Since the last economic report, both the US economy and stock market have weakened considerably. First I will cover the economy.

The unemployment rate for June (the U3 rate) was "officially" 9.5 percent, a decrease of 0.2 percentage points from May. However, this measure of unemployment is inaccurate because it excludes those who are unemployed but not looking for work, as well as those employed part-time for economic reasons. The U5 includes the U3 plus discouraged workers, and the U6 additionally includes people working part-time for economic reasons.

These rates show a lesser improvement than the U3. The U5 rate in June was 11.0 percent, unchanged from May. The U6 rate was 16.5 percent, down by 0.1 percentage points from May. These figures also include seasonal adjustments, which may distort the data, so for the sake of completeness, I'll include the non-adjusted data.

The rates not seasonally adjusted actually got worse in June. The U5 was at 11.1 percent, up from 10.6 percent in May. The U6 was 16.7 percent, up from 16.1 percent in May. Overall, the employment situation is not getting any better, and the separate payroll data show that non-census job growth continues to be extremely weak, and not sufficient to keep up with population growth. In other words, according to this survey unemployment is actually increasing, an even worse reading than the rates have.

Meanwhile, housing starts, sales, as well as mortgages have continued their decline, pumped up only by the expiration of the homebuyer tax credit in one month so far this year. This temporary boost was paid back in the form of a record pace of decline in housing the next month.

Just this morning retail sales data came in, showing the second consecutive monthly decrease. In June retail sales dropped by 0.5 percent, following a 1.1 percent drop in May. This is a significant decline in retail sales, and if this continues through the quarter, which it probably will, then the GDP for Q2 and especially Q3 will be dragged down, and might show a decrease in the official numbers.

Of course, the official numbers include a government understimation of real inflation on the order of 2.7 percent. Adjusting for this factor, the GDP was barely positive in the first quarter, even with stronger retail sales than what we have at the present time.

With weaker retail sales, which represent consumer spending, which is 70% of the economy, it seems unlikely that the GDP can remain positive. If the GDP goes negative, it will ignite calls of a double-dip recession. However, I think that it would be more accurately considered to be a singular depression, since the recovery was composed of a series of barely-positive numbers around late 2009 and early 2010. Also, the magnitude of the decline is such that it can be classified as a depression according to most figures.

The European debt crisis so far appears to not have caused a worldwide credit freeze and crash as initially feared, but as I have said, the Euro debt troubles are not the problem, they are the symptom of a problem with the credit markets. More specifically, there appears to be a stealth credit crunch at present, caused by key credit spreads widening, indicating that there may be trouble ahead much like there was in 2008.

The stock market has weakened as well, and several key bear-market signals have emerged. First up, a look at the S&P 500 Index over the past 3 months:



There have been ups and downs, but the trend is clearly downward. At the low in June (1010.91), the stock market was down by 17.1 percent from the April peak, which in market terminology relative to the April high is a severe correction. Of course, relative to the 2007 high, we've been in a bear market the whole time, even at the April peak.

Recently there has been a rally, but it seems to have halted right at the 50-day moving average, just like the last one, indicating that the downturn will in all likelihood continue.

Aside from this, there are other signs of a bear market. Look at the orange line -- that is the 200-day moving average. Then look at the green line -- that is the 50-day moving average. Notice that the 50-day crosses below the 200-day around the end of June. That is a "death cross", which is a classic bear market signal. Every bear market in history has been heralded with a death cross, although not every death cross has resulted in a bear market. This mainly covers shallow crosses of a lesser steepness than what we have had recently.



There is also another indicator which signals a downturn -- a head-and-shoulders pattern. Basically it is a top in a stock market rally (or bull market) which consists of a rally to a new peak, then a downturn, then a rally to a higher peak, and then another downturn, which is followed by another rally to about the point where the first peak was. The culmination of the top is when there is a downturn after the last peak below the "neckline", the line which connects the two lows.

That is the bear market signal, and it is usually correct, especially when the neckline slopes downward. It so happens that this neckline slopes downward, making the bear market signal stronger.

All of these events lead to my prediction that the downturn in the stock market will progress to a bear market relative to the April high, and the end of the little bull market which began in March 2009 and topped in April 2010.

