From a technical analysis perspective things don’t look promising for equities or precious metals for the next 4 weeks. Below is a look at various patterns – Symmetrical Triangle, Broad Market Instability Index, Three-Peaks and a Domed House, Bump-and-Run Reversal Top and Horizontal Channel – which tell the story. Words: 1200

So says Dr. Nu Yu (http://fx5186.wordpress.com) in his latest Market Weekly Update*.

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the report below for the sake of clarity and brevity to ensure a fast and easy read. The report’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

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Dr. Nu’s analysis of the various markets is as follows:

Broad Stock Market is Forming a “Symmetrical Triangle” Pattern

The Dow Jones Wilshire 5000 index, as an average or a benchmark of the total equity market, is forming an intermediate-term “Symmetrical Triangle” pattern (see here). The price trend can be any direction leading to this pattern depending on which side breaks out. The Wilshire 5000 index is below the 89-day moving average and is in the choppy zone of the triangle with negative readings of both the trend and momentum. The Leading Wave Index (LWX) indicator, color coded in the price bars of the following daily chart of the Wilshire 5000 index, closed in neutral territory on Friday.

The LWX forecasts a bullish time-window for the next four weeks.

Broad Market Instability Index is above the Panic Threshold

The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 155 on Friday. This reading is above the panic threshold level of 46, and it indicates that the current market is bearish. The BIX is plotted in the following chart as compared with the Wilshire 5000 index.

S&P 500 Index Derailed from the “Three-Peaks and a Domed House” Pattern

As affected by Super Committee failure last week, the S&P 500 index derailed from the “Three-Peaks and a Domed House” pattern as shown in the chart below. [See Dr. Yu's previous article Update: S&P 500′s “Three-Peaks and a Domed House” Pattern Continuing Climb from “Basement” to “First Floor”] The S&P 500 index returned into the “Basement” territory and it is not on track with the model. Tracking the S&P 500 index with this pattern is terminated [suggesting that the index likely will not rise much in the short term.].

Gold is in the “Plunge” Phase

The gold index is still in the “Plunge” phase of the “Three-Peaks and a Domed House” pattern but the time-window is going to run out for the “Plunge” phase.

 

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Gold is in “Bump-and-Run Reversal Top” Pattern

The gold index is forming an intermediate-term “Bump-and-Run Reversal Top” pattern and it now is in the “Bump” phase. The next target prices: 1) $1550 at the Lead-in Trend Line, and 2) $1380 at the Target Line. [See Dr. Yu's previous article  Gold Going to $1,300? “Three-Peaks and a Domed House” Pattern Suggests That’s Possible and The Case for $1,390 Gold Soon – and $1,000 Gold Later.]

Silver is in the “Run” Phase with “Dead-Cat Bounce”

The silver index is still in the “Run” phase of the “Bump-and-Run Reversal Top” pattern. After a “Dead-Cat Bounce”, silver should be in a post-bounce decline driving prices gradually lower. The last price target is projected at $23 on the third target line, which is close to the price level when this pattern originally started on the left side of the following chart. [Dr. Yu's previous article on silver was Will Silver “Bump-and-Run” Down to $22/ozt? Time Will Tell But it Doesn’t Look Good.]

U.S. Dollar is Breaking to the Upside of the “Symmetrical Triangle” Pattern

The US dollar index is breaking to the upside of the 11-month “Symmetrical Triangle” pattern (see here).

U.S. Treasury Bond is Forming a Horizontal Channel

The 30-Year US Treasury Bond index is forming a horizontal channel pattern (trading range).

Asset Class Performance Ranking with Bond Leading

The following table is the percentage change of each asset class (in ETFs) against the 89-day exponential moving average (EMA89). Currently bonds, oil and the US dollar are outperforming. Food and equity are underperforming.

Sector Performance Ranking with Utilities Sector Leading

The following table is the percentage change of sectors and major market indexes against the 89-day exponential moving average (EMA89). The Dow Jones Wilshire 5000 index, as an average or a benchmark of the total market, is 5.60% below the EMA89. Outperforming sectors are Utilities (-1.61%), pharmaceuticals (-2.50%), and Consumer Goods (-3.30%). Underperforming sectors are Banks (-13.63%), Materials (-10.17%), and Financials (-9.26%). The Dow Jones Industrial Average (-3.74%) is outperforming the market, and the Russell 2000 Small-cap (-7.86%) is underperforming.

BRIC Stock Market Performance Ranking with Brazilian Market Lagging

The table below is the percentage change of the BRIC stock market indexes against the 89-day exponential moving average (EMA89). The Brazilian market is outperforming the US market, and the Russian, India, and Chinese markets are underperforming the US market

.

