Thursday, June 2, 2011


Wednesday's massacre was a serious shot over the bow for the stock market. The market is now in extreme jeopardy of having formed a left translated intermediate cycle. When that happens late in a bull market it almost always signals the beginning of a new bear.

There's no way the market should have sold off like that on Wednesday if this market was still healthy. I'll explain in a minute.

Fundamentally; I think it's starting to become painfully obvious that QE2 didn't work (just like I said it wouldn't). I said over a year ago during QE1 that this wouldn't create jobs or fix any of our problems. It would just make the problems bigger. Ultimately all QE1 & 2 was good for was to allow the bankers to rake in another year of large bonuses and to spike inflation (mostly commodity inflation). I've said all along that commodity inflation would eventually poison the fragile global economy.

I think it's becoming more and more obvious that the global economy is now headed back down. Surprisingly, or maybe not surprisingly an economy with over 10% unemployment couldn't withstand $112 oil, $4.00 gasoline, and surging food costs.

Now the markets are at a critical juncture. The current daily cycle has topped in only three days. That means we are now looking down the barrel of an extreme left translated daily and intermediate cycle.  Left translated cycles tend to do serious damage because they have a long time to decline. In this case another 35 to 40 trading days. Left translated cycles are the hallmark of bear markets. This cycle topped in only three days. There has been only one other cycle in recent history that has topped quicker, and that was the September 08 cycle. We all know what followed after that.

 A left translated daily cycle is a problem in and of itself but it will also force the next larger degree intermediate cycle into a left translated orientation. Left translated intermediate cycles, especially ones that occur late in a cyclical bull market, almost always trigger a Dow Theory sell signal and the beginning of a bear market.

I've marked the the last two intermediate cycle lows with the blue arrows in the chart below. You can see that the current intermediate cycle has now potentially topped in 7 weeks. Any cycle that tops in less than 11 weeks would be classified as a left translated cycle.

Generally speaking most left translated cycles move below the prior cycle low. That is also a big problem as a move below the March intermediate bottom would almost certainly trigger a Dow Theory sell signal. A move below the March intermediate cycle low would confirm that the next leg down in the secular bear has begun.

On May 15th I posted that we were seeing warning signs and that individuals should exit stock funds in their 401K's if they hadn't done so already. Now that we have confirmation of a cycle failure, not only of the short term degree, but very likely of an intermediate degree it becomes even more important for investors to get retirement funds out of stocks and back into a money market fund.

Folks the odds are now very high that the next leg down in the secular bear market has begun. This is not the time to hope and pray that the market will rebound. This is the time to protect your assets before the storm hits. And it will not just be a squall. This will be a hurricane of titanic proportions. The Fed virtually guaranteed that with QE1 and QE2. 

One has to wonder at what point does the Fed finally figure out that every action has consequences and the bigger the intervention the greater the unintended consequences. We got a front row seat to the repercussions of Fed meddling in 08. If Greenspan hadn't tried to abort the tech bubble collapse and recession we wouldn't have had a real estate and credit bubble to begin with. And we would never have had the Great Recession. Bernanke in his infinite wisdom has now set the stage for the next depression and the stock market is saying it has probably begun.


  1. Now S&P is about to violate 1,300 even 11 points below your 1311 ref. Are you sure this extreme left translated manner going to do serious damage and the stock market will have a long time to decline? I would be very interested to find out.

  2. Nothing in this business is ever 100% but the odds are very high that we are now dealing with a left translated daily cycle that has topped in only three days.

    The only cycle that I can think of that topped in a shorter period of time was the daily cycle in the Fall of 08. That one topped in two days and led to the market crash.

    I don't think this will lead to a crash but it should do serious damage to the market over the next two months.

  3. Hi Toby -

    Thank you for this very informative post.

    Which inverse ETF would you recommend buying to take the best advantage of the upcoming bear? I'm caught between SMN (Ultrashort Basic Materials) and SKF (Ultrashort financials).

    In 2008, SMN went up 30x, SKF up 20x. Will it be around the same this time around in your opinion, or am I way off?

  4. I suggest you get at least a monthly subscription to the premium newsletter. Shorting is a very hard way to make money and if you miss time it you need to get out fast or be prepared to hold through a draw down for a while.


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