Market Topping - The Bull's Logic

Bullishness in the market has never been so high since late April of this year.  The Fed has repeatedly come out and assured people that they will intervene with QE2 if necessary and the investor public sees this as a good thing and bids stock prices up.  What's funny is investors are eyeing the weekly jobs report with the following rationale:

• If the jobs report is better than expected, then the economy is recovering and we can be optimistic and buy stocks.
• If the jobs report is worse than expected, then Bernanke will implement QE2 and this will be bullish for stocks and gold.

When the market gets to this level of optimism where nothing can go wrong and no matter what happens, we go higher, that usually is indicative of a top in the market. Also, bullish sentiment is near late April 2010 sentiment, volume continues to be weak, and we are at the top end of our trading channel, and quite near resistance.  All highly suggestive of a top in the market.

We are days if not hours away from a big (probably steep) correction in the market.  We might make one more stab upwards in anticipation of the jobs report, but any rally at this point is a fantastic opportunity to go short.

We are about to enter "minor wave 3" down, and that means the sell-off at the very least must breach the lows of the end of wave 1, approximately 1010 on the S&P 500. In all likelihood, we will at least sell off to 9400 DOW before the end of wave 3.  Of course, it won't be a straight line down, but that is the next big target before we have a significant rally.

Protect your Assets

The S&P 500 has rallied over the past couple of weeks by over 8%, as more and more bulls jump on the bandwagon. Bullish investor sentiment is now closing in on 90% which is quite high and indicative of a short term top. This is just another counter-trend rally in a larger Bear market.  At the beginning of a Bear market, there is typically a significant number of months of heavy resistance to the downside as hope and optimism keep the markets propped up while economic indicators slowly deteriorate. Some people refer to this period as the "Slope of Hope", but once it subsides, the sell-offs can be steep and nasty.

So I think now is an appropriate time to start discussing where one should put your money to keep it safe.  In a deflationary environment, there are not many stocks that will make you money.  But in severe deflation (which I believe we are headed towards), all stocks will be big losers, even some of the best quality dividend paying stocks that are regarded as "safe havens".  Just look at 2008-early 2009 as illustration of this.  There was almost no stock that didn't sell out well into double digit percentages before bottoming in March 9, 2009.  So, what good is a "safe" dividend stock paying 6-8% dividend if it loses 20-40% of its value???

You might be thinking "what about bonds?" at this point.  In a normal environment, bonds would be a logical alternative to stocks, but this is not a normal environment. Debt-ridden businesses and municipalities will make even bonds a risky investment in the coming years.  Municipalities and even entire states will be facing bankruptcy in the coming years as continued high unemployment and high debts wreaks continued havoc on balance sheets. Of course, there will be a very high pressure to bailout the biggest bankruptcies, but why take the risk?

Real Estate is even worse.  As I have posted before (twice), real estate is still over valued and is due for more corrections. Even precious metals like gold & silver sell off in a deflationary spiral.

One word: CASH.  This is the only asset class (other than shorting the stock market) that will survive unscathed in a deflationary spiral where panic sets in.   If you think you can stick it out through the next leg down and keep the "buy and hold" mentality alive, you are wrong. If you thought the March 9 low was ugly, you haven't seen anything yet.  The vast majority of individual investors who "hold" their assets through the sell-offs will eventually panic out near the low points in the market.  It happens in every recession, but this one especially as we will see extreme lows in the market that will shock almost everyone.  There are few people that will have the stomach to weather the storm all the way through, and large fortunes will be lost as a result. Don't be one of them, protect your assets NOW.

Crossroads: Inflation vs Deflation

As time goes by, I get more and more Bearish on the long-term economy.  First, let me tell you what I know for certain:  We are in a depression, and the worst is yet to come. There is really no doubt about this in anyone's mind who has a clue about economics and a record of predicting market trends correctly.  Years from now, when the history books are written, this decade will be referred to as the darkest, deepest depression our country has ever seen, and there is nothing we can do to stop it at this point. The question is really what type of depression we will face.

In one camp, we have the inflationists, with Peter Schiff being one of the most well known. They say (in a nutshell) that the dollar will continue to plummet to farther and farther lows due to money printing and as a result we will see commodities and precious metals soar in price, dramatically raising the cost of living for the United States as unemployment stays high, taxes are raised.  This could very well cause hyperinflation.  However, in this scenario, since our economy is so weak, stocks would underperform inflation as everyone flocks to commodities to keep their net worth from sinking in value.  Ultimately, the United States would be forced to raise interest rates to stave off inflation but this will slow down the economy even further relative to inflationary pressures.

In the opposite camp, we have the deflationists, with Robert Prechter and his Elliot Wave analysis at the forefront of predictions. This scenario, which I regard as significantly more likely, will be caused by the American people pulling back spending with increasingly pessimistic views of the state and future of our country and economy, sending earnings and the stock market in a downward spiral.  Deflation has already started happening in the past few months, but it is only in its beginning stages. Deflation theory at its core says that this must happen in order to de-lever the decades of debt our country and its people have been building up.

In my opinion, both camps are right and it is only a matter of timing.  I do believe that in the next few years, we will experience severe, unrelenting deflation only to eventually lead to high inflation afterwards.

