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This Week's Theme: "I Wonder". . . If the Stock Market Will Roll Over   (February 26, 2007)

This week's theme is "I wonder"--as in, I wonder if the stock market is about to roll over into a sharp descent. To get the wonderment ball rolling, let's look at three charts: the SPX, a broad measure of the U.S. stock market; the VIX, a measure of near-term volatility, and the XAU, a broad measure of gold and silver, all in three-year timeframes.

Looking at the steep climb of U.S. stocks for the past 7 months, I have to wonder: is the economy really that much better now than it was over the previous 3 years? The market has screamed upward for over 7 months as if the economy is near-perfection. Uh, right. Did anyone say "subprime mortgage meltdown"? Rising oil prices? Declining GDP? Negative savings rate? And how about that flattened MACD? Looks pretty toppy, as does that 6 months of uninterrupted overbought stochastic.

The VIX, declining steadily for the past 3 years, fairly shouts, "No worries, Mate!" If you looked at this chart and nothing else, it might seem surprising that the yield curve has been inverted for months, industrial capacity utilization has dropped below 50 (big red flag), oil has risen from $50 to $61, the market has risen for nearly 8 months without so much as a hiccup, setting a record unmatched unless you go back 50 years to 1954...and those nasty subprime loans blowing up. Hmm. Nothing to worry about, eh? I wonder--if the market gets a whiff of reality, perhaps it will be cut down much like Napoleon's whiff of grapeshot cut down the mobs of Paris. (A thousand pardons for the egregious historical reference.)

And speaking of bullish: how about that gold? Wooie. Virtually every gold pundit and analyst out there is calling for $730 gold, $780 gold, and then that magic $1,000 gold. But a funny thing tends to happen on the way to unanimous super-bullishness: when everyone is in agreement that something can only go up, everyone usually turns out to be wrong. If it were that easy, we'd all be millionaires.

First, there's that big wedge in the XAU. Yes, it might bust out to the upside, as everyone from 8 to 80 seems to be predicting. But then look at the MACD and the overbought stochastic, and a tiny doubt introduces itself, if not about the inevitability of the ascent to $730, then perhaps about its longevity.

What could cause the market to roll over into a long-awaited correction? What fly could make its way into the ointment of the gold market? I don't know, but the charts make me wonder.

Cold cereal mystery solved: In Friday's entry, I was puzzled by a reader's report that Kashi Go Lean had reduced its fat, sugar and salt content, yet the Go Lean package at Costco was unchanged. It turns out that some legerdemain in the serving size is the magic: by reducing the stated serving size on smaller packages of their product from 190 calories to 140 calories, the fat, sodium and sugar per serving is also magically reduced--not in the product, but on the "nutritional information" label. Talk about having to read the fine print.

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.

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