Saturday, January 29, 2011

REGRESSION TO THE MEAN

All markets are subject to the forces of regression. Newton's basic laws of motion; Action and reaction.

At current levels both the S&P and Nasdaq 100 are stretched further above the 200 day moving average that virtually any other time in  the last 10 years.





Not surprisingly the further a market stretches in one direction the harder it snaps back in the other once the forces of regression gets its hooks into the market.

The Fed is exacerbating this process with their constant meddling in the markets.


The flood of liquidity unleashed by Greenspan and Bernanke from 2002 to 2007 in the vain attempt to abort the bear market was directly responsible for creating the conditions that led to the market crash of 08/09.


The rally last April was pushed much higher than it would normally have risen by the forces unleashed during QE1. The end result; the correction when it finally came was much more severe than it would have been normally, even including a mini-crash in May.

QE2 has now driven the market even further above the mean than in April. Unless the law of action and reaction has been repealed we should soon see an extreme regression to the mean event
.
 

I believe the Fed has put into place the conditions that will bring about the end of this cyclical bull market and usher in the next leg down in the secular bear. 

During the next 3 months we should see the dollar begin to collapse down into the 3 year cycle low unleashing the currency crisis we've been expecting. This will drive a massive surge in inflationary pressure that will poison the fragile recovery and send the global economy back down into the next recession.
A recession that should be much worse than the last one as it will begin with economic conditions much weaker than in `07.

The last time the Fed did this it produced a brief period of prosperity by creating a real estate and credit bubble. We all know how that ended. This time I expect the party to last two years tops, which means this cyclical bull should top by March. In their ill fated attempt to get something for nothing the Fed is going to cause a currency crisis and a massive surge in global inflation. 


The price we will all pay when the house of cards comes crashing down again will be multiples more expensive than last time.

29 comments:

  1. Hi Toby,
    If case of another recession which as per you is around the corner, would you suggest one should buy physical gold and silver now or if not now then when.
    Thanks
    Cindy

    ReplyDelete
  2. Gold is due for one more leg up in the current C-wave. we should then experience a severe D-wave correction.

    One could buy anywhere in here for the next ride up but they need to exit at the top of the C-wave later this spring and then re-enter at the bottom of the D-wave sometime this summer.

    ReplyDelete
  3. Toby,

    When you think this push by QE2 last for 2 years, do you mean you expect S&P can stretch up for another 12 months?

    Thanks
    Thomas

    ReplyDelete
  4. I mean the cyclical bull shouldn't last more than two years, which means it should top by March at the latest.

    ReplyDelete
  5. Toby,

    This bearish call is very bold... If the market was functioning normally, we would have crashed a long time ago. The Fed has taken full control of the markets and all assets have been under de facto price management since the crash of 08. The intervention happens day and night, 24/7. It is obvious to see. If the scoreboard has to be green at the end of each trading day, if no one ever loses, and if everyone gets bailed out, then hard assets like gold, guns, and groceries get purchased. Now this thing in the middle east could be the early signs of disintegration of the monetary system. It's amazing how fast this is playing out. I will buy into the bearish case if I think that there's a force that the Bernank can't overcome. Maybe this is it. Monday is going to be interesting. Let's see if they can jump in after Dow down 200 to start juicing it back green before the end of the day. What a joke Banana Republic this is. What a freaking joke! Buy gold and silver!

    ReplyDelete
  6. If the Fed could really control the markets then what was that thing in May and June?

    Don't let the conspiracy nuts make you lose sight of what's really happening. The Fed can print money but they can't control where it ultimately ends up.

    The markets are going to go where the fundamentals lead them. The Fed can no more stop that than one can push water with a fork.

    ReplyDelete
  7. Well Toby one thing is for sure... The Fed doesn't want us shorting any of their precious stock indexes which have become items of national security. How else can you describe the gravity defying feats being displayed almost daily? You see, the Fed wants us to buy something, almost anything really. Ideally, the Fed wants us to take our federal reserve notes and buy the exchange traded fund SPY, to then exchange those shares later on in the day, the next week, or somewhere down the road. What we get back is more federal reserve notes to go out in the economy and buy something, maybe even celebrate with an ice cream cone! That my friend is the wealth effect, a central tenant of the Federal Reserve. It's really that simple. If we want to have more federal reserve notes, we must behave accordingly. If we are buying gold and silver, we aren't behaving correctly so we might not be rewarded for buying those things.