But make no mistake..... no matter how the scenarios play out, it will be ugly. Really, Really, REALLY ugly.  I have been saying that I believe that less than 1% of the american people really have any idea of how severely bad our economy is going to get in the next 5 or so years.  Very few people in our time have experienced the Great Depression, but most of us have heard stories about it.  Banks failing left and right, people losing their entire net worth... unemployment at 25%.  So what can we expect in this decade??  I believe it will be even worse than the Great Depression for reasons which I will outline in future blogs coming soon. I will lay out survival strategies and what you need to do to protect yourself. For now, I will leave you with one thought until next post. Whatever you believe or don't believe about how bad our economy will get, do NOT, I repeat do NOT underestimate the severity of how bad it can get. It's human nature to do so, as we are all optimists by default but this is not a time to be complacent. Keep these thoughts in the back of your mind, and I'll post back soon with some specific predictions, thoughts, and strategies.

Chris

How to fix a debt crisis? Issue more debt of course!

This article comes a bit late, but I think this topic is important enough that it needs to be stated.  About a month ago, the European debt crisis which started in Greece started spreading to other countries in Europe, sparking a global sell-off in equities.  This is hardly surprising for anyone who understands economics, but what is unbelievable is what happened next.  A 1 Trillion dollar bailout package.  Wow.  Right when I thought government idiocy couldn't stoop any lower, they prove me wrong.  How do we solve the world's worst debt crisis in history?  Of course, issue more debt!  What's even more surprising is that many people are actually RELIEVED over this news, which shows absolutely NO understanding whatsoever about what caused this whole crisis in the first place.  "Kicking the can down the road" not only does not solve the problem, but it makes it worse. We have just entered the beginning stages of a worldwide sovereign debt crisis which will eventually spread to the United States, and it's going to get ugly. 


On Friday, we got a jobs report that was absolutely abysmal.  Although 430,000 jobs were created, almost all of those jobs were for the Census 2010 program!  In other words, the jobs are non-productive and they do not grow the economy like private sector jobs that produce goods and services that people actually want to consume.  This is just the latest indicator on how unhealthy this economy really is.  Many years of over-consumption for the US consumer is now going to be followed by another period of deflation, where consumers pull back and save money in the face of another down-turn in US housing prices which has just begun.


What all of this means for the stock market is a double-dip recession. The "recovery" that we experienced over the past year was not a real recovery, it was a result of stimulus programs, inflation, and relentless printing of money.  None of which actually improve the economy, but they do create the "appearance" of an improved economy.


The next 6-12 months will be ugly as the 2nd leg of the recession (depression) takes hold.  The fundamental problems that caused the recession in the first place (i.e. debt) have never been solved, and now it is time for it all to play out.  Cash is king, folks.  Prepare yourselves for some ugly times.

Double Dip is Imminent

I have been purposely reluctant to be calling for a double dip for the past few months because I was afraid that people would tend to just 'tune me out' and call me a crazy person in the face of a rallying stock market.  I have officially changed my stance as of today, the first day since July 2008 that the market has closed below the S&P 500's 200 day moving average.

The bulls' main argument against another deep correction is that earnings are very good.  This is of course a short-sited argument, but very typical nonetheless. Fundamentals always look good at the peak in a market. That's WHY it's the peak in the market.  With the entire global economy in debt-ridden turmoil, future U.S. company earnings are bound to be seriously impacted, and the stock market is now anticipating this.     But the United States debt is one of the worst in the world... do we really expect to come out of this unscathed?  Furthermore, the fear that this correction brings on will snowball to the downside.  As is typical in every market cycle, the markets will overcorrect and stocks will get extremely cheap.  A deflationary period is imminent which will cause a double dip recession. I expect 5000 on the DOW.

Prepare yourselves for a wild ride. It gets ugly from here on out.

Beginning of the US Currency Crisis

If you want to know what is happening with the upcoming currency crisis, how our market has rallied recently, and why the dollar is doomed to fail eventually with hyperflation, this is your video.

However, this video covers inflation, not deflation.  What we are facing today and at least over the next year is another deflationary period not unlike the one that took hold in 2008 and early 2009.  We will see massive stock sell-offs in the medium term.  The inflationary period described in this video will not come until later.

Warning:  This is a hugely informative video, but it is long.  At 55 minutes long, you will need a good chunk of time to watch it.

http://www.youtube.com/watch?v=eb1n1X0Oqdw&feature=player_embedded#!

A new Bear Market

I have been publicly Bearish for months, but now it has finally become clear that we have entered a new Bear market.  But after a steep sell-off last week, we had one of the biggest 1 day rallies I can remember in recent times after a EU bailout was announced.  This was enough for me to predict a short-term rally would continue for at least a few days, but alas it looks like I may have been premature in that call.  As I write this, the futures market is down about 0.5% just hours after a 3.5% rally.  A scan of the blogs and sites I follow indicate that the smart money is not fooled by this bailout and the subsequent rally. Europe’s problems are far from solved and in fact they are just beginning.  Although we did not yet break the 200 day moving average, I believe it will happen in the next few weeks.  Once that happens, all bets are off on how low we can go.

We have just entered the beginning stages of a Sovereign Debt Crisis, which started with Greece, but will ultimately end in the United States (through a collapse of the U.S. dollar).

Brace yourself. It’s going to be a wild ride.