In my last report, I indicated that I was expecting a long-term B-wave high, followed by a C-wave correction in a larger-scale sideways pattern. This seems to be playing out, though in a rather disjointed fashion. The broader indices have clearly seen some kind of high, while a very narrow set of tech stocks keeps pushing the capitalization-weighted indices higher. Chances are increasing that soon the epically bad technical breadth of the current environment will result in the anticipated C-wave drop. That move could see a bear movement of as much as -25% for the Dow, with less significant declines for Big Tech and much larger losses for Small-Caps.

My overall analysis for many years now has been that we would see a world-changing, paradigm-shifting technology revolution, led by Artificial Intelligence and robotics, that would formalize the end of capitalist economics and "markets" as we have known them and usher in a new epoch. This is being borne out in the present, as it becomes clearer that the future of the economy will be based on the generation and distribution of Intelligence as the primary economic value.

As I have also anticipated, a huge gap is opening up between entities based on the old models of economic value and the new emergent model, which can be called Intelligence Economics. This is being reflected in the pricing of stocks, with both smaller and more traditional enterprises falling behind and starting to decline while issues aligned with the new model accelerate to the upside. This massive divergence has, historically, led to a bearish period.

Having said that, part of my analysis has also been that since the underlying market mechanisms of the stock "market" are no longer functional, many technical and fundamental measures of analysis and performance have become either useless or less useful than in the past. That means that, yes, this time could be different, for the simple fact that debt monetarism has almost entirely replaced market mechanisms in finance and economics.

I stated at the October bottom that it could be that Big Tech would launch a legitimate bull market while the rest of the universe of stocks would travel sideways or even decline, creating a definite bifurcation. This, again, is tied to the emergence of an entirely new economic foundation over which only a handful of companies would have dominion while the business and economic models supporting traditional enterprises evaporate. There's a strong chance that, to some degree or another, this is in fact playing out now.

It's difficult to wrap one's mind around the scope, degree, and rapidity of change we're talking about here. But I believe it's essential that we adapt our minds to the new reality as soon as possible, so that we can be well-positioned to thrive, both personally and financially. In this report, we're going to look at charts, technical indicators, and fundamental metrics that illustrate the points I have made in the foregoing introduction.

PRICE CHART ANALYSIS

Let's begin, as we always do, with a look at the SPX 500. Here's the weekly chart:

We can see that while the big-cap index broke out to a new all-time high in late 2023 and has maintained that breakout, it has produced a large weekly bear RSI divergence, similar to the divergence pattern seen at the December 2022 top. We can also see that the price is tapping the upper rail of a rising wedge pattern. Either the index is going to burst through the upside of the wedge, or it is going to fail through the lower rail and start a correction. With RSI at resistance and showing a bear divergence, the setup is for a bearish move here. If, on the other hand, there is an upside breakout that holds on a weekly closing basis, then the orientation would have to stay bullish.

If this is indeed a B-wave high, the likely pattern would place the C-wave low in the middle of the range, somewhere near the red 200-week EMA, such that in the end the abcde triangle pattern would be a rising, running correction. Support of the 200-day EMA and prior highs would likely limit losses to about 10-12%. The current high or a bit beyond would be revisited with wave D and then a period of volatile, largely sideways churn would ensue to complete the pattern. I could see all of this playing out between now and the election, or perhaps the inauguration in January.

The upshot for traders and investors: if you're long SPY or some equivalent, you might want to hedge some downside risk here, but there's no reason to exit your position. The overall orientation is to buy the dip.

But not all SPX stocks are dancing to the same tune. If we look at RSP, the equal-weighted cousin of the cap-weighted SPY, we get a different picture.

This looks much more like a classic A-B setup with C down now poised to start in earnest. RSP popped to a new all-time high but then dropped back and made a lower high. So the equal-weighted index is not confirming the cap-weighted. Even more significant--and this is something we are going to see in many more charts to come--is that while SPY is rising, RSP is declining.

Normally in this sort of setup, RSP would underperform and perhaps also fail to confirm SPY. But it is not normal, in fact, it is quite rare, for the two to become entirely uncorrelated, moving in opposite directions. This is a sign of some kind of profound dysfunction.

Now let's have a look at DIA weekly, the Dow ETF:

The mega-cap Dow has been declining on a weekly basis for the last month while the tech-dominated mega cap SPX has been rising. It also shows a large bear RSI divergence at the May high. Normally, Dow and SPX would travel together. The non-correlation seen here over the last month is almost unheard of. I've been analyzing markets since 2008 and I have never seen anything like this.

