2/5 Weekly Commentary

Friday saw an extension of the 5 wave from July.  This was predicated by I1 and posted as the almost certain outcome.  The Friday afternoon stock rally confirmed that Thursday's high was not the end of the 5 wave from July. 
SPX is now in wave iii of 5 of C of 2, so it could go for another day, as 3rd waves tend to extend themselves.  Friday also saw the linkage between Euro and stocks broken, with a sharp decline in Euro in the face of rising stock market.  The stock market Technical Composite is -10 with a reading of -22 required for a sell signal, so the only way to register that is continued rally.  EWI quotes sentiment and individual technical measures to indicate imminent top, but my own composite reset after the recent consolidation phase.  In addition I1 is rising smartly so the earliest the major top occurs is 3/22. Until then extensions of extensions will be the order of the day.

Current I1 chart looking forward through June, 2011.  The values are reliable but are still estimated going beyond 3 months from present:


Looking for re-entry into long stocks and short Euro.  I had to run errands Friday afternoon so I closed out almost everything. 
Last week I benefited from long stocks and long dollar.  The dollar completed it's first 5 up and Euro it's first 5 down within their respective 3rd waves.  So on a retracement I look forward to a Minor 3 of Intermediate 1 or Primary 3 in currencies.

I bought 2% ZSL at 10.52 for a quick trade to 10.68.  I still believe that gold will rally to 1375.  This would fit in with a continued rally in stocks.

The last Weekly posted the view of Fed action within the third world.  The seeds of any bust are sown in the prior expansion.  The use of fiat actions to prevent the normal cyclic behavior of economic activity has made political chaos not only possible but likely in the third world (not just the mideast) and Eastern Europe.  It saddens me to witness these actions by the western governments because we can already see the new cracks in the dam of seemingly limitless decadence on the part of the western political institutions.  The Fed will have lost any vestige of political autonomy due to the extreme leverage it has injected into the financial system.  Congress will oversee future actions and this will likely result in a suspension of future QE and scrutiny of Fed activities in general.  Currently the Fed submits the bulk of it's profits back to Treasury (minus the 6% dividend to it's stockholders), so they have become a vassal of the president and congress.  The conflict of interest between the expansion of the Fed's balance sheet generating greater profits for the Treasury and any check on Fed activity by Treasury is a corruption of the government's system of finance. Ben's assertions that the Fed exists as an independent entity is laughable on it's face.  Since the days of Jimmy Carter and especially the Greenspan and Bernanke eras the Fed has become a political lapdog, depending on the extent to which the president desires to micro-manage.  Senator Paul and the House and Senate Tea Party forum should provide limits on government activity even with Constitutional Amendments and legislation that have dismantled the intentions of the founding fathers. Without continual inclux of fiat the leverage will reverse.   Of course 2011 budget deficit of 1.5T is far from limiting government activity, but the debt ceiling has not been increased yet so there could be changes even as early as the 2011 budget, even though it has passed.
Finally, from it's inception the Congress has voted on each debt issuance.  This limitation was yet another  Constitutional limit removed under Woodrow Wilson.  The Second Liberty Bond Act of 1917 established a statutory limit on federal debt. Congress had previously approved each debt issuance separately. The debt limit provided the U.S. Treasury with more leeway in the administration of debt, allowing for modern management techniques in government finance (sic).  So, elect a liberal president and congress that does not want to be hassled by a Constitutional limitation and viola! you steepen the path to perdition.