"Most people grow old within a small circle of ideas, which they have not discovered for themselves. There are perhaps less wrong-minded people than thoughtless." ~ Marquis De Vauvenargues, 1715-1747, French Moralist
One of the most horrendous corrections the Dow has ever been through began in Sept 1929 and appeared to end in Nov 1929. In this short time period, the Dow shed roughly 50%. This move was almost repeated exactly in 2008, when the Dow dropped In Sept from 11600 to roughly 7550 by Nov 2008, the only difference was that the Dow shed 34% instead of 50%.
The bottom In Nov 1929 proved to be a false bottom just as the bottom in Nov 2008 turned out to be a false bottom.
From its low of roughly 190 (Nov 1929) to its high of roughly 300 in April 1930, the Dow tacked on 57%. The current move that started in March 2009 is strikingly similar; currently, the Dow is showing a gain of roughly 47%.
This chart clearly illustrates the false bottom the Dow set in Nov 1929. The bottom in Nov 2008 failed and the Dow put in what appears to be bottom in March 2009. What remains to be seen now is if the Dow will follow a similar path downward, where each so called bottom eventually was taken out until the Dow lost 90% of its total value. Time will tell, but it does appear that the Dow is following this old pattern rather closely.
If the Dow now trades past the 9800 on volume that is below 8 billion shares, it will probably be a clear warning signal that a very strong correction is about to occur. Thus traders willing to do some extra work should monitor these ranges closely. Risk takers can short stocks like AIG (especially AIG, short via the purchase of puts), LEN, etc if the Dow trades to the above ranges on low volume.
As the markets have gotten so ahead of themselves, we are going to wait for a decent to strong pull back before we open any new positions, unless we specially issue entry points for certain stocks. Our risk to reward models are giving of extremely high risk readings and when this happens it is prudent not to go against them. Market update Sept 15, 2009.
Patience and discipline are called for now for the herd is turning more and more bullish, and it is never wise to follow them. Leaders always have to make difficult choices; they have to look in a direction that is opposite to that of the herd, a direction that the majority will view with distaste.
Our risk to reward models continue to issue very high readings and are close to setting new records indicating that jumping into the market now is not a wise choice. It's time for traders to start keeping a diary again; this time instead of dealing with fear as was the case late last year and early this year you are going to be dealing with euphoria. You will see that the result is the same and that is why we have repeatedly stated that trading based on emotions is a perfect recipe for disaster. When it comes to trading, there is no place for Joy/euphoria and even less place for fear. Be a practical trader not an emotional one. Market update Sept 22, 2009.
There are always going to be some differences, the Dow could on a percentage basis rally much higher as the number of market participants has increased by at least a factor of 100. Current circumstances are worse now than back in 1929, at least at that point in time the U.S. did not have a deficit of 11 plus trillion dollars and growing on its back. It was the leader in manufacturing and consumer spending did not account for over 70% of the GDP as it does now. One has to understand that if spending accounts for such a large part of the economy then something has to give sooner or later whether it is now or 10 years later. Consumer spending creates nothing of value; a long term foundation of growth can only be created by investing in capital goods and not by taking on more debt. An economy whose foundation is based on debt can only keep growing by taking on more debt, eventually you are going to run into a brick wall and everything will fall to pieces and that's exactly what happened. Going forward we are still trying to use to debt to get out of this hole, which means that the next correction is going to be even more severe as there is nothing to support the foundation but paper bricks. China continues to invest very heavily into capital goods (new infrastructure, new manufacturing plants, new power plants, etc.) and this why it is destined to take the title from the U.S just as the United States took the title from Great Britain and will eventually hold the number 1 spot as the largest economy in the world.
If the Dow follows this path, then from low to high this pattern suggests that the Dow could shed 90% of its value. The Dow's all time high is roughly 14000, thus it would have to drop to satisfy the above pattern. We are not stating that the same exact pattern has to be repeated but if one looks at the facts the current situation is actually a lot worse than it was back in the 1930's, so this is something to keep in mind. What we are ready to state is that we have not seen the worst yet and that there is a very good chance that the lows of March 2009 might not hold.
Remember that the Dow put its 1st bottom in Nov 1929, what later turned out to be a fake bottom. 13 years later (1945) after putting in a long term bottom at 40 the Dow was still unable to test 190, the first so called bottom in this very massive correction. Only towards the end of 1945 did the Dow finally muster the strength to trade past 190.
As we have always stated every disaster, and we mean every single disaster is nothing but an opportunity in disguise waiting to be discovered. When the Dow dropped down to 40 in July of 1932, it represented a once in a life time opportunity to become a multimillionaire with just a few thousand dollars. No one can time the exact bottom thus if one started purchasing at any time around April of 1932 (note the market dropped another 45% from roughly 60 to 40) one would have done still extremely well. Even if one bought at 90, 50% higher one would have still made a fortune. Looking at our long term charts we note that the Dow was flashing a series of extremely large positive divergence signals from roughly the end of March 1932. We have saved this pattern and kept it in a safe place, thus if this pattern ever manifest itself in the future we will be ready to issue what we would term the mother of all buy signals. Right now going forward our focus has to be on what might end up being termed the father of all sell signals.
Given the fact that the housing crisis is far from over and that the commercial sector is now starting to fall apart, the economy continues to shed in excess of 200,000 Jobs a month, Americans are drastically cutting back on their expenditures and the threat of hyper inflation continues to loom very strongly in the near future, it is very hard to see how a new bull market could begin. The story below just hit the news wire, and it clearly illustrates Americans have embarked on a new long term path.
Consumers slashed their borrowing in July by the largest amount on record as job losses and uncertainty about the economic recovery prompted Americans to rein in their debt.
Economists expect consumers will continue to spend less, save more and trim debt to get household finances decimated by the recession into better shape. However, such action is a recipe for a lethargic revival, as consumer spending accounts for 70 percent of economic activity. The Federal Reserve reported Tuesday that consumers ratcheted back their credit by a larger-than-anticipated $21.6 billion from June, the most on records dating to 1943. Economists expected credit to drop by $4 billion. Full story
We have a long term trend change here, and such changes never end quickly, such trend changes usually last for several years. