nowhere close to the expected impact of stimulus.  We seem to be hitting the point of diminishing returns of stimulus via debt.  This is a known problem; see chart.  It comes from a number of factors, including banks not lending and people/business not borrowing; using the tax rebates for paying down debt; and poorly spending the shovel of sudden money.  

We end up with gimmicks like Cash For Clunkers, a classic example of the Broken Window Fallacy. And gimmicks like C4C fizzle into confusion and political spin.  The reality of that program is "eight of the ten top-selling vehicles are foreign-made cars, while U.S. cars occupied all top 10 spots on the trade-in list." It put people into debt who could have used the money or credit on better decisions.  

BTW the Clunker program created a controversy when DOT put out a chart of the top 10 cars - almost all Japanese and small.  Turns out they may have not properly counted US cars with same design but different models, such as Ford Escape two-wheel drive vs. four-wheel drive.  It may be the most bought car was a truck - the large Ford Escape SUV! Also high on the list would be other SUVs (the small Jeep Patriot and the huge Chevy Silverado).  This is what happens with government gimmicks: they are followed by government spin to attempt to "prove" that the purported purpose was achieved.  

What was accomplished?  If the purpose was global warming, why was the top car (in the real list, not the DOT spin) an SUV and why were two other SUVs in the top 10?  If the purpose was helping American car makers, why were most cars Japanese?  If the purpose was to jumpstart the economy, why are dealers expecting a sharp drop in sales?  Most likely the purpose was desperation - anything to get a green shoot.  I think what was accomplished was to make the W-Shaped Recession more likely.  

In the Greenspan Indian Summer from 2002-2007, we only got 40c on the Dollar: $10T cumulative GDP growth for $24T of new debt. Now it appears that the Stimulus is getting less than 10c per Dollar.  We are rapidly approaching a point of disaster where every new attempt to stimulate simple destroys GDP. See chart.

Final Surge!

Today was quite a surge day.  The STU thinks we should see a relatively brief affair with a sharp reversal, but first it has to run.  Neely told his traders to stand back until at least 50 SP pts have run up.  This looks like minor wave 1 of C, which should break in five waves.  If I had to paint a scenario, it would be this:  a spillover up Mon am as the weekend herd jumps in, followed by profit-taking; this is minor wave 2.  It should be over quickly.  Then the big surge up in minor wave 3, powering through Dow9700 towards Dow10K, which it will probably not make.  Then an annoying plateau in minor wave 4 testing our patience near the fable five-digit level.  Then BAM! the final spurt up through 10K to the 50% retrace of Dow10330. If this happens fast enough (six trading days) I could still win my bet.  Of course, this is just one of a myriad of scenarios.  We will know when the final top is in: the reversal will be violent, steeper than the run up. 

Is the China Boom Bogus?

China's economy appears to have recovered its growth since Nov08, but China counts GDP differently than we do.  When we sign a Stimulus Bill, we wait until the money is actually spent to count it; when China does, they count it immediately, even if it sits on a budget or in a bank.  When we ship a product to retail, we wait until it is actually sold to count it; when China ships, they count the retail price immediately.  And so on.  Is China really back on an 8% growth path?  Exports are down, and assets are way up (housing is up, stocks were way up until the last two weeks, etc.).  Maybe the budgeted funds are being used by banks for speculation?  If Goldman Sachs ran China, you betcha this is what would be happening.

If the West does not pick up, this could end badly.  Presumably the Chinese are counting on that.  And so is the vast consensus of economists.  But that same consensus got it terribly wrong in 2007, and indeed over and over if you check back on consensus forecasts.  Some Western economies have perked up, like Australia, but they are commodity-based economies which gain from China stockpiling and focusing on building intermediate goods, even if they never get sold at retail.  Some of the Euro economies popped above zero, and maybe they will emerge with sustainable growth.  And of course the US had a smaller drop in Q2 than expected (-1% vs -1.5% expected), with a trend towards a positive Q3.  

I analyzed that report before in discussing the likely W-Shaped Recession.  Let's look at it from the Chinese point of view.  For their bogus recovery to gain legs, they need the US consumer to begin buying again.  But consumer spending was down in Q2, retail sales disappointed, and indeed the whole private sector is still sinking, not rising.  The Q2 story was largely driven by a spike in US defense spending.  If that continues and drives GDP positive, it won't mean much at all for the Chinese.  If the Stimulus finally kicks in, that could mean something, but again would largely go to infrastructure projects of little direct benefit to the Chinese.  

It is also unclear if the Q2 trend should be extrapolated.  Given how GDP is calculated, a tiny increment in a quarter can mislead.  Let's do some math.  The GDP in 2007 was $14T, and a bit less in 2008, down something like 6% or almost $1T.  (The numbers keep being revised downward.)  Let's say we sit around $13T economy.  1% growth is an increase over a year of $130B, or $32.5B a quarter.  If the Stimulus pops out a $32.5B increase in Q3, it will be extrapolated on an annual basis to a 1% increase over what GDP would have been.  

Of course, since we count differently than the Chinese, the question is how much of that $32.5B would actually contribute to GDP.  Something like $100B of stimulus was spent in Q2, and yet the impact on annualized GDP was much less than that, an estimated 0.15%, plus some part of the State spending contribution of 0.30%.  Let's call it 0.20% contribution.  $13T times 0.20% is $26B.  This means the $100B had only a $26B impact in the quarter, a pathetic return, and even more pathetic if you consider the quarterly impact multiplied by 4x to annualize. $100B should have driven it up by 3%!  (Each $32.5B should get 1% growth.)  It appears that the vaunted Keynesian Multiplier is not working.

This is all part and parcel of why the worse is in front of us.  For a stock market perspective, read this piece "The Bounce is Aging, But The Depression is Young" below the fold.

Final Surge?

Market bounced off 23.6% retracement, a minimal level.  It also broke back above SP992.  Sentiment is getting bullish - as the STU today notes, in a wave 2, near the end, investors will be convinced a new bull is underway. And that indeed is where sentiment is going.  The STU is unsure whether we fade one more time to the 38% retrace, which gets us below Dow9K, or just head up.  A couple of critical gaps need to be filled, both higher, over SP1K (futures, emini contract).  Neely put out two emergency bulletins, one for the S&P and the other for the Euro.  Both indicate he expects a surge as well, in the S&P and the USD.  All in all, it looks like the Final Surge is on and a new top is ahead.  If so, the market should truly surge up.  No more choppy overlapping confusing moves.  We shall learn more tomorrow.  Maybe I can still win my bet of Dow10K by Aug31.  

Are We Repeating the 1930 Rally?

A number of folks have compared the current fall to 1937-38, partly on the view that 2000=1929. Yet a look at history shows a different analogy. We had an Auto Bubble from 1915-1919, then a Dow collapse of 72% into the early '20s. This seems comparable to the Internet Bubble of 1995-1999. In the Auto Bubble, roads, gas stations, tire shops, repair shops all got built out.  In the Internet Bubble, the digital economy all got built out.  In the 1920s after a tax cut, we had the False Bubble of 1925-29.  Florida real estate exploded.  In the 2000s after a tax cut, the Greenspan Bubble of 2004-2008 led to the huge credit distortion we are now working through. Florida real estate exploded.  (What is it about Florida?  It also had a bubble in the 1825-1836 canal bubble, which was followed by the first Great Depression in US history from 1837-1842.)  

Doug Short's excellent chart site dshort.com has been running a popular Four Bears analogy to prior bear markets. They pegged the start of this one to Oct 2007, and hence seemed to match the 1974 drop (or 1937 if they had shown a fifth bear).  Now they have matched the bottom in 2009 to 1929, and come up with this much more insightful chart.  A good commentary is at EconBrowser.  The good professor adds: 

Among the factors that turned the hoped-for recovery of 1930 into the debacle of the Great Depression were a sharp hike in interest rates in October 1931 and a decline in the overall price level of 10% per year in 1931 and 1932. Whatever else happens, I don't expect those particular mistakes to be repeated by the Bernanke Fed.

Perhaps he should be watching the PPI.  Latest stats show the sharpest drop since records started in 1947, of over 6% down in the past twelve months.  And that dreaded 10% drop in 1931 would be ahead if the analogy holds (if Mar09=Nov29, then we are in early 1930 and 2010-11 is 1931).  

China Now an Official Bear Market

SSE (Shanghai Composite) continued its swan dive after a brief respite yesterday, down another 4.3%.  Down over 20% in two weeks, the marker of a bear market in common parlance, and to this site the marker of a major change of trend.  The punditry is all over this, arguing the Dow is weak today due to the fall below 20% of the SSE.  The WSJ even adds a cute infobabe video.  As Yves pointed out, the Dow has not followed, and indeed should not be expected to follow down unless something else drives it such as drying up of liquidity or risk to earnings of US companies.  That risk would come from the underlying Chinese economy fading, which is explored in this analysis from Zerohedge.  

Yves promises an update next week, but shares these thoughts today:

We remain steadfast bulls on long term bonds.  Since our post on the 19^th June, the bull fed greenshoot died happy and fat.  The market is rolling over and the target will be shocking for most. Wave 1-2 in bonds is done from june bottom (from the Dec top an A-B-C completed).  I will be on Bloomberg Radio Thursday at 3:30  to discuss  structural buyers turning chronic long term sellers and its stock market impact.

Guidance on the Current Stock Move

Prechter is offering his recent (July) EWT for free.  You have to join Club EWI to get it, but that is a useful thing to do since you get access to his Q&A board. 

Right now the markets are hovering just below SP992 - what was support on the downside has become momentarily resistance on the upside.  As a guideline in time, this B wave shouldn't last very long; perhaps it ends tomorrow, or by early next week.  Then we should have the FInal Surge.  There is of course a chance that the top is already in and this is the start of the next major wave down.  A break below SP965 would strengthen that view.  

As a guideline in price, the chart below from yesterday's STU  provides historical perspective.  It shows how similar the Dow rally from Nov29 - Apr30 is to our rally from Mar09 - Aug09.  If Aug7 is the top, this rally has also carried the same 22 weeks of that rally, and rose 46%, a bit less than the 52% then but certainly close enough. 

Their guidance from this chart is that whenever the market broke below the lower trendline, it fell hard.  The STU draws the current lower trendline, from Mar9 through the Jul8 low, to derive targets that this B wave should stay above in order for a Final Surge to still await.  If we break those targets, watch out below!  

Also in Spring 1930 we had pronouncements that the recession was over!  You wonder whether Krugman and others will be quoted 70 years from now for their premature extrapolation.  While the US was watching itself in 1930, international markets were beginning to break down.  Similarly, the end of the China Bubble is likely to be momentous, particularly if the Chinese economy is next to fall, not just the Chinese stock market. 

Chinese Curse Day

These are certainly "interesting times" for the Shanghai Composite.  This morning it fell 4.4% and closed down 5.8%, breaking through the lower trendline - now down 18% over the past two weeks and 16% for the month.  We might see an attempt at a recovery, coming back up to the trendline from below, and then if it fails to break through, "kissing it goodbye" for a continued fall.  What was support is now resistance.  

How low might it go?  Bubbles retrace to their start, so the target for the Shanghai Composite is 1000.  The parabolic rise up in the index is clear (see my prior post), and indicative of a bubble.  Over market after market we see the pattern of a parabolic rise followed by a sharp drop back to the start of the mania.  

Yves does not think we should extrapolate for a similar fall in the Dow, even with the Dow down today. He posted this chart and an analysis over at BlackSwan.  The China Bubble Redux is from "liquidity froth" not fundamentals. The Dow may hold up as it did last year even as the Shanghai Composite fell steadily downward.  

We will say later today what the leading pundits make of this.  Most likely we are in the decline we have been expecting - the week-long B wave before the Final Surge to new highs to end this bear market rally.  Whether we get to Dow10K by end of August seems problematic - I may lose my bet - but look for the US equities' correction to end between SP965-985.  It hit the upper end of that range this morning.  

We will then see over the last half of the year what this means for the Greater Recession.  A lot of calls of its end, especially based on China's Bubble Redux and how it has pulled up Australia and other commodity countries, and may have caused the Euro economies to at least show signs of life this past quarter.  I have written how China is not yet large enough to pull the world out of a recession, but it certainly can caused a stutter-step in the stats, as it may have done.  If the Chinese are hitting the limits of their ability to use fresh credit (debt) to drive their bubble, the coming fall-off of growth in the Chinese economy may also drive the fall off the W-shaped recession after a momentary positive GDP report in Q3 or Q4.  

China Bubble Drop Nearing Critical Trendline

The STU commented on the drop in the Shanghai Composite today, giving this chart and noting that it is approaching the lower trendline (the 2-4 line of wave C).  If it breaks through the odds are high its bear market rally is over, and it will be the first to roll over.  US indexes should follow after the reality sets in that the Chinese recovery was a mirage driven by debt, the Final Bubble so to speak.  

Right now the S&P hovers above the crucial 992 level.  A break of that indicates a change of trend and the now two-week's delayed week-long decline before the Final Surge.  Thus the perspective remains of a higher high in the range of SP1100 and Dow 10K (+/- 300) by end of summer, after the decline.  Recall that Dow9700 puts it in the heart of the prior 4th wave, a common stopping point; and Dow10334 puts it at the 50% retrace.  

The USD strengthened today, and now seems poised for a dash higher from DX78 to DX90, a huge move. If so, oil should drop and the Dow will be under pressure as foreign interest will slacken (noting that the Dow/Dollar inverse relationship in part reflects a Dollar carry trade and the Dow as a hedge against Dollar weakness).  

All in all, Monday should be a Chinese Curse Day ("may you live in interesting times") for both the Chinese markets as well as US equities. 

China Bubble Update: Markets Open Down UPDATED

Major Chinese markets down over 2% by mid-day, continuing a slide that began several days ago after a double top.  Watch this today and Monday to see how this develops.

UPDATE Friday:  The Shanghai Composite ended down 3%.  It is down almost 10% for the week and over 12% from its last peak.  This is in the realm of a market crash, and given how parabolic the index went up since last November, a sharp and deep drop is to be expected.  It appears to be well underway.  As put by Prieur du Plessis:

Chinese Shanghai Composite Index (3,046) has now declined by 12.2% since its peak of August 4. This morning the Index dropped to below its 50-day moving average (3,097), but is still comfortably trading above its 200-day line (2,413). The Rate-of-Change Indicator (black line in the bottom section of the chart) is also about to break below the zero line, thereby flashing a sell signal.

China Bubble Bursting: Double Dip

We have been following the dramatic bubble in China.  The Shanghai Index has done a double top based on indications the horrific pace of reflation via bank credit is coming to an end.  This chart courtesy of Gary Dorsch shows how the Chinese stocks have risen with the credit reflation.  The second chart shows the double dip amidst pronouncements pulling back from the reflation. 

We have also seen the end of the stockpiling. Baltic Dry has dropped indicating less shipping demand, and China *may* have stopped buying iron in particular from Australia.  (This is wrapped up in a disturbing story around China trying to buy the Aussie mining company Rio Tinto, so momentary slowdowns may be due to those negotiations not the ongoing stockpiling of resources.) 

The Chinese reflation may become a paradigmatic example of how government stimulus can put an economy on life support, and create an illusion of growth, but once withdrawn, so ends the faux recovery.  We shall see when this story ends.  The Chinese government may slow down their bubble-making to see the effect, and may find that the drop is much faster than they expect.  This may cause a secondary reflation in Q4 before this effort by the Chinese comes to an end.  Japan tried this in the 1990s and ended it in 1997.  It put their economy on life support, and the patient remained sickly with a small remission during the US bubble in 2004-2007 and a recent relapse into a dreadfully desperate state.  China may overtake Japan as the second largest economy n the world later this year, if this China bubble continues that long.  A terrible fall for the formerly great Japanese economy.  

Whereas the US is big enough to pull much of the world with it when it bubbles, China is not that great a factor.  The end of its bubble may be seen in the future as the final bubble before the Greater Depression takes effect.  

Decline is Nigher or Market Spikes Higher

Interesting market juncture.  At a top we should see divergences, and we are starting to see Naz lag.  Wave count according to the STU is that we are either in for (a) the week's delayed decline or (b) a spike up towards Dow9700 (+ 100 /- 50), the range of the peak of the prior wave 4 of (3) down, a very common level.  If the spike, then this bear rally is probably spent.  If the decline, it gains one more leg up towards the next Fib level, Dow10334 (50% retrace).  A break of SP992 signifies a change of trend to down.  

Prechter rushed out his monthly EWT by a week in order to get the message out before this potential peak. He gives more reasons for the end being nigh in the EWT.  Suffice to say we have satisfied Fib relationships in retrace (38%) and time (1/3), and are seeing the beginnings of topping behavior.  

The STU adds tonight: "key technical indicators are uniformly bearish, so upside potential should be limited if the rally continues."  And that really is the point.  If you recall, last Feb Prechter put out an EWT saying the deep fall was likely over, or if not, further downside was limited.  Not worth the risk.  And indeed the big bear rally happened within two weeks.  I remember this as I put out a couple of posts on a potential bear trap - trapping bears just as the rally commenced.  So bearish were many of my readers they thought I meant a bull trap.

So we probably sit either at the top, or within 5% (Dow9800, the high end of the next target range) or 10% (Dow10334).  Is it worth that extra 5% to risk the next wave down?  If you are so inclined, look for a choppy topping action near the end then a sharp fall signifying the change of trend.  

Dollar Rocks UPDATED

Huge move in the Dollar Index today signals a major Dollar bottom. Also a huge move in Treasury rates up after two bad auctions this week. Half a $Trillion to be auctioned over the next two weeks - heretofore that would have been over a whole year, and an exceptionally bad year of deficits at that. S&P hit the 38% retrace, and Dow came close enough. Dumb money coming into stocks. I still expect a run to Dow10K by end of summer. Market has not had the expected pullback but watch for it next week. Unemployment dropped slightly although I expect the market to realize that if it weren't for the long unemployed dropping off unemployment it would meandered up to 9.7%.  

UPDATE 8/10: This chart gives a good perspective, courtesy EconomiPic.  Unemployment got worse by 250k jobs, yet as a percent the unemployment rate got slightly better.  How come?  Because the total labor pool shrunk more than jobs, causing a net gain. As explained in The Big Picture, the chart shows that the total labor pool as a percent of population has been falling since the 2000 peak, meaning people are stopping looking for jobs since the dot-com bubble peak, and more so now as benefits run out and they disappear from the reported stats.

UPDATE 8/8: Friday's STU has pulled back from any targets for the potential B wave pullback, but does expect it to be sharp and quick.  The Market Ticker has a good look inside the unemployment numbers.  Simply put, the total US employment continued to drop, so any apparent downtick in unemployment is not due to fewer unemployed, but fewer reporting for benefits as they drop off the extended time period.  Zerohedge has a good analysis (and great comments) on why the Fed will soon end Quantative Easing (QE).  Bernanke has signaled that in the last month with his 'I have an exit' speeches and OpEd's. He traded the high quality reserves last fall for bank junk, and will likely justify his QE as primarily to repair the quality of the Fed's reserves. Next week we may see this signaled in the FOMC meeting.  If so, the USD should run to Dollar Index 90 as rates of the 10 yr crest 4%

Decline is Nigh

STU notes sentiment is very bullish, as it was at the peak in Oct07. Typical of 2d wave bear rallies. The expected decline has suffered a final wave v jink up, which either ended yesterday or should tomorrow. Pattern may be a rare ending diagonal - if so a pop up tomorrow but not above SP1018 then a drop over a week, likely to SP968. USD sentiment is more bearish than at the prior low, typical of nearing an end to the downtrend. Given the inverse Dollar/Dow relationship, a pop in the Dow and a drop in the Dollar tomorrow would not surprise.