This is only the second chapter in the Crash of 2010 series, but a lot has happened over the past month. The stock market and economic situation is deteriorating, but there are a few bright spots.

First, the U3 unemployment rate dropped by 0.2 percentage points to 9.7 percent, but this does not tell the whole story, because the U3 excludes those who are discouraged or employed part-time for economic reasons. U6 includes these people, and that measure dropped by 0.5 percentage points, declining to a seasonally adjusted 16.6 percent or 16.1 percent not seasonally adjusted.

This is good news, but it remains stuck about where it was in October 2009, over 9 months ago. Also, the other side of the employment report, payrolls, showed an increase of 430 000 jobs, but 411 000 were temporary Census workers, meaning that less than 20 000 jobs were really created. This indicates that the small rebound in the employment situation may be withering.

Meanwhile, the European debt situation continues to get worse. Hungary is on the verge of a financial collapse due to crushing debt. If Hungary collapses, it probably will not in itself affect the world economy.

However, these impending defaults and debt crises, combined with the widening of credit default spreads generally, plus the steady increase in the LIBOR rate, point to a broader trend of an impending credit crunch, of which Hungary, Greece, Spain, Portugal, and so many others including Portugal and Dubai.

This credit crunch will affect the wider world economy in the future, likely this year or possibly next year. This time, however, it is not the banks alone which are overburdened with debt, it is the governments of the world. The governments now are in the same situation as the banks were in 2008, and when they fail, there will be no bailouts. Without government support and constant infusions of cash, bailout money, and special favors, the banks will go down with the governments, because the banks are now dependent on governments.

However, there may be a bailout in the end. Governments do not have the government to bail them out, but they have one tool -- it is called the printing press. The central banks have the ability to create new money to buy up government bonds, thus they can keep governments afloat in a credit crisis when no one will be willing to buy government bonds. However, there is a side effect of money-printing -- price inflation. The more money is printed, the more inflation there will be, and this will increase the cost of government operations, thus precipitating more money creation, and a vicious cycle initiates which results in hyperinflation.

Both hyperinflation and credit crises result in depressions, but hyperinflation results in inflation, and credit crises result in deflation, a seemingly contradictory indication. This is reflected in gold rising and oil falling, two commodities that usually move in the same general direction.

Since the central banks around the world have already printed money in huge quantities and creating a "recovery" with no employment gains driven by inflation, debt-laden zombie banks, and government spending, hyperinflation could strike any time between now and 2013. In the classic case of Germany in the early 1920's, the time between seeming recovery and outright hyperinflationary depression was only a few months.

Meanwhile, the stock market is deteriorating markedly. After an initial crash, the stock market rebounded tremendously, but failed at the 50-day moving average. The market then took a downturn (not sharp enough to be a crash) below the 200-day moving average. The S&P 500 Index has not moved above the 200-day moving average since May 20, and has attempted to move above it twice since then, but failed both times.

On top of that, the 50-day moving average is falling rather rapidly, and if the current situation continues, will cross below the 200-day moving average. Additionally, the number of shares traded is generally lower on upswings than downswings. This all portends bad news. Below is a 3-month chart of the S&P 500 index:



A move below the 200-day moving average of this magnitude is indicative of a bear market, and the one we are currently in (2007-2010) has resumed. The 2009-2010 little bull market was more akin to a bear market rally than a cyclical bull market, but didn't really meet the qualifications for either (like the original 1929-1930 little bull market).

In short, the saga of the Crash of 2010 continues, and the situation is looking worse.

Yes, you read that title correctly. We are currently in the midst of a stock market crash, tentatively named the Crash of 2010. Since peaking on April 26, 2010, the stock market has entered into a downtrend.

This downtrend accelerated into a stock market crash on May 6, 2010. On this day, the Dow Jones Industrial Average at one point was down by 998.5 points, or 9.19 percent, down to 9869. The Dow rebounded off of that low, but remained sharply downward for May 6, closing down by 348 points at 10 520. This was in addition to losses the previous two days, and on May 7, 2010, the losses continued, with the Dow currently standing at 10 380.43.

The consensus definition of a stock market crash is a steep double-digit percentage loss over a period of several days. This downturn meets that definition.