Financial pundits have been cheering the declining U.S. trade deficit, but they should be careful what they wish for. Once the U.S. is no longer running a huge trade deficit, then all those exporter nations will no longer have hundreds of billions of dollars floating around, looking for a home in Treasury bonds. Interest rates are about to start rising, and will continue rising for a generation. Words: 782

In further edited excerpts from the original article* Charles Smith (www.oftwominds.com) goes on to say:

The Fed has created massive artificial demand for more U.S. debt in two ways:
1. by direct purchase of bonds being auctioned and
2. by secretly buying Treasury bonds from “primary dealers” (banks) which give the appearance that some private parties are actually buying T-bills to hold, when in fact they are only temporary proxies for cloaked Fed purchases.

Now, however, as the Fed ends some of its lavish support of the Treasury debt and Congress and the Obama Administration are stepping up their borrowing to unprecedented levels it begs the question as to who will be the “buyer of last resort”. It won’t be China for a number of reasons:

1. When China’s trade surplus with the U.S. was expanding into the hundreds of billions every year, the Chinese needed a place to park all those dollars. U.S. Treasury bonds were liquid, supposedly safe and available in limitless quantities. Keeping interest rates cheap for their American “consumer” debt junkies made good sense as well. Now, however, the gargantuan trade surpluses are shrinking, and the torrent of dollars has diminished.

Financial pundits have been cheering the declining U.S. trade deficit, but they should be careful what they wish for. Once the U.S. is no longer running a huge trade deficit, then all those exporter nations will no longer have hundreds of billions of dollars floating around, looking for a home in Treasury bonds.

2. China holds about $2.27 trillion in foreign reserves, about two-thirds of it in US dollars, making it the world’s largest holder of US Treasuries outside the United States, according to the US Treasury Department. Now, however, it has fewer dollars to park in T-bills and has started trimming its holdings of long-term Treasury debt.

OK, let’s add this up: the two primary sources of demand for new Treasury debt are scaling back or even dumping their holdings, while supply of new Treasury debt is increasing at record levels. Thus, according to the laws of supply (increasing rapidly) and demand (falling), the Treasury’s ability to palm off hundreds of billions in new debt every few months is about to outstrip demand by a long shot. The only way to increase demand will be to raise interest rates, which will then spread to all layers of the economy. All interest rates will rise, including mortgages.

There really is no escape from this conclusion and this is about 2010 through 2035, as bond rate cycles tend to run between 18 and 26 years. Just as interest rates fell for 26 years, now they will rise for a generation or so.

For those who think the newly frugal American household or corporation will step up and buy the $1.4 trillion in new debt and the $2 trillion in debt being rolled over each and every year–dream on. American households were, in fact, net sellers of Treasuries in the second quarter of 2009, and on a massive scale. Purchases by mutual funds were modest, while purchases by pension funds and insurance companies were trivial. The key, therefore, becomes the banks.

a) U.S. banks’ asset allocation to government bonds is about 13 percent, which is relatively low by historical standards. If they raised that proportion back to where it was in the early 1990s, it’s conceivable they could absorb about $250 billion a year of government bond purchases but that’s a big “if.”

b) That just leaves two potential buyers: the Federal Reserve, which bought the bulk of Treasuries issued in the second quarter; and foreigners. Morgan Stanley’s analysts have crunched the numbers and concluded that, in the year ending June 2010, there could be a shortfall in demand on the order of about a third of projected new issuance.

If the Fed and Chinese cut back, due to not having more dollars to squander on T-bills or from various other constraints, then the pressure to sell Treasuries at whatever the market demands could cause rates to explode higher, to the surprise of virtually all observers.

*http://seekingalpha.com/article/179827-why-interest-rates-will-almost-certainly-rise-in-2010

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The bond market is signaling that rising prices are just ahead and you should be worried. Don’t be deluded into thinking that inflation “might be coming” in the future and that once you see the signs you can protect yourself. If you wait too long to take precautions, this silent thief will most certainly steal your wealth and savings. Take the right actions today, and you can not only insure your wealth against erosion by inflation… you can generate life-changing profits as well. Words: 853

In further edited excerpts from the original article* Jon Herring (www.investorsdailyedge.com) goes on to say:

First, it is important to have a proper understanding of inflation. Most people believe that the definition of inflation is rising prices. This is not true. The definition of inflation is when the supply of new money outpaces the production of goods and services. When an increasing supply of money chases a decreasing or static supply of goods and services, the money becomes worth less (or worthless, if you prefer) and the price of goods and services goes up.

