6 May 2005

Equity Markets at a Fractal Crossroads

While the major Asian markets have been closed recently for holidays, many
of the major European markets have nearly filled their nonlinear downward
gaps made two to three weeks ago ­ a day or so of additional trading should
plug the gap. A lateral fractal basing formation in the US equities started
15 days ago with the beginning of an upstroke movement 5 days ago. The
breakdown gap of two to three weeks ago in the NASDAQ has been triply
filled. This last 5 day upstroke which represents the third growth fractal
of the basing pattern also can potentially represent the initial portion of
a first fractal of a new longer multi-week growth pattern. Many analysts
seeing this basing pattern and using technical indicators are targeting
higher valuations. 

These analysts base their projections more on daily and weekly oversold
technical indicators, directional oscillators, and summation indices rather
than on current economic data, which has weighed negatively on the economic
balance scales. Technical indicators are useful but should be employed in
the context of an appreciation of either a dominant expanding or a dominant
contracting credit system. The duration of the time units of indicators are
equally important ­ especially near terminal portions of an expanding credit
cycle, i.e., phase transitions. Equity valuations may be oversold on a daily
and weekly level, but be overbought on a yearly level and extremely over
bought on a decade level.

GM¹s rocket assisted boost by a Œplanned¹, not actual, bid for 28 million
shares of stock by a ultra wealthy investor - who had incidentally acquired
slightly less than that number of shares over the last two weeks - put a
vice like squeeze on those shorting GM, with both speculators and short
coverers propelling GM stock upward by fifteen to twenty percent. Unlike
this questionable antecedent short squeeze Œjunky¹ equity move, GM on May 5,
2000 received its unquestionably appropriate official junk bond status by
the S and P bond raters. Interestingly100 million GM shares have been traded
in the last few days; this would present ample opportunity to unload million
of shares acquired at 15 percent less during the preceding two weeks.

If fractal interpretation of market valuations is to have any value,
specific patterns must be elucidated prior to turning points. The nonlinear
drop in multiple world equity markets two to three weeks ago was such an
elucidation. Gapping down to new lows characterizes nonlinear movement. The
nodal low 5 days ago was day 130 (2.5x) of a 52 day (x) base.

Declining fractals, which are decay and credit contraction dependent, start
their descent at the top of a growth cycle. Just as the first day of the
first 40 day cycle of the Wilshire TMWX 40/100/100 cycle started near the
high of preceding growth period and ended in early January 2005, the first
day of the sequential decay cycle started on the last day of that preceding
third cycle or on day 100. From the January top, the declining fractal
sequence has been 15/37/ and May 5, 2005 - 36 of? 37. (X/2.5X/2.5X)
Significantly the high of this potentially nearly completed growth pattern
is lower than the high in January. To corroborate this declining fractal
scenario with an ongoing well-trafficked simultaneous growth fractal entity,
RMS can be used. RMS, a REIT index and a housing bubble protégée, shows a
low nodal determined growth sequence of 16/39/ and 5 May 2005 -31 of 32.
Notably the ideal projected terminal growth day of the growth fractal entity
and the declining Wilshire fractal sequence terminal day are on the same
day, Friday May 6, 2005.

If the lows of the preceding 2-3 week period are exceeded, a downdraft of
major proportions is highly likely. If equity valuations increase steadily
over the next three trading days, a further multi-weekly fractal growth
cycle is yet possible. The current short term US treasury rates are still
below current inflation rates and markedly below the double digit number the
wise Mr. Volcker used to curb growing commodity price rises in the early

The devaluation and deflation of assets remain not a question of if, but
when. Only if the central government owned all businesses and
employed all citizens, could continuous inflation by arbitrarily increasing
wages remedy the current expanding debt and consumer saturation
difficulties. American private businesses, unlike the government, cannot
arbitrarily borrow and expand credit to increase wages and accommodate
growing inflation and debt. Unlike the government, private enterprises must
be generally profitable in order to continue their existences and continue
to employ wage earners.

G. Lammert