On April 26, 2010, the Dow Jones Industrial Average reached a high of 11258.01, and the S&P 500 reached a high of 1219.80. These levels marked a gain of 74 percent from the low on March 6, 2009 on the Dow, and 82.94 percent on the S&P.

At the low of May 6, 2010, the Dow stood at 9869.62 and the S&P at 1065.79. These two figures represented a 12 percent decline from the peak. In a three-day period between May 3 and the low of May 6, the Dow dropped by more than 11 percent. This meets the most common definition of a stock market crash.

There's more.

All three major indices are now down for the year 2010. What took months to gain was lost in three days.

Below is a 1-year chart of the S&P 500 index, showing the huge gash in the chart the likes of which has not been seen since 2008:


The chart picture is also deteriorating fairly rapidly. Look below:



As foretold by this blog since December, the rising wedge pattern has long been broken, and the stock market attempted a final push to new highs on very low volume, highlited in the lower graph. The gap between the 200-day and 50-day moving averages has also narrowed.

Since the peak on April 26, volume has shot up, with more shares trading hands on down days than up days. The index has also broken below the 50-day moving average, and during May 6, went below the 200-day moving average.

If the S&P moves below the 200-day moving average in the near future, the future for the market is bleak to say the least. Moves below this line is considered indicative of a bear market. Also, if this downturn continues, the 50-day moving average may move below the 200-day moving average, which has occurred in every single bear market in history.

What is the cause of this historic crash? It is mainly driven by troubles in Europe. The Greek Debt Crisis is spreading throughout the region, with one country after another moving closer to default due to huge debts and insufficient revenue. This situation is occuring throughout the world due to the interconnected financial system, and also because of many countries, including the US, facing the same situation as Greece.

What is feared is a domino effect which could tip the world into another economic depression. If this indeed happens, which in my opinion is likely, then the same problems which faced the world in 2008 will return.

This is due to the fact that the underlying problems in 2008 have not been corrected. What the bailouts and inflationary measures did was merely prolong the inevitable correction, and indeed will end up magnifying it. The underlying problem was a collapse of the inflationary credit boom which was created by the Fed, as well as the collapse of the housing boom. This collapse, if allowed to take place, would have resulted in a short, deep depression in which there would have been massive bankruptcies, bank failures, and a great liquidation of the bad asset, such as subprime mortgages and toxic CDOs. After this was all cleaned out, the economy would have quickly recovered.

Instead of doing this, governments worldwide masked the problem by bailing out banks, buying up their bad debt and assets, and instituting inflationary money-pumping on a scale unprecedented in the history of mankind. This produced an unsustainable inflation-driven dead cat bounce off the lows of the 2008 depression.

However, now that the governments have assumed the problems of the banks, the governments are now facing the exact same problems the banks did in 2008. When these governments collapse, there will be no one to bail them out, and this will produce another economic depression.

Furthermore, to stem the collapse of the government, central banks will print even more money than they have to buy up the government's bad debt. This massive inflation will lead to a massive depreciation in the value of currencies worldwide, plunging the world into a hyperinflationary depression.

The European debt crisis is but the first sign of what is to come, and this reality is now bearing out in the markets. While the stock market crashed, along with oil and other commodities, as well as every major currency in the world, gold was up. In fact, the price of gold is skyrocketing to over $1210 per ounce. This is despite the fact that relative to other crashing currencies, the dollar is stronger.

In other words, everything is crashing except gold. Why gold? Because gold is the ultimate safe-haven investment, and it will come out on top during either a debt default crisis or, especially, a hyperinflationary depression.

Collapses such as this usually have a deflationary effect, and indeed the 2008 one did have a deflationary effect, but this was and is more than made up for by inflationary effects from money-pumping worldwide.

The reality of the worldwide situation in the future is upon us now. The Crash of 2010 will be as remembered and feared as the three famous crashes throughout history: 1929, 1987, and 2008.

The next economic report will come when it is merited, as current events make a monthly schedule imprudent.

Although I usually end up putting a bearish spin on the economy and stock market, I for once have good news to report in the April 2010 Economic Report.

On net, in the month of March 2010, more people were hired than fired. Yes, there is net job growth, and on top of that, it is marginally good job growth. Payrolls for the month of March rose by 162 000. This is more than the 150 000  or so needed to keep up with population growth, so even with that taken into consideration, there was a net gain of 12 000.

