Saturday, July 9, 2011

18000 NEW NAILS IN THE COFFIN


As many of you know I believe that we have begun the topping process of this cyclical bull market. In a healthy market an intermediate decline is a profit-taking event after a significant leg up. It should hold well above the prior intermediate bottom. The decline into the June low was not a profit-taking event. The market had not rallied long enough or far enough to warrant an intermediate correction and certainly not one that would test the March lows. The decline in May and June was the first shot over the bow that something is wrong with the fundamentals driving this market.

Now let me be clear because I think many people got the wrong idea from my last article. I don't recommend anyone sell short the market. All I'm saying is it is too late to have retirement funds positioned long at this time.

Asset appreciation is the FED’s stated third mandate. Bernanke is going to fight the bear tooth and nail. There will be continued interventions into the markets. The rules will be changed as we go. Anything and everything will be tried to keep stock and bond markets levitated. That is not the kind of environment conducive to making consistent gains on the short side. That is the kind of environment that can and will whipsaw traders to death.

Even in a market free of intervention the topping process is always volatile and dangerous. But in a market that is being actively managed it is especially dangerous on the short side. Case in point - the June bottom was way too early for a final intermediate bottom.

As I said in my previous articles we should have seen a counter trend bounce to relieve sentiment extremes followed by another leg down into a more lasting bottom. Unfortunately that was not allowed to happen. The powers that be manufactured an explosive rally on the low volume preholiday week in an attempt to create a massive momentum move ahead of the end of QE2 that would be hard to turn around. Needless to say Bernanke didn't want a repeat of last year when QE1 ended.


The Fed can temporarily turn the markets higher but what they cannot do is reverse the economy. I said when QE1 began that no amount of printing or stimulus would stop the underlying cancer in the economy. All it would do is create a brief reprieve which would be followed by an even deeper and more severe recession once the sugar high wore off.
The simple fact is that we cannot cure a problem of too much borrowing and too much spending with more borrowing and more spending. We tried this in the `30's and it caused a 15 year depression. Japan tried it and it led to two lost decades.

The cure is to bite the bullet and allow the deleveraging process to run its course. Yes it will be painful. We've put this off for so long that it isn't just going to be painful it's going to be catastrophic. But the longer we kick the can down the road the worse the endgame becomes. The only ray of sunshine I can offer is that if we let the markets work they will complete the deleveraging process fairly quickly. Within 2 to 3 years the world can be back on a sustainable path of growth. Continue to fight this and we could be stuck in an on-again off-again recession for another 20 years with the final end game collapse so devastating that it will make the Great Depression look like a picnic.

The last two employment reports are clearly showing that the economy is slipping back into recession. I suspect by August the employment report could, and probably will, turn negative. All the manufactured rallies in the world cannot prop up the stock market if the economy is rolling over into another recession. They can postpone the inevitable only so long and ultimately will just make the bear that much more severe.

The Fed's efforts have only extended the topping process, they haven't stopped it.

17 comments:

  1. Didn't you say the dollar is the key to the next market move?

    How does a small jobs gain, or a recession for that matter lead to a stronger dollar?

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  2. Recessions are deflationary. Look what happened to the dollar during the last recession.

    If the printing continues under the guise of a job stimulus program then we may get one more leg down in the dollar before the final three-year cycle low. If not then May probably marked the bottom.

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  3. I am leary of using the past recession as a model. Sorry, but a 900 point fall in the S&P in less than a year is not the new normal, at least I hope so.

    I don't know Gary, this whole thing, it just feels like fraud, artifice, false, and I think that may explain the endless calls for a new bear market, or continuation as you see it.

    Look the paradigm is a failure, there are no jobs, inflation is here, the economy isn't growing in a healthy way, that is sustainable.

    I would love to hear from you how you think we get out of this fraud without a collapse, I wonder if there is a middle ground here? Thanks Gary, enjoy your weekend.

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  4. I am leary of using the past recession as a model. Sorry, but a 900 point fall in the S&P in less than a year is not the new normal, at least I hope so.

    I don't know Gary, this whole thing, it just feels like fraud, artifice, false, and I think that may explain the endless calls for a new bear market, or continuation as you see it.

    Look the paradigm is a failure, there are no jobs, inflation is here, the economy isn't growing in a healthy way, that is sustainable.

    I would love to hear from you how you think we get out of this fraud without a collapse, I wonder if there is a middle ground here? Thanks Gary, enjoy your weekend.

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  5. Agreed. This has been a horrible year for the markets. Up a month, down a month, up a month, down a month. Rinse and repeat.

    There are very few jobs to be had in the U.S. Yet we need to create a quarter million new jobs every month for the next 5 years just to get back to zero (pre-recession levels). Not going to happen.

    For the life of me, I can't understand why the markets have been rallying. Perhaps you are correct, Gary, that the invisible hand is moving the markets.

    I don't ever fight the markets. I take what it gives me, and trade accordingly.

    What's your prognosis for gold/silver?

    As always, thanks for your analysis.

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  6. Good article. Very well stated, in my opinion.

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  7. We have dollar going up together with metals.
    Rare, but it's happening right before our eyes

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  8. boss man,
    I went over it in detail in last week's nightly reports.

    Suffice it to say that I think an intermediate bottom has been formed.

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  9. Dollar going up. Gold and silver going down, debt still going higher and we are no better off. What ever they do won't change things for a long time so, what do you do.

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  10. The whole bearish setup is 90% look like topping process and almost 90% people trust the bear is coming back but I still like to see if S&P drop below 1249 in next couple of weeks. This is really the last nail in the coffin. You know this year stock market really act like a drama. You never know what will happen next, especially in the last 12 month of Presidential cycle.

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  11. Gary are you still looking for an intermediate correction in gold still?

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  12. Gary,

    What the heck is going on with the Fed?

    Are they bluffing or will it cost us 5 bucks to fill up our tanks this Fall?

    Your thesis based on today's testimony? 2008 Recession bringing the S&P back down to 1100?

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  13. ... and Boom! And just like that, PM's are on a tear!

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  14. This comment has been removed by the author.

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  15. Just like I expected the trolls are nowhere to be seen when the market turns and heads back down just like I thought it would.

    I said at the time that the fleas would disappear back into the woodwork as soon as things went against them.

    Funny how they all wanted to come on and gloat during Bernanke's manufactured rally at the end of June. Now that it's melting away they're nowhere to be seen.

    I think it's time for them, and they know who they are, to come on and apologize.

    Otherwise your posts will be deleted from now on.

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  16. SO Toby, what are we to make of this dollar situation?
    It took off and then went back down, but it's not behaving like something that is supposed to fall further.Tricky stuff.
    Do you now think that was dollar bottom in May or not?
    Because you said that if that wasn't the bottom than the next bottom should be in late fall.
    Thanks

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  17. fleas? ouch
    gary! usually you dont mind the contrary/ wrong evaluation of the market. you answer them well and i think they give you a wonderful platform and topics to educate. Although you may be upset at someone in particular.
    This flea is just trying to ride the gold bull. I am now haveing great success with your help gary.

    anyone that has not tried the premium site, I cant stress enough to give it a serious consideration

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