In other words, rising prices are a symptom of inflation. They are the end result of a monetary phenomenon but if you wait until the symptoms appear, it will already be too late. If you own a house on the Gulf of Mexico, you wouldn’t start pricing hurricane insurance with a Category 4 storm curling around the Florida Keys. Likewise, the time to shop for inflation insurance is not when prices have already begun to rise and here are some early indicators:

1. The bond market is signaling that rising prices are just ahead and you should be worried. The credit markets are much larger than the stock markets. These markets are driven by traders whose job it is to see beyond the lies and propaganda coming from Washington and Wall Street. You will not have to wait for asset deflation to finally give way to inflation. The bond market will spot it on the horizon and begin discounting bonds and raising long term rates. When Uncle Sam’s creditors begin to worry about inflation, they demand a higher rate of interest for their loans. As interest rates tick up, bond prices fall and the prices of long-term U.S. Treasury bonds are falling at a record clip.

2. Another indication that the first winds of inflation will soon arrive is that gold stocks have broken out to highs not seen since 2008. The market is speaking loud and clear. It is time to batten down the hatches.

There are a number of ways to profit and protect your wealth during a period of inflation. If you are knowledgeable and prepared, it can make you a fortune.

1. you should have a healthy portion of your portfolio in precious metals and energy investments.

2. consider shorting long-term government bonds. As interest rates inevitably rise, bond prices fall. Shorting the TLT would make an excellent long term inflation hedge. You could also consider buying TBT, a leveraged inverse fund which seeks to return two times the return of the TLT. In other words, if the TLT falls by 10%, the TBT should rise 20%.

3. blue chip companies with strong business fundamentals and a long history of raising dividends are also an excellent way to profit in an inflationary environment. These companies can raise their prices to keep up with inflation, and then pass the profits along to shareholders and the consistently rising dividends can produce a yield that outpaces all but the most severe inflation.

4. hold sensible levels of long-term fixed rate debt on valuable assets (a mortgage, for example). By “sensible”, I mean debt that can be easily serviced, even in a worst case scenario. Fixed rate debt can be a powerful financial tool in an inflationary environment. How else could you legally borrow a dollar and pay back 50 cents? If you use that debt wisely to purchase assets that increase in value over the term of the loan, your profits can be substantial.

Don’t be afraid of inflation. It is already here and there is nothing we can do about it. The effects will soon be obvious to all. Just make sure you are among those who are protected and prepared to profit.

*http://www.investorsdailyedge.com/inflation-is-not-coming-it-has-arrived.html#more-4413 (Investor’s Daily Edge offers a free daily investment newsletter in which you’ll receive practical strategies for protecting your portfolio and multiplying your money. You’ll also learn about undiscovered opportunities in emerging sectors and markets, deeply discounted stocks, recommendations for bonds, cash, commodity and real estate investing, and top ETFs. To view archives or subscribe, visit Investor’s Daily Edge.)

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By bailing out bankers, brokers and CEOs, Washington has created the most dangerous bubble so far: the enormous and rapidly growing explosion of federal debt — U.S. treasuries — dumped on investors worldwide. You don’t need a PhD in economics to know what’s next. Like the tech bubble and real estate bubble that preceded it, this new bubble will also burst, wiping out trillions more dollars of invested wealth. Words: 770

In further edited excerpts from the original article* Martin D. Weiss (www.uncommonwisdom.com) goes on to say:

There are 3 compelling reasons long-term bond prices MUST crash:

Reason #1: Exploding Federal Deficits
The 2009 budget deficit of $1.4 trillion was the worst in history — more than three times larger than the previous record and the Congressional Budget Office (CBO) has projected that, rather than shrinking, the 2010 deficit will be $1.4 trillion. Worse, Washington will sink a total of $7.4 TRILLION deeper in debt over the next ten years.

The White House’s Office of Management and Budget (OMB) quickly disagreed, pegging the 2010 deficit at $1.6 trillion and promising an $8.5 trillion gusher of red ink over the next decade.

The New York Times quickly chimed in, pointing out that about 80 percent of the government’s deficit forecasts over the past three decades were too optimistic. In fact, just two years ago, the CBO said the 2010 deficit would be $241 billion. Now it’s likely to be at least $1.6 TRILLION — or over SIX TIMES MORE. Imagine if the government’s current ten-year debt estimates — already over $8 trillion — turn out to be equally far off-target! Of course, that would be impossible. Bond investors would simply stop lending Washington money long before that could happen.

Reason #2: An Explosion in the Supply of U.S. Treasury Bonds
It would be bad enough if Washington only had to borrow enough to equal each year’s budget deficits but Washington also has to borrow enough to replace Treasuries that are maturing — and that means an even greater avalanche of Treasuries need to find buyers each year.

