rpt mta 2011 07 aa peak inside

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1 July 2011 Edition Restricted & Confidential

Copyright 2011 © Gordon T. Long All Rights Reserved [email protected]

Monthly Market Analytics & Technical Analysis

July 2011 Edition - European Summer, American Autumn.

Gordon T Long

7/8/2011





Monthly Market Analytics & Technical Analysis

JULY 2011 EDITION

MONTHLY MARKET UPDATE: SECTION III

MARKET ANALYTICS .................................................................................... 5

HIGHLIGHTS - W HAT Y OU N EED TO K NOW ........................................................................................................................................... 5

CURRENT MACRO EXPECTATIONS ................................................................................................................................................. 6

Rounded Top ...................................................................................................................................... 7 Rolling and Cascading Markets................................................................................................................. 9 Confirmed Death Crosses ..................................................................................................................... 15 Wolf Wave / Megaphone Tops ................................................................................................................ 21 Head & Shoulders............................................................................................................................... 26

OUR APPROACH ................................................................................................................................................................................27

Identification of Major Pivots .................................................................................................................. 27

Global Macro Driver - Our Proprietary Techno-Fundamental Bridge ................................................................... 28 SHORT TERM – T ECHNICAL ANALYSIS ................................................................................................................................................32

Gann Analysis ................................................................................................................................... 32 Elliott Wave....................................................................................................................................... 33 Channels ......................................................................................................................................... 34 Cycles - Bradley Model......................................................................................................................... 35 Fibonacci Clusters .............................................................................................................................. 35

Sentiment - Consumer, Investor & Trader .................................................................................................. 36

CONSUMERS

Consumer Confidence - Conference Board ............................................................................................ 36 Consumer Sentiment - Michigan ......................................................................................................... 38

INVESTORS

American Association of Independent Investors ....................................................................................... 39 Investors Intelligence ....................................................................................................................... 40 National Association of Active Investment Managers (NAAIM)...................................................................... 43 Smart Money / Dumb Money Confidence ............................................................................................... 44

TRADERS

Perfect Trading Days - (Q1 Reference - Goldman, JP Morgan, BOA-Merrill & Citi) ............................................. 45 Percentage Stocks Above 50 & 200 DMA .............................................................................................. 47 Margin Levels................................................................................................................................ 48 Mutual Fund Cash Levels v S&P 500.................................................................................................... 51

Oscillators & Breadth Indicators of Importance............................................................................................. 53 NYSE Overbought / Oversold............................................................................................................. 53 OEX Open Interest (Puts/Calls) .......................................................................................................... 54 TRIN........................................................................................................................................... 55 McClellan Oscillator ........................................................................................................................ 56

INTERMEDIATE TERM – R ISK ANALYSIS ............................................................................................................................................57

Global Macro -Risk Levels..................................................................................................................... 57 Credit Metrics - Libor-OIS Spread (New)................................................................................................ 57 Housing- Rate of Change (Reference) .................................................................................................. 57 Divergence (Reference).................................................................................................................... 58 Money Supply Growth - M3 (New) ....................................................................................................... 59 Bank Liabilities (Reference) ............................................................................................................... 59 Global Credit Default Swaps (Reference)............................................................................................... 60 EU Credit Default Swaps (New) .......................................................................................................... 61 Cost of Money (New) ....................................................................................................................... 62 Employment Divergence (New)........................................................................................................... 63





VIX / VXO Warnings (New) ................................................................................................................ 64

The Longer this Goes - the Greater the Risk - the Poorer the Risk:Reward.......................................................... 70 Consecutive Days Without a Bollinger Cross........................................................................................... 70 50 DMA Boundary Condition Near Failure.............................................................................................. 71

Market Warning Telltales - 'Canaries in the Coal Mine' ................................................................................... 72 Are The Credit Markets Getting Unstable? ............................................................................................. 72 Two Big Contrarian Indicators Point To Downside Risk .............................................................................. 75 New Stock Bear?............................................................................................................................ 78

LONGER TERM - F UNDAMENTAL ANALYSIS .........................................................................................................................................79

Highlights ......................................................................................................................................... 79

Cost Push now Creating Margin Compression! ............................................................................................ 81 Margin Compression versus PE Compression......................................................................................... 82 Big companies' P-Es shrivel to single digits ............................................................................................ 83

Earnings - Need to be Watched Carefully................................................................................................... 85 Are Corporate Profit Margins About To Grind Lower For Another 10 Years Or More? .......................................... 85 Corporations Have Captured 88% Of All Post-Recession Income Growth ........................................................ 86

Think Stocks Are Cheap? Here's 7 Reasons Why That's A Myth ................................................................... 87 Strategist Year-End S&P 500 Price Targets ............................................................................................ 88 Wal-Mart, Gap, Cisco Yelling there is a Problem (Reference)....................................................................... 89 Entering Earning Warnings Season (Reference) ...................................................................................... 90 Equity Valuations Forming Second Biggest Bubble in US History (Reference)................................................... 93 Extreme Conditions and Typical Outcomes (Reference) ............................................................................. 96 Headwinds Rising (Reference) ........................................................................................................... 98