But here is the flipside of this bright story in the payrolls -- 48 000 of these new jobs were temporary hires for the 2010 census, and these jobs will disappear in a few months without any question. Therefore, it is questionable whether these 48 000 should be considered as real job growth. Discounting census workers, it rachets the figures back below the level needed to keep up with population growth.

However, even if the job growth is not keeping up with population growth, it is still good news, as it is growth, and it is the best growth in 3 years. There are still 8 million jobs which were lost during the depression, and a 120 000 job growth blip in one month will barely put a dent in this number. It should be closely watched in the next few months to see if it is sustainable.

There is also the payroll number's twin, the unemployment and underemployment rate. The unemployment rates have not budged despite the better payroll number. The official rate (U3) is steady at 9.7 percent on a seasonally adjusted basis, and it actually went down by 0.2 points without a seasonal adjustment (to 10.2 percent), but this does not tell the whole story, as it excludes discouraged workers and those working part-time for economic reasons.

U5 takes into account the discouraged workers, and this showed, on a seasonally adjusted basis, no change, holding steady at 11.1 percent. On a non seasonally adjusted basis, it showed a big improvement of 0.4 points, registering at 11.5 percent.

U6 takes into account discouraged workers and those working part-time for economic reasons, and that showed a slight worsening, up by 0.1 points on a seasonally adjusted basis, registering at 16.9 percent. On a non seasonally adjusted basis, it showed an identical improvement to the U5 rate, of 0.4 points, registering at 17.5 percent.

The unemployment rate is still telling things are flat to slightly worse, whereas the payroll numbers are getting flat to slightly better. This does not tell a tale of recovery, since in every single actual recovery there ever was:

- GDP will show real and sustained growth
- Payrolls will show real and sustained growth
- Unemployment and underemployment will steadily go down
- There won't be large inflation or deflation

The only criterion satisfied thus far is the last one, inflation. It has remained officially at around zero, but the official inflation underestimates real inflation by 2.7 percent (possibly more), so inflation has actually maintained a 3 percent increase since the end of the January-March 2009 downleg in the market.

That said, there are huge inflationary pressures coming to bear on the economy, due to the extraordinary interest-rate lowering and money-printing of the Federal Reserve. The money supply had doubled, but most of it is in bank reserves. As soon as that money filters out into the economy when banks start lending (only a perception of a recovery is needed for this), then expect a huge spike in inflation, which will snuff out any recovery, and lead to a hyperinflationary depression.

We may have already seen a taste of this, as after the inflationary money-pumping, banks started to lend more, and as a result, inflation went from 0 after the crash (where it ideally should be), to 3 percent, in less than a year. And that was the result of consumer credit declining more slowly, not growth.

Meanwhile, the stock market has gotten a boost out of the good news, although looking at the charts, the current position of the market is precarious to say the least:



In the 53 trading days since the bottom of the January downturn, the market has been up 39 days, and down only 14. Half of these down days occured before March, and since then, it has been a nearly nonstop upward climb.

On top of this, it has been on low volume, meaning that the rally is more anemic than it ever was. Also notice that volume is much higher on the down days than the up days, which means that when investors decide to trade, they do not buy, they sell.

The lack of buying pressure makes this rally unsustainable. On top of that, the rising wedge pattern, which supported the little bull market since its inception, collapsed last January.

Also note this chart of the 50 and 200 day moving averages:



Since reaching a maximum separation last October, they have steadily been closing in on each other, and especially so since January.

All these factors combined tell me, as they did last month, that the little bull market is entering its death throes, a last low-volume push higher (a la Summer 2007), before resuming the bear market. This will still hold true in the absence of any real recovery, but if and when a real recovery arrives, the picture might look different.

The annual of the March 2009 stock market low has come and gone, and the little bull market is spawned is, despite all three indicies having exceeded the January peak, withering towards the end. The reason is a deteriorating picture concerning government policy, the economy, and the stock market itself.

First up, employment payrolls, as measured by BLS, were down by more than 30 000. This means that on balance, more people are being fired than hired. This also signals that, contrary to popular belief but in compliance with logic, the employment picture is not getting better -- it is getting worse at a slow pace.

