We’re going to make the commentary short this week because, as we said in the title, “the rest is up to Mr. Market.”
We’ve been talking about the 12-17 through 12-21 period for a couple of weeks now and although we can never tell the market what to do, the data that continued to pour in last week only strengthened our confidence in a bearish resolution of this trading range. In fact, I would be completely shocked if stocks aren’t starting a series of free-falls beginning at the opening bell on Monday morning.
We have magnets staggered at levels that seem to indicate a stair-step decline consisting of 10 to 30 SPX pt. plunges at a clip with the first large 65 pt plunge coming on a break of 1373.97 and the big crash collapse not coming until we slip under 1268.78 but conflicting with that idea (of a stair-step decline as opposed to a straight-line crash) is the chart pattern below showing a plunging speedline that will be, as of Monday 12-17, a full 375 SPX points BELOW Friday’s closing price level.
NOTE: The market started to free-fall that Monday morning and with the exception of a quick bounce into Christmas (which we forecast) selling was relentless through year-end and into January as we crashed toward our long standing target of SPX 1268.78. On 1-22 the FOMC, once again, intervened creating another temporary low in market on 1-23 at the 1270 level, less than 2 pts from our target.
OK, But What NOW?
I just spent the last 7 hrs going through all of my work and my unchangeable forecast moving forward is INDU 6606 into the 2008/2009 period followed by INDU 3971 (a 72% decline off the October TOP) into either 2012 or 2015. Hope you didn’t miss that, but just in case you’re falling asleep…
INDU 6606 into the 2008/2009 period followed by INDU 3971 (a 72% decline off the October TOP) into either 2012 or 2015.
The whole “financial engineering” house of cards has started to collapse and the coming surprise is going to be the revelation that huge levels of fraud related to loan origination all types of home loans (subprime as well as prime involving appraisers, brokers, realtors and anybody else who wanted some free money) was perpetrated and that waves of worthless paper are coming back into the laps of the guys who bundled it and passed it along in the first place. Look into it a bit and you’ll see stipulations that the holders of the bad paper can give it back if there was any fraud involved in the origination or packaging process and that spells disaster for wall street because mortgage originators have gone broke and bond insurers are illiquid (I’ve read Ambac and MBIA may have levered up 300x of capital base–and that was when they had some money so who knows what the number is now–and that implies broker/dealers etc. will be rumored (even if the GOV steps in to bail them out) to be stuck with enormous losses that dwarf what we’ve seen so far.
Another huge problem, in my opinion, is that we dumped so much bad paper on foreign soil (including naive managers of small municipalities etc.) that ill-feelings and lawsuits will create a hairball of litigation and other long-lasting PR problems for the broker/dealers.
Which carries us back to my major thesis for the problems facing stocks over the coming two-to-five years which is IF all of what I’m guessing above does come to fruition, where is the money going to come from to keep the momentum investors and fast-money hedge funds levered up and, IF they’re forced to de-lever, who’s left to prop up over-price stocks in the US and abroad?
Anyway, the model shows a disaster coming and I have very specific rules about those price levels being revisited, (6600 and 3971) so as far as I’m concerned it’s a matter of when, not IF they are reached. Also, the nature of the decline calls for crash legs so we should see one or more crash legs this year and next. My sense is that we’ll witness something more similar to 1929 than 1987 because once the crash occurs it should be followed by lower lows a few months down the road as opposed to the 1987 experience which marked a capitulation BUY opportunity.
Sorry to be such a huge bear but I know what I see in the model and with the backdrop of casino’s and state lotteries scattered all over our country and the fairly common news of multi-billion dollar blow-ups—including 100K per year desk traders in France—the backdrop is ripe for the type of disaster the model is predicting.
Before I let you review that information though, let me tell you that for the first time since October 2006 I’m nearing a point at which I’ll be recommending that we cover some shorts and get long select groups in anticipation of a very sharp, very short-lived rally. This is a VERY tricky situation because the market is extremely bearish and prone to crashing but because of the dynamic, stretched-out nature of the current trading range, the idea of a 7%-15% bear market bounce (from lower levels) is easily within the realm of possibility. My no-brainer approach to trading this year would be to remain short into September but I think we can pick up an extra 10%-20% over the year if we’re flexible enough to take advantage of the model’s call for periodic bounces along the way.
Full report coming soon