Valuation Methodologies...................................................................................................................... 101 Four Set Consolidated Market Valuation Indicators Continue to Signal Caution ................................................ 101

Crestmont from the Arithmetic ......................................................................................................... 103 Cyclical PE 10 Ratio..................................................................................................................... 105 Q Ratio .................................................................................................................................... 109 S&P Composite Regression-to-the-Trend ........................................................................................... 113

Rule of 20 (Reference) .................................................................................................................... 114 Cyclically Adjusted PE's (CAPE) are Richly Valued (Reference) .................................................................. 115

Value Line Arithmetic (Reference) ...................................................................................................... 116 Shiller PE Ratio(Reference) .............................................................................................................. 116 Comments on Estimated Forward Operating Earnings (Reference) .............................................................. 117

S&P Earnings Yield versus Bond Yields ................................................................................................... 118

S&P 500 TARGETS ..................................................................................... 119

Time Frame ..................................................................................................................................... 119

CURRENCY CORNER ................................................................................ 120

HARD CURRENCY ............................................................................................................................................................................ 120

FOREX ................................................................................................................................................................................................ 123

CONCLUSION .............................................................................................. 125





MONTHLY PROCESS OF ABSTRACTION

The Global Macro Tipping Points (GMTP) Service is an integral part of our monthly Process of Abstraction research

methodology. The process starts monthly from the Tipping Points and completes with a final Synthesis. The

sequence is optimized to align with the established Macro Economic Data releases.

Section Release

Date

Service Focus Coverage

II. 3rd Saturday

of the Month

Global Macro Tipping Points

(GMTP)

Tipping Points

Abstraction

Abstraction

Tipping Points

Global Macro

US Economy

III. 1st Day of theMonth

Market Analytics & TechnicalAnalysis (MTA)

Technical Analysis

Market Analytics

Market Analytics

Technical Analysis

Fundamental Analysis

Risk Analysis

I. Day Following

Monthly Labor

Report

(~ 1st Saturday)

Monthly Market Commentary

(MMC)

Synthesis Commentary

Synthesis

Thesis

Commentary

Conclusions





MARKET ANALYTICS

HIGHLIGHTS - What You Need to Know

The market action since March 2009 is a bear market counter rally that is presently completing a classic endingdiagonal pattern. The Bear Market which started in 2000 will resume in full force once a broad 'rounded top'

formation is completed with cascading weakness across multiple markets being clearly evident.

We presently are in the midst of 'rolling top'. We are seeing broad based weakening analytics and cascadingwarning signals. This behavior is typically seen near major reversals. This is all part of a final topping formationand a long term right shoulder technical construction pattern. I expect the rounded top to be shown to havebeen centered on the markets June 17th Quadruple Witch. It will take a further 3-4 months tocomplete

The ending diagonal or wedge patterns are extremely difficult to trade as trading reversals are significant and frequent. This adds to the confusion about market direction. This market behavior should be viewed as the market

forces in the process of systemically changing balance. It is very typically of major reversals.

Highlight examples of weakening analytics and warning signals continue to be the following:

- Rising Termination Wedge pattern in the Industrials and S&P 500 since the July 2010 lows.- Elliott Wave, Gann and Weekly/Monthly Full Stochastic confirm ending rally highs near at hand.- Asian & World Market Weakness which is leading the US Market.- The S&P bounced heavily off its 200 day moving average but the Nasdaq has not yet been able to breakback above its 40 year trend line - suggesting this is still just a technical bounce and not to be trusted,which in the context of near record divergence between data and sentiment & expectations is not good.

CONSUMERS- Concern about future business conditions is the big worry on consumers' minds this month. TheConference Board reported that its May Consumer Confidence index fell a further 5.2% from May to 58.6,the lowest level since November.- The expectations component of confidence fell a sharp 5.6% from May to the lowest level since October.Expectations for improved business conditions and employment in six months cratered to the lowest levelssince early last year. Income expectations fell sharply as well. The turn in oil prices and the weakeconomy probably caused consumers to expect the inflation rate in twelve months to be 6.0%, the lowestsince February.-What stands out to me is that against comparable prints taken at financial crises and tragedies of the

past such as the October 1987 markets crash, Desert Storm, LTCM, the dot com collapse, September 11,Katrina, and Lehman they are WORSE!

INVESTORSThe AAII Bear/Bull ratio is at the bottom of a rising channel which is at a level that suggest the marketwill find support soon with general strength in the markets in the near term.- National Association of Active Investment Managers (NAAIM) ) shows that on average they are only32.78% invested. This is down dramatically from the 66.99% average of last quarter. This could lead topanic buying as part of a classic Bear Market rally.- We have had a protracted period of Divergence with the Smart Money Index. This suggests the SmartMoney does not believe this rally is real and it is artificially being held by Federal Reserve buying,Momentum Traders and Trading Programs.- The surprise index measures the divergence between actual data and economists forecasts, and istherefore another form of sentiment or expectations index. Economists are at a near record divergenceagainst the reality of the data, and as the overlay chart shows net bullish market sentiment is also at anear record divergence to how the data is coming out versus expectations.