    ReplyDelete
  8. The Fed cannot stop the coming downwave, which will likely last up to two years. Their QE is starting to backfire here in the U.S., causing margin compression in U.S. companies, which is starting to show up in earnings. Those who are receiving the free money will not be pouring it into companies whose earnings are falling. I would not be surprised if they do start pouring money into gold/silver miners, who are benefiting from the inflation which is killing everything else.

    ReplyDelete
  9. Hi Gary/Toby,
    allowing to see the subscriber only articles gave a glimpse that you were already bearish at 1156.
    Just to mention that.

    I agreed couple of days ago with you that a correction is imminent.

    I do not agree however with your very bearish view assuming lower lows compared to 2009.

    You mention a cyclical bull does not last more than 2 years. I am wondering if you have had the same view back in 2003 and early 2005.

    "The markets going there were the fundamentals lead them....." So where are the fundamentals? Did you see any extremely bad earnings in past 12 month?
    What are the forward earnings ? Do you know them ? Would you like to share with us your view about fundamentals?

    ReplyDelete
  10. Will commodities be a sector to watch as inflation unfolds? If so, would companies such as oil service, oil E&P and miners be the way to go or the pure ETFs that actually hold the commodities?

    ReplyDelete
  11. One unspoken market support may be European money.
    As much as they hate us, the smart money there probably sees the Euro shotgun wedding of economies for what it is: mismatched economies with a common currency.
    Europe is in worse condition than us.
    And so some of that capital is flowing this way.

    ReplyDelete
  12. I think we had the bottom in Gold at 1308. I load full possition.
    Very simple bottom,just few pips down from old low at 1315 and at the same time achieving two goals.
    1.Making all the bears thing that we are going down to hell
    2.Making all the bulls waiting for test of 1290-1265 which may never hapen

    ReplyDelete
  13. Dear Gary/Toby,
    being too early bearish (since October according to your articles) and calling cycle tops all the time is not the answer. Now it is postponed until March and for certain once you will get it your way.
    Don't become a Prechter calling 10 times a major top and get 1 out of 10 right.

    It would make far more sense to call a top upon a confirmation of change in trend. The rest is just plain guessing and since October you have guessed wrong and missed 140 points gain in S&P 500

    ReplyDelete
  14. If you have been reading the nightly reports then you would know that I've been pleading with people not to short the market for the very reason we've seen. Trying to time a top in a bull market is extremely hard to do. And even if you get it right the potential on the short side is limited especially if you miss the bottom.

    So you might want to check your facts first next time.

    ReplyDelete
  15. Dear Gary/Toby,
    I did read it right and did not even suggest that shorting the market was stated. Since you mention it, you did enter a short yourself on BKX.

    If you would understand my concern, you would notice that guessing a top will cost you ample profits by selling too earlier without entering shorts. This you have failed to mention. An analyst who assumes a cycle top surely does not hold onto his stocks and is selling. Otherwise it does not make sense to call one at all or does it?

    Assuming we do see a correction and I do believe we will, all stocks without exception will fall and it would include precious metal stocks as well. If memory serves correctly, the last corrections did include all stocks and USD gained.

    ReplyDelete
  16. Well first off I'm not invested in the stock market and even if I was I certainly wouldn't continue to hold stocks with the market stretched as far above the mean as it is.

    The risk of getting caught in a big plunge down (like the flash crash) is too great and the potential gain is too small. What are the odds of another 10% gain with the NDX stretched almost 17% above the 200 DMA?

    I'm not saying it can't happen but I am saying I would never ever take that trade. The odds of winning are too small.

    I took a very small, nothing trade on the BKX months ago when it looked like it might break through support at 42.