The report also indicated that the official unemployment rate was steady at 9.7 percent. However, this measure is inaccurate because it excludes those who want a job now, those who are unemployed but discouraged and are not looking for work, and those who are working part time for economic reasons.

The discouraged workers are added in with the U5 rate (official is U3) which is also measured by BLS. This measure stood at 11.9 percent, down by 0.1 percent.

Adding in people working part time for economic reasons yields the U6 rate, which on a seasonally adjusted basis stands at 16.8 percent, an increase of 0.3 percent. Excluding seasonal adjustments it is at 17.9 percent, down 0.1 percent but still elevated from the increase to 18 percent in January.

All of this taken together points to a jobs picture which looks flat to slightly downwards. Until payrolls become largely positive, the unemployment rate is coming down, and GDP is sustaining a move higher based on well-grounded components, I find it difficult to declare an economic recovery at present.

Meanwhile, housing, the same sector which led the economy into recession, is falling sharply. The vast majority of housing data, including builder confidence, sales, and housing starts, have plummeted since November 2009, after staging a recovery from March to October.

The only reason the recovery in housing occured in the first place is due to government propping up the sector with inflated money buying mortgage-backed securities as well as tax credits. This is an inherently unsustainable order, and the breakdown of this is what is the cause of the plummet in housing. Housing led the economy into recession last time, and this time it may cause another dip into the abyss in the near future (<2 years hence).

The stock market, while all this is happening, has reached new highs, but only by a 1 percent margin or less. The sustainability of this recent advance is still uncertain, but one thing is certain -- the chart pattern is broken. The rising wedge has been broken, and the market has been feeble since.

Below is a 1-year chart of the Dow, showing patterns, and a highlight. In the top red box, note the rise of the market to new highs. In the bottom red box, note the concurrent decline in volume (the number of shares trading hands). It has been steadily decreasing as the stock market has been rising.

A rally built on anemic volume cannot stand, as happened and that this report foretold in January. This rally will end the same way, only now the charts are broken, and the economic picture is deteriorating:



There is also another deterioration worth mentioning -- the interaction between the 50-day and 200-day moving averages, the two oft-used indicators for where the market is moving.

The 50-day moving average crossing below the 200-day is usually an indicator of a bear market. The opposite situation is usually an indicator of a bull market. That said, sometimes this interaction fails, as in the original Little Bull Market of 1930. However, it usually works, and extrapolating from this relationship, the higher the difference, the stronger the trend, be it bull or bear.

The difference between the 50 and 200-day moving averages has been steadily decreasing ever since the rally in November 2009, when that difference reached its peak. The current difference is the lowest it has been ever since August 2009, only a month since the two averages crossed.

If current trends continue and/or if the stock market undergoes a downturn as it surely will at some point, the 50-day moving average may cross below the 200-day, signaling the resumption of the bear market, as the rising wedge breakdown foretold.

Below is a chart of the relation with the S&P 500 Index:



In addition to all of this, there are concerns about policy coming from the US federal government. Tax raises are nearly sure to come in 2011 due to the expiration of the 2001 and 2003 tax cuts, and there is also the matter of the health insurance bill currently pending before Congress.

If it passes, it stands to, by the basic laws of economics, raise premiums for consumers, thus reducing the income they have available to spend or save, thus reducing economic activity at large, and hence reducing the stock market. Combined with tax raises this produces a wicked combination for traders and consumers alike to stomach.

In the meantime, the Federal Reserve has maintained interest rates at essentially zero, and is continuing inflationary policies, creating new money (thus devaluing the currency) in order to purchase securities of all manner and also to buy US Treasury Bonds. There is also a lot of inflated money in bank reserves.

All of this new money, which has nearly doubled the money supply, devalues the American currency. Aside from the general inflation this will inevitably cause, the price of oil is sure to rise. This will further crimp the consumer's wallet, and exacerbate the already dire economic situation. Inflation at large, and especially higher gasoline prices, are also sure to cause already weak consumer sentiment to plummet, and also inflame the situation.

Higher gas prices have already been seen as a result of inflationary policies, and the higher demand that always comes in Summer has not even arrived yet. Once Summer arrives, gas prices are sure to push higher with both increased demand and increased inflation.

