Sunday, May 15, 2011

WARNING SIGNS

It is been my belief that stocks and the economy have been locked in a secular bear market since March of 2000. During that period we've had two recessions and two cyclical bear markets. One of those recessions was the worst since the Great Depression and the last bear market in stocks was the second worst in history.

I've said all along that printing money will not cure the problem we've gotten ourselves into. It's never worked in history and it's not going to work this time either. We can't solve a problem of too much debt with more debt. All we will accomplish is to make the problem bigger.


We are now fast approaching the period when the next crisis should arrive.


On average the stock market suffers a major correction about every four years. In a secular bear market that cyclical trough arrives as the economy sinks into recession and a stock market bear bottoms out.


The last four year cycle bottom formed in March of `09. That just happened to be the longest four year cycle in history. I've noted before that long cycles are often followed by a short cycle that compensates for the extended nature or the prior cycle. If that's the case then the next four year cycle low is due sometime in 2012. (My best guess is in the fall).



As we are still in a secular bear market then the move down into the four year cycle trough should correspond to another economic recession and cyclical bear market for stocks. Bear markets tend to last about a year and a half to two and a half years. If the next four year cycle bottoms in the implied timing band then the current cyclical bull should be topping soon.

As a matter of fact the stock market is already flashing warning signs. Three of the largest and most important sectors in the S&P have not confirmed new highs.



Another warning sign; Despite record earnings the market has only been able to move to marginal new highs and is now in jeopardy of reversing the recent breakout.

I've noted in the past that this is how major tops and bottoms are often established. Smart money sells into the breakout, or buys the break down in the case of a bottom. The trend then reverses and a major turning point is formed. Both the `02 bottom and the `07 top were put in this way.



The market is now at risk of a similar event as we've experienced a marginal breakout to new highs that is threatening to fail. Don't forget this is happening against a back drop of record earnings.


When a market can't move higher on good news something is wrong. And don't forget bull markets don't top on bad news, they top on good news.

If the market can recover and move to new highs the cyclical bull will be confirmed, but if the market continues to fade and drops back below the March 16th "tsunami" bottom it will constitute a failed intermediate cycle. If both the Dow and the Transports close back below that level we would have a Dow Theory sell signal and that would confirm the next leg down in the secular bear has begun.


It would also be a signal that the economy was unable to handle the spiking food and energy costs that were the direct result of Bernanke trying to prop up the financial system with his printing press.


Like I said, printing money has never been the answer. Every empire in history has tried this approach and not one of them has ever succeeded with it. We won't either.

6 comments:

  1. Excellent article, thanks allot.

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  4. I agree 100% and say the same things all the time. Most Americans do not understand this however. Gold and the silver dollar value will rise.

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  5. I am tired of the speculation when the bottom will drop out! Depression or Recession? Deflation of the dollar ...Removing Dollar as reserve curency...??? Blah Blah Blah! To bad all these financial experts and their predictions, can not actually be specific when crash will happen....... Whether its the WSJ,CNBC,Potter Stansbury,Buffet, their all full of !@#$.

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  6. They can't predict the bottom. They also don't need to. They don't know the top either. They, also, don't care because they exit well before or hedge properly when the time comes to be careful. Call it full of shit all you want but rage-posting wont get you any closer to predicting it either.

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