TRADERS- Goldman, Morgan, Merrill and Citi all posted 100% perfect trading days in Q1 (there was only a singleone day exception). It couldn't be any clearer than that. I believe this is statistically impossible UNLESSthe market is presently fixed, controlled, properly regulated or is being manipulated by the FederalReserve. (or all of the above).-With nearly 70% of the S&P 500 above their 200 DMA and over 60% of the S&P 500 above their 50 DMAwe have an over-extended market but capable of further upside.- We are presently experiencing total Margin Debt falling off significantly. This is highly unusual and astrong precursor of "risk off' beginning to creep into the market. The last time this occurred to such adegree was in early 2000 prior to the dot.com bubble implosion and in early fall 2007 prior to the financialcrisis hitting. Something is seriously amiss here.- Leverage longs now exceed the mutual fund cash 'cushion' by as much as the Tech Bubble Peak.

http://www.businessinsider.com/contrarian-data-point-to-downside-risk-2011-7








- We have divergence between the S&P 500 and the NYSE Overbought / Oversold indicator. A decaypattern suggested a termination of this condition in the May-June 2011 timeframe. Initial July readingsindicate this is occurring.- The OEX Open Interest (PUT/CALLS) suggests a topping pattern to this cyclical counter rally which willrequire a period of time to unfold similar to that in 2007. This confirms our rounded topping formationoutlook.

- The TRIN and McClellan Oscillators suggest the early July Rally will need some correction before finishingslightly higher.

- The VIX index, reflects "a market estimate of future volatility based on the weighted average of theimplied volatilities for a wide range of strikes". The low VIX level suggests a level of complacency totallyout of kilter with this level of risk, and at a time when QE2 has come to a conclusion.- The Weekly VIX chart shows a wedge with the getting steeper but shorter in duration. If they were to begetting shorter but not as steep we could see this as good news with the system becoming more stable asit decayed. Instead we have 'shock' reactions. This is a bad omen for stability - whether an up market ordown market follows. The daily VIX shows the banding of the 50, 100 and 100 day VIX moving averages.Tightening bands are an indication of a pending break in pattern, whether up or down. Additionally, wehave a 100 DMA cross of the 200 DMA which is sign of a potential trend reversal.

- The gap between the 10 Year Note Yield and the Forward Earnings Yield is excessive by any historicalmeasure. It must and will be closed with i) a significant rise in bond yields, ii) a drop in stock earnings, iii)and increase in stock prices, iv) a combination of all these.- The Rule of 20 Suggests stock prices need to rise or earnings need to fall. Warnings from Wal-Mart, GapStores and Cisco are early indications of pending cost push inflation which will mean margin compressionis ahead. We would expect it to result in reduced PE ratios and PE compression.

CURRENT MACRO EXPECTATIONS

OUR CURRENT MACRO EXPECTATIONS FOR FINANCIAL EQUITY MARKETSThe following schematic best represents the US S&P 500 Stock Index





Rounded Top

We have been predicting the end of the cyclical bull market with the June 2011 quadruple witch since early 2010.

It appears the rounded top formation pattern we have also been predicting is unfolding with the rounded toppattern being centered as labeled below on the June quadruple witch.

Above

A bounce off the 200 DMA was long overdue. A strong Bear Market counter rally is too be expected as the RoundedTop is retested.

The S&P bounced heavily off its 200 day moving average but the Nasdaq has not yet been able to break backabove its 40 year trend line - suggesting this is still just a technical bounce and not to be trusted, which in the

context of near record divergence between data and sentiment & expectations is not good.

Below

Markets demonstrate "Fractals" at all levels. It is highly likely the rounded top formation will demonstrate a'mirrored' fractal of the initial half of the rounded top giving us some gauge of its duration.





Bear Market counter rallies look like this. Panic buying occurs as shorts are forced to cover.





Rolling and Cascading Markets

A PERSPECTIVE ON A ROLLING OR CASCADING TOP - (Detailed Charts Below Summary List)

November - Starts in Asia

January – Top in ‘City’s’ FTSE

February – US 10 Year Treasuries Weaken

February – Banking Stocks Start Falling

Late February – Technology Begins Weakening

Early March – Japan’s Natural Disaster

Early April – Commodities Countries Weaken – Canada, Brazil

Early May – Commodities Top

Early May – US Markets Show First Signs of Weakness

Mid May – Weakening Agricultural Stocks

What to Watch for:

We are looking for Death Crosses of the 50 DMA crossing the 200 DMA below

IT STARTED IN ASIA - November 2010





TOP IN LONDON'S FTSE - Early January 2011

US TREASURIES START FALLING - February 2011

Note the 50 DMA cross of the 200 DMA - Further Treasury Weakness Ahead with Rising Yield





BANKING STOCKS BEGAN THEIR DROP WITH WEAKENING us TREASURIES

TECHNOLOGY STOCKS BEGIN WEAKENING




C i ht 2011 © G d T L All Ri ht R d l@G d TL

JAPAN'S NATURAL DISASTER HITS - Early March

MAJOR COMMODITY COUNTRIES STARTEN TO WEAKEN - Canada & Brazil

rpt mta 2011 07 aa peak inside

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