With all these things combined, a preexisting weak economy, stock market, and housing market, plus tax raises, plus monetary policies which will cause inflation if not hyperinflation, plus increased premiums for insurance, it produces a picture which looks more akin to the next great depression than the next great boom.

It is my view at present, based on the facts available to me , that the American economy will enter a hyperinflationary depression by this summer at earliest, and 2014 at latest, due to the perfect storm of increased taxes, increased inflation, increased premiums, a weak economy, a weak stock market, and a weak housing market.

The next report, barring an economic collapse, a stock market crash, or major policy change, will come in April.

The stock market, after stalling at the 50-day moving average, has moved up, although the volume that is driving this move has diminished, making the rally once again suspect.

Regardless, the S&P 500 now stands at 1145.58, a little more than 4 points off of the January peak. The Dow Jones Industrial Average stands at 10 567.33, some 163 points off of the peak. Stocks have indeed managed to creep up, in spite of the fact that the time it has took to recover from trough back to the peak is 23 trading days and counting, the longest since the March 2009 low.

Below is the chart of the market over the year, showing the entire span of the rally, plus the month and a half since the January peak:

Today is March 10, 2010. Not only is it the one-year anniversary of the beginning of the rally, it is the tenth anniversary of the peak of the Nasdaq Composite index's peak on March 10, 2000. Back then the Nasdaq stood at 5049, and over the ensuing three years, fell to 1100. It recovered to nearly 3000 by 2008, only to fall again to 1300 by 2009, and to crawl back to 2300 by now.

Below is a 10-year chart, showing the entire crash and recovery:

The recovery of the Nasdaq is very reminiscent of the recovery from 1929-1939, and it has a solid foundation for continued recovery. This will, like the aftermath of the 1929 crash, take about 10 years more to recover to the peak of 5049.

After the nearly 10 percent downturn which the stock market suffered through early February, the major averages have managed to creep up somewhat. The reason for this is twofold:

1. A dead-cat bounce off of the lows
2. Better-looking economic data

Part 1 needs no further explanation. Part 2 does, however, since this is an economic report.

First of all, the US goverrnment reported that GDP in the fourth quarter of 2009 was up by 5.7 percent at a real annualized rate. On the surface this looks like good news, and it ordinarily would be. However, the government typically underestimates the rate of inflation by 2.7 percentage points (you can see the reason for this in earlier reports).

In addition to this, economists estimate that two-thirds of the growth that was reported was due to a buildup in inventories. While it may be a defined component of gross domestic product, a buildup in inventories does not make any difference when it comes to growth in economic activity.

Two-thirds of 5.7 percent is 3.8 percent. If this is added to the inflation underestimate, this yields 6.5 percentage points to subtract  from the 5.7 percent. This adjusted figure is a contraction of 0.8 percent. Even if you do not subtract the inventory component, it still comes out to an expansion of 3.0 percent, after a contraction of 0.5 percent in the third quarter, which is not a very robust recovery, if it is a recovery at all.

Also consider this -- the inventory buildup may not continue beyond the Christmas shopping season, and it may work in the reverse in the first quarter, and become a drag on GDP. Also, the 5.7 percent figure may, as the third quarter figure was, be revised downwards.

A buildup in inventories does not constitute an economic recovery by any definition, and until there is a sustained and real expansion in economic activity, the US economy is still in the same downturn it has been in ever since 2007.

Meanwhile, there is good news on the employment front. In January 2010, the seasonally-adjusted U3 unemployment rate decreased to 9.7 percent from 10.0 percent. This is good news, except when it is considered that U3 excludes the discouraged workers and those working part-time for economic reasons.

When these two groups are included, which they are in the U6 rate, the rate now stands at 16.5 percent. This is a major improvement from 17.3 in December. However, this is a seasonally adjusted rate, which only tells part of the story. The U6 rate, not seasonally adjusted, was 18.0 percent, up from 17.3 in December. This is probably due to the firing of holiday workers, but nevertheless it should be watched closely in the coming months.

If this downward trend continues, it will mean better news for the economy.

Meanwhile, we must not forget the stock market. When we left the market last month, it was in a crash mode. Earlier this month the Dow hit a low of near 9840, and it has since recovered to above 10 400. The S&P 500, earlier hitting a low of 1040, has since recovered to around 1110.