    It sounds to me like you've ignored my warnings and have tried to short the market. If not, and you just exited then you did the right thing. The market is too stretched to stay on the long side. The correct move is to go to cash or better still start buying in the precious metal sector that has already regressed to the mean.

    Your odds of making money, a lot more money are much better in metals than in trying to push the long trade on the stock market.

    ReplyDelete
  17. Dear Gary,
    are you saying you do not own stocks?

    I find it amusing that your interpretation of my comments are that I am shorting the market according to your analysis. If I would trade to everybody's analysis, I would run out of funds already.

    My objective is to wash your eyes a little bit and await a trend break instead of guessing according to your cycles.

    Perhaps you had a chance to view the rising trend line today . Would you agree with me it is at 1280 ?

    Again, please do not get me in any way wrong, I do indeed believe we will experience a correction. Would it be a new bear market as your lines in the Charts suggest, I honestly say " I do not know". The charts on the right side are blank for me and for you.

    ReplyDelete
  18. Dear Gary/Toby,
    just to clarify, I am not a subscriber of your blog.
    I did read your articles of late at safehaven.

    ReplyDelete
  19. I don't own the general stock market if that is what you are asking. I do have ETF's in the precious metal sector.

    I'll take your word for the trend line as they can be just about anywhere depending on how someone constructs the X & Y axis on their chart.

    The purpose of cycles isn't to get one in and out at exact bottoms or tops. I don't know any system that can do that consistently. If there was one then who ever found it would be a billionaire in short order.

    Cycles are good for getting one "close enough".

    Do we have a final intermediate bottom in the precious metal sector? I have no idea.

    Are we close enough? Absolutely.

    ReplyDelete
  20. This comment has been removed by the author.

    ReplyDelete
  21. In one of the reports I read where, for whatever the reason, the markets go up in the third year of a presidency...so which is it up or down and why is there such a disconnect between what is said then and now?

    ReplyDelete
  22. Understand that I'm not suggesting the stock market will end the year down just that we should have a final top in the cyclical bull sometime this year. Probably in then next 2-3 months.

    Tops are complex and take time to complete. We could see a top in April. A first leg down into July. A bounce into the end of the year that tests the highs and then an aggressive move down next year as the next leg of the secular bear gets underway in earnest.

    ReplyDelete
  23. Very insightful. Artifically inflated market as was the last two bubbles economy. This is their last bullet(QE2),to inflate economy all based on BS.

    ReplyDelete
  24. You people really believe that QE2 is about inflating the stock market or stimulating the economy? That may be the (temporary) result but if you have a 1.5 trillion dollar deficit and virtually no one wants to buy your bonds its about funding your government spending pure and simple. Therefore, QE2 must necessarily lead to QE3, QE4 and so on until the currency and the economy collapse. The US has passed the point of no return.

    ReplyDelete
  25. Soon the Dollar bubble will burst and will be a cause to ignite the present smouldering ashes in to a massive fire which will again engulf the world and then their will be peace. Euro and all other major currencies will plummet to zero value. The rich will join the ranks of the poor and guess what?

    ReplyDelete
  26. I am keeping about 33% of investments in cash and on the sidelines while "guessing" at a 14 to 15 percent correction.

    ReplyDelete
  27. Toby, what about the coming Euro implosion, or are you already discounting same? The Euro makes up 50% of the Dollar/currencies Index, so where do you see this free fall for the present reserve currency if indeed the EU implodes?

    ReplyDelete
  28. What makes you think the Euro will collapse? Europe is initiating austerity measures so they don't have to print their currency into oblivion while the US just continues to take on more and more debt and print ever larger amounts of money.

    What would be the fundamental driver for a strong dollar or weak Euro?

    ReplyDelete
  29. Toby:

    The Euro is doomed. The "bailout" is going to the countries that don't even generate enough tax revenue to pay the INTEREST on their debt. (So the solution is more debt?!????) And with the majority of the people working for the government, these folks come out in droves to protest the "austerity" that you refer to. When it finally becomes politically unfeasable for Germany and France to finance these folks the EU will start printing Euros. Might be a couple of years or could happen very fast.

    ReplyDelete