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Money Monitor: Breakdown in Tech a Macro Message?

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The risk is intensifying on numerous fronts.

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Editor's Note: This article was written before the markets opened on May 17,2006, long before today's deep decline in the market confirms a technical breakdown. The charts do not reflect today's price action.


What if a breakdown in technology shares indicates that a peak is already passed, in terms of US Productivity growth?

OUCH.

We shudder to even contemplate the likely outcome, should productivity begin to disinflate. A macro-event such as that could be the proverbial 'last straw' in terms of the 'battle' against the monetary debasement of all paper wealth.

Productivity growth, driven by technology, has been a major 'offset' to commodity price pressure by keeping a lid on the labor market and inhibiting wage demand pressure.

With this ominous macro-thought in tow, we scan the tech sector to observe the widening technical cracks, beginning with the NASDAQ-100 Cash Index, pictured in the daily chart on display below. Note the severe bearish divergence exhibited by the Oscillator, which is now negative. The index has already violated the long-term MA, and the support level defined by the mid-2004 high and late-2005 low and is now threatening the uptrend line that has defined the latest trend towards reflation.



We are monitoring two of the key iShares in the sector; the Goldman Sachs Semiconductor Index, also exhibiting significant bearish momentum divergence, with a massive topping pattern clearly in evidence, and a downside run at the long-term 200-Day Moving Average.



We also note (not shown) the weakness in Taiwan Semiconductor Manufacturing (TSM), which is looking to post a key outside-downside reversal month, following the key outside-downside reversal week posted in line with last Friday's deep loss.

The Dow Jones Tech-Sector Index has already broken down, with an Oscillator in negative territory and a long-term moving average that is reversing to the downside, directionally, after being violated last week.



Relative to the commodity-linked strength in the Dow Industrial (and Transport) Average, the 'tech-sector' was already lagging severely and now, as noted in the long-term weekly ratio chart on display below, the NASDAQ is breaking down anew, versus the Industrials.



Perhaps the MOST intriguing perspective is offered in the chart below in what might be called a 'Proxy-for-Productivity ' as we plot the NASDAQ relative to the Yield on the US 5-Year T-Note. The downside break below the decade-plus long uptrendline sends a most ominous macro-message, if indeed this perspective offers any insight into the near-term trend in productivity growth.



And in terms of the monetary debasement of paper-wealth 'assets,' we offer the secular breakdown taking place today, in the tech-sector relative to Gold, as exhibited in the long-term weekly Ratio Spread chart seen below.

Indeed, from this viewpoint the latest 'monetary-reflation' in the NASDAQ never even got the index above the declining 2-Year Moving Average, relative to Gold, a strong statement as to the 'credibility' and 'sustainability' of the current 'run' in monetarily-reflated paper assets.



This chart speaks volumes in terms of the monetary reflation angle, as an explanation for all of the gains in equities since the tech-bubble burst, and since commodity price inflation became a risk to labor-derived productivity gains. The chart reflects the fact that without monetary support, should productivity begin to disinflate, the global equity markets are highly exposed.



We have been, and remain, bullish on bullion versus the US stock market.

We stepped into the Bond-Stock theme in the US yesterday, but if productivity has peaked, it could severely inhibit the upside potential in Bonds, until the downside in Stocks became more 'concrete'. We have already abandoned the Bond side of the theme, leaving us with a preliminary short-stance in stocks.

And, again, the main risk to the entire commodities bull market lies with reflated stock prices, a disinflation of which could cause a 're-adjustment' in the entire 'asset-price-curve', across all sectors.

Again, the things to watch on the periphery: the JPY, and Emerging Markets.

Thus, we note today's spike in the Yen versus the New Zealand Dollar, which is making new lows, a move that threatens to spill over into the Aussie Dollar-Yen cross-rate. Observe the overlay chart on display below, revealing that the Yen is in fact gaining strength, hinting at an intensifying potential for a 'run' on the infamous 'carry-trade.'




The risk is intensifying on numerous fronts.

We are becoming increasingly 'negative' on the US stock market.

And, Gold bulls might consider a bearish stance in stocks, as an offset 'hedge' to being bullish on bullion, in the event that 'prices' in all reflated asset-classes suffer a bout of disinflation.
Position in gold
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