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Is There Something Rotten in the Market?
(and 'Depression 2011' update)
  (April 6, 2007)

Let's take a look at the 3-year chart of the Nasdaq, which has been rallying this week on the good news that the war with Iran has been rescheduled due to conflicts with other previously scheduled wars.

Judging by the week's action, the Nasdaq has resumed its upward climb. To this amateur chart-reader, it's a mixed bag of signals. On the plus side, the index is back above its 20-day moving average without even testing its 50-day MA. The stochastic is also rising in a bullish manner.

On the bearish side of the ledger, the break in the uptrend is still evident, and the Bollinger bands have tightened, a pattern which presaged a major drop last year. In a disturbing divergence from the uptrend, the RSI, MACD and stochastic are all tracing declining patterns.

The long-term uptrend is still intact, though, and even if the market drops 15% to 2100 then that trend is still in place. Interestingly, the trendline is intersecting with the 200-day moving average.

What can we discern in a short-term (3-month) chart?

It looks bullish. The price has moved above both the 20-day and the 50-day moving averages, forming an obvious uptrend. MACD and RSI are positive, and the stochastic, while overbought, is also in an uptrend.

The only fly in the ointment is the gap (2470-2492) which opened up on the day of the big drop, February 27th. Gaps often become resistance, so the index will have to fill this gap before proceeding higher.

Though I can't state exactly why--perhaps a more experienced chart-reader using different indicators could do so--something in these charts suggests a market past its prime. If the index powers through the gap, then a new high is certainly a possibility. If it stalls in the gap, then it could roll over and end up testing its 200-day MA at 2100. It certainly 'bears' watching.

Depression 2011 update. Readers of the April 3 entry America Now (2007 'debt prosperity') and Then (2011 Depression) checked in with a variety of scintillating comments. Astute reader Jay M. had two suggestions:
After reading your comparision of 2007-2011 economic conditions I believe you should open this comparision up to your readers, you may get some really funny ones. I would like to suggest one:
2007-You scan the Sunday circular looking for an ATV, mini motorcycle or mini scooter for your boy.
2011-You push a go-cart that you and your son fashioned from parts found in the town dump down the hill.
Frequent contributor Michael Goodfellow extended the spirit of the piece with these additions:

Small TV found on curb won't work because all TV transmissions have gone digital, and the old receivers can't handle them without a converter box.

Download of songs from iTunes won't work -- massive piracy will cause all for-pay services to collapse.

Windows98 PC useless, since you can't connect it to the internet without immediately picking up a virus.

Social Security check not "huge", since government attempts to bail out the economy have devalued the dollar.

Not sharing one DVD amoung family -- bootleg DVD's are nearly free.

WebMD not in library -- government funding for nonessentials has evaporated. Instead, use pirated DVD.

Last home computer you bought was not sold -- it was nearly worthless. Still works fine though, except for the virus-ridden software.
Knowledgeable reader Scott M. also noted the analog TV in my entry would no longer work:
The TV from the curb won’t work in 2011 as all analog broadcasts will be discontinued. So, no TV at all.... Maybe people will find books from the trash, or the free bin from the second hand book place, to read instead.

from an MSN story: "Legislation passed by the Senate on Wednesday would require broadcasters to end their traditional analog transmissions by Feb. 17, 2009, and send their signals digitally. Such technology promises super-sharp pictures and better sound."
Long-time correspondent Mark D. came up with another great idea: adding a "1967" column:
You forgot to put 1967 with the same items as 2011 as a third column. the only TV I watched when I was a kid was rocky bulwinkle on our next door neighbor's TV before school. Then we got a TV around '67 or '68 because we watched batman, disney etc on a 9" black-and-white zenith TV that still works.
Our U.K. Correspondent added a thought-provoking entry linking housing, travel and extended families:
Here's one of mine on the 2007-2011 theme

2007: Fly to far off cities to visit your parents and siblings.
2011: Walk to the basement or garage for a visit.

My feeling is that things will be getting much more local and when times get tough people will pull back and try to form traditional extended family groups. If this is the case think what that will do to the real estate market. In 2006 (in the above example) three houses are required, in 2011 only one is required. Consider the numbers if this trend becomes commonplace. A practically instantaneous fifty percent drop in demand for housing if just one formerly independent family component coalesces around another with a job or salvagable house/mortgage. This effect is the accelerated opposite of the familial diaspora in evidence since the 50's. The fact that many families are estranged will doubtless complicate this. However, I believe that the families that do manage to gather in will be much happier than before.
As I have noted elsewhere, housing is remarkably elastic. Cities such as San Francsico have added or lost tens of thousands of residents despite very modest changes in the number of dwellings. Thus the above scenario is certainly plausible.

Correspondent Brian H. provides a somewhat darker "tax the last ones standing" perspective on 2011:

We’ll have government programs to ensure people get their daily intake of Starbucks coffee.

Right up until the whole edifice collapses on itself. (which is probably further away than 2011, although you never know)

Everyone is protected against their bad decisions. Those of us with little debt, lots of savings, etc, we’ll be taxed as hoarders or something similar.
Thank you, readers, for such a wide array of additions and suggestions.

For more on this subject and a wide array of other topics, please visit my weblog.


copyright © 2007 Charles Hugh Smith. All rights reserved in all media.

I would be honored if you linked this wEssay to your site, or printed a copy for your own use.


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