The Binary Circumstance

When I want a technical view of the stock market other than my own, one site I check is TraderMike.net.

In his October 28, 2009 recap, Mike notes that the major indices and many stocks dropped below their 50-day moving average. This has done some serious technical damage to the market. I was particularly interested in his daily chart of the Russell 2000 Small Cap Index, which he notes has confirmed a double top which further supports a bearish outlook.

Just a month ago, I posted a monthly chart of the S&P 500 going back to 1995 to illustrate a huge double top on the S&P 500 index. It is important to note that even though the market inched up some since then, it failed to break through the resistance trendline that goes back to 1995. Given the technical damage in the market yesterday, it is unlikely that the market will break through that line to the upside any time soon.

SPY and other long funds have high put/call ratios. That is usually bullish for the market because it shows a lot of people are betting on the market going down. The market usually moves inversely to expectations, especially when those expectations are extremely bullish or bearish.

With so many betting on the short side, we should not have been too surprised that the market jumped almost 200 points today, the 29th, gaining more than it lost yesterday, the 28th. Much of that was probably short covering. It looks to me like the market will trend lower, in spite of today’s report of healthy GDP growth, but as traders cover shorts, the decline should be slowed by bounces similar to today.

Fundamentally, it looks like things have improved a lot from a year ago. But as I’ve stated before, we’re doing the same things to get ourselves out of this mess that we did to get into it and that cannot work long-term. The government has been supporting the banks, the auto industry and the housing market. That makes the economy appear much stronger than it is. What happens when those supports are removed? And they have to be removed if we are to have a sound economy again.

Charles Goyette, author of the upcoming book, The Dollar Meltdown: Surviving the Impending Currency Crisis with Gold, Oil, and Other Unconventional Investments, wrote an article for CNBC about what the government and the Federal Reserve have done to the dollar and it’s impact on the price of gold.

He explains how our once-strong dollar is losing its status as the world’s reserve currency due to relentless borrowing and printing:

As long as the rest of the world was willing to continue holding dollar reserves, their demand for the dollar would bid its price higher than it would otherwise be.

As long as oil producers were willing to sell their depleting commodity for a depreciating, irredeemable currency, Americans were the beneficiaries of this added dollar demand.

If the world would just continue to go along, the Federal Reserve could accommodate spend-thrift US politicians and create new dollars at virtually no cost.

But to mix our ornithological metaphors, the chickens have begun coming home to roost. There is no reasonable prospect of the federal debt being paid down, at least if both the visible ($12 trillion) and the hidden ($100 trillion?) debt are taken into account. Nor can anyone possibly believe that today’s government bonds can be paid except by issuing new bonds tomorrow.

It is this reckoning that had gold pierce the $1,000 mark in 2008 (while oil soon surged ahead for the same reasons to $147). And despite the scramble for liquidity with the mortgage meltdown last year that drove gold briefly down to almost $700, it didn’t take long for gold to work its way back up and to new highs.

The dollar bubble may not pop suddenly like the dot com bubble or the housing bubble. But like the miner’s canary, the gold price is warning that our monetary system is toxic…

It’s an excellent, short article that does a good job of explaining what has happened to the value of the dollar since Nixon took us completely off the gold standard in 1971.

The World Gold Council has a graph of monthly gold prices since 1971. It shows what happened to the value of the dollar relative to gold once the government and banks had no limit on how much money they could print. The same page shows that this is a global phenomenon, often because other countries used the dollar as their reserve currency. Paper currency around the globe is becoming increasingly worthless.

As I noted in my previous post, the Federal Reserve has debased the dollar so that what cost $.08 in 1913, now costs $1.00.

It’s no wonder that Ron Paul wants to put an end to the Federal Reserve.

I’ve noted in previous articles that no person who works for a living can compete with someone who has a printing press that is counterfeiting money. Government and bank printing presses have enslaved all Americans for generations to come to a massive debt that can never be paid off without enormous pain. And most Americans have gone along willingly.