However, both indicies have stalled at the area around their 50-day moving averages, and this is not good news, since the 50-day moving average has since July been a floor for the market. If it turns into a ceiling, then it will probably go lower.

Both indicies were down today, possibly signaling the end of the couple weeks of a dead cat bounce.

Below is the one-year chart for the Dow:



And S&P 500:



The next report will come in March.

Well, it looks like that my predictions of about a week ago are now panning out. On January 14, I stated, after explaining the rising wedge formation in the Dow Jones Industrial Average:

"But remember that when a rising wedge breaks down, the ensuing market reaction is usually sharply downwards. Perhaps this downward move will have to wait until the Dow catches up with the S&P. As usual, we'll just have to wait."

It seems now like the Dow has caught up with the S&P 500. After reaching a 15-month high on Tuesday, the US stock market on Wednesday sunk despite positive news from the companies and somewhat good, but still weak, economic indicators. On Thursday, a confluence of events -- China curbing lending, Obama announcing a plan to restrict banks, and the possibility that inflationist Fed chairman Bernanke may not be reappointed -- spooked the stock traders, whom then initiated a precipitous selloff that has only accelerated today, with the Dow Jones Industrial Average ending the week 550 points off the highs.

The rising wedge formation described in the last report has been decisively broken, and it broke on heavier-than-usual volume, followed by a sharp decline, precisely as predicted. The 50-day moving average (the orange line), an important technical indicator of the market trend, has been broken. This signals that the stock market's direction for at least the next month or two is downward:



I would also like to add that with all the uncertainty in the current market environment, combined with the market's downward reaction to news that used to make it go up, plus the fact that the same stocks are moving in the same direction now as they were in late Summer 2008, signals that conditions are currently ripe for a sharp major downturn. It might qualify as a crash, or it might be a bit more shallow and slow than the classic crash.

Regardless, prospects do not look very good for the forseeable future.

If one phrase can describe the state of the economy and stock market in the first month of the decade it would have to be "weakness continues".

My prediction for the stock market to tank has not panned out (yet at least). All major US indicies have hit new highs. The Dow is at 10 700. But all is not as strong as it appears. The drivers of this advance and the underlying fundamentals are still weak, and may have gotten worse in December.

The S&P 500, after hitting the bottom line of its rising wedge formation, has remained stable and has even moved a bit higher:



On the contrary, the Dow Jones Industrial Average has remained perfectly contained in its similar rising wedge, so go figure. Whether the formation is real or phony now depends on which index you trust the most. I lean towards the S&P 500 myself, but the Dow has a pretty good track record of following trends as well:



But remember that when a rising wedge breaks down, the ensuing market reaction is usually sharply downwards. Perhaps this downward move will have to wait until the Dow catches up with the S&P. As usual, we'll just have to wait.

On the economic front, everything is looking weaker. After posting an actual gain of 4000 jobs in the month of November, the employment situation continued its worsening trend in December with a loss of more than 80 000 jobs. This is also reflected in the rates.

Though the official U3 rate showed a decline to 10.0 percent in November, remaining there in December, this does not reflect the real unemployment rate, because U3 excludes all those who are not looking for work, those who are employed part-time for economic reasons, and those who are not in the labor force but want a job now. Combining these factors in produces a much more accurate picture of the employment situation, and it is not good.

In the month of December, the U6 rate, which includes the U3 rate, those who are not looking for work, plus those employed part time for economic reasons, shot up by 0.8 percent to 17.1 percent. On a seasonally adjusted basis, though, the gain was less dramatic, but the rate remains weak, standing at 17.3 percent, up by 0.1 percent.

Adding in those who are not in the labor force but want a job now to that figure, and it stands at a collosal 20.8 percent, or 21.3 percent seasonally adjusted. The percentage of the labor force (plus them) that they are in rose by 0.2 percent to 4 percent.

In addition to this, many other economic indicators after showing positive blips are returning to a decline, a prime example being retail sales. This suggests the possibility of a double-dip downturn, with the gain between dips being extremely weak.

Alternatively these indicators could be a negative blip in a positive picture, but when most indicators are turning weaker at the same time after trending positive, it usually suggests future weakness in the economy, and consequently in the stock market.

Happy new decade to all. The next report will be in February.