QQQ is a big-cap tech ETF.

The chart pattern is very different from the others and there's a legitimate argument for a 5-wave bullish impulsive move off the October low. With the contact of the upper resistance line in pink and a long bear RSI divergence pattern, one could see QQQ positioned for a bull market correction. Like SPY, hedging longs to protect profits might not be a bad idea here, but the orientation is more towards looking to buy the dip. In this pattern, a correction back to the breakout point, which also corresponds with the blue 50-week EMA, would probably be a good entry point.

Now let's compare QQQ to its equal-weighted cousin, QQEW:

Not so great. This looks much more like a classic A-B pattern with C down pending. It broke out in late 2023 but has since stubbornly refused to move higher, failing to confirm the cap-weighted index. A trendline break and a drop back below the 2021 high looks close at hand.

The overall picture is that while a concentrated handful of tech stocks might very well be in a bull market, the rest of the stock universe is giving strong signals that it is at best mired in a largely sideways bear market.

What about smaller issues? The Wilshire 4500 is the total market excluding the SPX 500, in other words, everything but the biggest capitalization stocks:

This is definitely a classic A-B setup. C-down can be expected to make a significantly lower low. This index peaked early this year and has failed to make a new high since then, refusing to confirm the new all-time highs of the big-cap indices.

IWM, the small-cap ETF, looks even worse:

IWM has been falling as QQQ has been rallying over the last month. It's not far from turning negative for the year to date.

Let's compare the relative performance of SPX to a raft of economically sensitive ETFs on a weekly chart since the 2021 top:

While SPX has gone on to an almost 15% gain, an equal-weighted measure of all stocks (EUSA) is down almost 3%, Value stocks are down 7%, Transports are off 8% and Consumer Discretionary is down almost 13%.

The relative performance of various ETFs since the May high is compared below:

Since then, only the biggest cap tech stocks have gained, while the rest of the stock universe, including the Dow, has declined significantly.

As I said in my last report and in many prior reports before that, the indices would come to be dominated by technology companies, and in the process of the secular shift, fewer and fewer companies would be able to operate as going concerns on the basis of the now defunct formal capitalist economics and accounting methodologies. Many of the companies in the small-cap universe are going to see their entire business models completely disrupted by AI and other technologies and will simply cease to exist.

So the price charts are reflecting the fundamental, underlying economic dislocations and transformations that I have been forecasting for years. Sooner or later (probably sooner) there's going to be a catalyst that will spark some selling and it will snowball into a bear movement. For some stocks, it will be a relatively minor correction, for others a deeper miring into a protracted "dead money" sideways grind and for others, literally the beginning of the end. This kind of extreme trifurcation can only be seen under conditions of profound, fundamental dislocation and paradigm shift.

TECHNICAL INDICATOR ANALYSIS

Now let's study some technical indicators. We're going to see that they not only confirm the above analysis of the price charts, but are displaying even more extreme behavior that presages a significant bearish phase.

Let's start with 50-Day SPX Advance Decline Line. This is an indicator that rarely gives any kind of signal at all. Most of the time, it moves in lock step with the index price.

Here we are seeing that the indicator completely decoupled from the index at the end of May and is now making lower lows as the index price makes higher highs. So not only is it giving a rare signal, it is giving the worst possible signal that it can.

Here's the 200-Day SPX Net Advances-Declines:

Also completely decoupled from price and made a lower low. Keep in mind this is an average of over 200 days, so considered a long-term indicator. Not a blip, a trend.

The 50-Day McClellan Summation Index, also a longer-term indicator, has completely fallen off a cliff while SPX climbs:

The last time this indicator performed similarly, the 2022 decline resulted.

50 Day SPX New Highs is showing a similar chart:

While the index price climbs, fewer and fewer stocks are making new highs, a massive technical divergence. Also note that the number of stocks making new highs at the top this time is far fewer than in 2021-2022.

This is just a sampling. There are literally dozens of other charts that show similar signals and setups. Having said that, I'd like to return to some points I made earlier in the introduction. All of this is taking place in the context of a massive paradigm shift. This character of this shift is literally, at a minimum, on the level of the shift from Feudalism to Capitalism in my opinion. Only I believe the transition will take 3-10 years, not 300. In this context, what worked in the past with regards to any analytical methodology may no longer apply, simply because the underlying nature of the phenomenon being analyzed may have already changed on a fundamental basis. In short, under the normal conditions of an actual market environment, I would be screamingly bearish here. My overall analysis leads me to think a correction will occur, but I must add that it is possible that all of the above chart analysis may prove wrong in the context of fundamental changes to the underlying reality.

Now let's look at some of the fundamental factors that are driving the current environment and shaping this analysis.

FUNDAMENTAL ANALYSIS

As I indicated in the introduction, the current economic and financial environment is not based on Capital. It is based on Debt Monetarism. It would take too long to explain the distinction, but on the basis of real economics, there is a fundamental difference.

Debt Monetarism borrows value from the future and brings it forward into the present. The "money" pumping through the economic system today does not represent real, actualized value. It represents future value. It represents a leveraged bet that by bringing future value into the present the economic basis for current value generation can be bootstrapped, thereby generating real, current economic value to pay off the bet.

Debt Monetarism is a transitional regime. It cannot exist forever as a stable system. It only exists to bootstrap the next economic system. It appears this is likely to happen as Artificial Intelligence, Robotics and associated technologies accelerate and proliferate, creating the basis for massive productivity gains and an exponential increase in economic value generation.

There are several dangers, however. The first is that transitions are always chaotic and disruptive. War, social chaos and economic distortions always happen during such shifts. Obviously, the risk of World War III entails the risk of nuclear annihilation. The second is that the old guard which is benefitting from the vestigial capitalist and debt monetarist systems will most likely thwart and control the new, emergent system to maintain their power and control in my view. If the new system, let's call it "Intelligence Economics", is thwarted or its dynamics are corralled and perverted, the debt monetarist bet could blow up, resulting in economic catastrophe.

To bring all of this into perspective, let's look at some graphics.

Debt Monetarism started in the 1970s when Nixon took the US dollar off the gold standard. Total public debt has been rising exponentially since then:

The US Debt to GPD ratio has been growing consistently since the 1980's, exceeding 100% in the mid-2010's.

Above 100% indicates that economic activity is equal to debt, such that a decrease in debt will likely have a negative impact on economic output and growth. A slow growth, high interest environment like the one we have today means that the debt will continue to increase, with less growth and less increase in GDP for every new unit of debt. Long term, this is unsustainable.

Debt to GDP ratios have exploded over the last quarter century:

This condition represents a massive wager on future productivity and growth, which can only result from a thorough economic revolution.

The long-term chart of the US Treasury 10-year bond yield shows that the paradigm have been broken:

The long term downtrend in yields was radically smashed in 2022 and has stayed smashed. Debt service costs are higher now and will stay higher, which means that higher percentages of economic activity are going to be dedicated to servicing debt, not increasing output.

One of the indicators that investors have long relied upon has been the spread between the 2-year and 10-year Treasuries.

When the spread inverts, or goes above 0%, that has always been a signal that a recession has come. Typically, after the signal is given, the curve uninverts as the recession takes hold. This time, however, there has not been a recession according to standard economic metrics and the curve has not uninverted, staying above 0% for far longer than ever before.

This is perhaps the prime example of a formerly reliable indicator that has stopped "working" the way it is supposed to because something fundamental has changed under the hood.

The ratio between Junk Bonds (JNK) and Long Term Treasuries (TLT) has typically been a good indicator of economic or financial distress:

Right now, this ratio appears poised for a trendline break following a big weekly RSI divergence at the recent high. I would suggest monitoring this closely to gauge how the bond markets are anticipating and reacting to approaching and ongoing developments.

CONCLUSIONS

I believe we are sitting at the cusp of literally world-changing forces and events. We will all be challenged to continually refresh our worldview to keep up with the pace of dislocation and transformation.

It's highly likely that, if the analytical methodologies relied upon in this report remain valid under current circumstances and continue to perform as they have in the past, there will be at least a substantive correction to stock prices sometime soon.

On the other hand, it is possible that new forces and a new paradigm has already taken hold, for which there are not yet proper economic and technical measures and methodologies. Big-cap tech could simply continue to explode in anticipation of radical, world-changing technologies that grow productivity and economic value generation exponentially into the future.

My overall take is that the economic and technological revolution will unfold, and faster than most expect, but that there will be some turbulence in the nearer term as measured by the prices of many stocks.

I would also strongly recommend doing a deep dive on individual holdings for core business model vulnerability to radical technological transformation. Many business models will simply cease to exist, like the horsebuggy manufacturing business with the onset of the automobile.