Total issuance of government debt hit a stunning $922 billion in 2008 and then surged even higher to $2.1 trillion in 2009, and it’s on track to top $2.5 trillion this year. The size of just ONE WEEK’s debt auction has ballooned to almost $120 billion — more than the total supply hitting the market in a FULL year not long ago.

The laws of supply and demand dictate that when you get a massive increase in the supply of anything, its value plunges — and Treasury bonds are no exception.

Reason #3: Global Investors Starting to Rebel
So far, given the realities above, the U.S. treasury market has proven to be remarkably resilient because, in the global competition for investor funds, U.S. Treasuries are typically viewed as the “least ugly” alternative for many investors. That is why, so far, most foreign investors — now holding about 60 percent of all marketable U.S. Treasuries — have been willing to pay a relatively higher price for them and accept lower yields but now even that is changing! China, the single largest holder of U.S. debt, recently dumped more Treasuries than in ANY month since the government started tracking the data in 2000. The 30-year auction was especially pathetic. Indirect bidders — mostly foreign governments and investors — took down just 28.5 percent of the bonds sold, compared to a ten-auction average of 43.2 percent percent. Prices slumped and yields surged as a result. In effect, the U.S. Treasury had to bribe investors with higher yields to get them to buy.

Immediately alarm bells began ringing at the Fed. [In mid-February] the U.S. Federal Reserve raised the discount rate on loans made directly to banks by 25-basis-point increase which was the FIRST hike in the discount rate since early 2006.

Secretly, the Fed is in a panic to ward off a bond market collapse! They know that, sooner or later, they MUST send the message that they’re serious about cutting back on their mad money printing. The danger of course, is that foreign investors will get an entirely different message: that Washington’s efforts to fight the most severe recession since the Great Depression are waning. If that happens, you could see turmoil — not just in the bond market, but in every asset class imaginable.

*http://www.uncommonwisdomdaily.com/on-the-brink-of-a-bond-market-apocalypse-3-8479 (Uncommon Wisdom is a free daily investment newsletter from Weiss Research analysts offering the latest investing news and financial insights for the stock market, precious metals, natural resources, Asian and South American markets.)

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Optimists expect mild inflation in a decent recovery. Pessimists fear the feds may have waited too long; they think they see higher rates of inflation coming. Here on the back page we see no recovery…nor any inflation. At least, not yet. Instead, we are blind. We see nothing. As for what is coming…a slow motion depression wouldn’t surprise us. Neither would the collapse of the public debt market. Words: 594

In further edited excerpts from the original article* Bill Bonner (www.dailyreckoning.com) goes on to say:

There is always a wide gap between the Fed’s reach into the economy and their grasp of what they are really doing. When the Fed increased reserves in the banking system, the idea was simple enough. More reserves would allow the banks to lend more. In turn, more credit would allow consumers to spend more. Ergo, the recession would soon be over.

The more reserves the Fed pumped into the banking system, however, the more reserves the bankers didn’t lend out. In 24 months, excess reserves (beyond what was needed for loans) expanded 500 times from the level they had been for the previous 30 years.

If the banks chose to lend these reserves they could multiply them into another $10 trillion to add to the money supply. Instead, lending to households and business is in a steep decline. Nothing like it has happened since WWII. Total credit outstanding is falling too. The banks are barely even lending to the US government from which they got the money in the first place. Why?

The “Unintended Consequences” of Quantitative Easing
Bankers competed for yield with the deepest pockets in the monetary universe – the central bank itself. When the Feds bought Treasury bills they drove yields down to such skimpy levels that the incentive for risky private loans was nearly lost all together. Better to leave the money on deposit at the Fed.

No Loans, No Multiplier. No Multiplier, No Recovery.
Instead, the Feds take a dollar’s worth of supposedly “idle” resources out of the private economy (actually, savings that people hoped to spend or invest later); squander it on bribes, bailouts or boondoggles; and get 90 cents worth of ‘recovery.’ Then, when a real recovery doesn’t come, they spend two dollars.

Where this will end up? With the multiplier out of action, consumer price inflation – and a recovery – seem far away and the Feds are helpless. What? What about more government spending or dropping hundred-dollar bills from airplanes? But those tools have self-mutilating effects too. They jeopardize governments’ access to deficit financing.

Inflation and Rising Interest Rates are Coming
Sooner or later, lenders will worry about inflation and the risk of default. They’ll demand higher interest rates. Treasury bond yields will rise, in real terms, even in a deflationary world. These higher rates affect public finances like a cold draft on a pneumonia patient. As governments pay more to borrow, their condition deteriorates. The odds of default increase.

The slow motion depression continues, if we are lucky…and nothing goes wrong.

*http://www.dailyreckoning.com.au/mild-inflation-in-decent-recovery/2009/12/07/

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
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