The World Stocks Are On The Verge Of Entering An Elliott Wave 3 Of 3 Down

Old Mr. Grace comments on The RainMaker’s article Learn To Trade The Downturn Or Die article: “We are entering wave 3 of 3 of 3 according to the Elliot Wave practitioners. There will be no bounce or rally. Wave 3 is the most powerful wave of all. Sure, a countertrend rally is bound to come sometime, but not until wave 3 has done its damage”. 

TheRainMaker provides the chart of the Dow $INDU in late April and early May, 2010, and a video as an example of how to short sell the market at the appropriate time.

The chart of the world stocks, VT, shows that we are about to enter an Elliott Wave 3 of 3 Down. These are the most sweeping of all economic waves.

They create wealth on the way up and destroy wealth of the way down. For those interested in short selling, I provide a Chart List of ETFs And Stocks To Sell Short For A Debt Deflationary Bear Market which loaded with short selling suggestions; but personally I made the decision long ago to invest in gold bullion.

This week, traders reacted to the Fed announcement of QE of money printing operations by calling the short duration interest rates lower, and by placing huge carry trade investments in value, dividend, financial, banking, consumer stocks, commodities. Silver, SLV, and gold, GLD, moved massively higher, and the US Dollar, $USD, through the floor and into the basement.

The yield curve is a graph of what benchmark bonds such as US Government bonds are yielding across different maturities. The 30 10 US Sovereign Debt Yield Curve, $TYX:$TNX, exploded and steeped massively higher to 1.625 suggesting that peak investment value, that is peak credit, perhaps better said, peak debt was achieved November 4, 2010

The steepening yield curve inflated the financials; the European Financials, EUFN, rose 3.4%; American Express, AXP, 4.0%, Community Banks, QABA, 4.0%, Too Big To Fail Banks, RWW, 4.5%, Banks, KBE, 3.3%, India Earnings, EPI, 2.9%, and Mortgage Finance, KME, 4.6%.

The the small cap pure value shares, RZV, which are interest rate sensitive and carry trade sensitive, rose 3.1%.

I envision that the yield curve, will steepen from here. Some would say, that this would be economically stimulative, but, as the 30 year rate rises over the 10 year rate, then the longer out government and corporate bonds will fall in value, causing Governments to introduce austerity and corporations to cut back as interest rates rise.

An ever steepening yield curve will cause the loan markets to dry up, and businesses will not take on new projects, there will not be economic growth but contraction; there will deflation like in Japan, EWJ. A rising 30 Year US Government Bond Interest Rate, $TYX, will cause disinvestment from both the longer maturity corporate bonds, BLV, and the world government bonds, BWX.

The currency traders will react by being currency vigilantes, and push hard on competitive currency devaluations, that is competitive currency deflation, calling the major currencies, DBV, and the emerging market currencies, CEW, lower, which will stimulate unwinding yen carry trade disinvestment from stocks globally, but especially in the more risky countries such as Poland, EPOL, and all of emerging europe, ESR.  

The US small cap shares, the Russell 2000, IWM, rose 2.5%; they have likely reached their maximum expansion. As the 30:10 US Sovereign Debt yield curve, $TYX:$TNX, continues to steepen, then these companies will be decapitalized by both a rising 30 Year US Government Bond Interest Rate, $TYX, and unwinding carry trade investment.  Given the large amount of US Government Debt, and the dependency of these small companies upon a well-functioning credit system, providing relatively low-cost loans, America will be at the global epicenter of austerity and hardship.   

The Interest Rate on the 30 Year US Government Bond, $TYX, traded basically unchanged a little above 4%.

But the Interest Rate on the 10 Year US Government Note, $TNX, fell lower.

The mortgage-backed bonds, MBB, rose. The preservation of these is the unstated goals of QE2.

Total Bonds, BND, closed at, 82.96, Aggregate Bonds, at 82.96, AGG, at 108.92 and Lehman Aggregate Bonds, LAG, at 57.96, making for new rally highs. Peak Bond wealth “may have come in”.

Kondratieff Winter is about to commence.

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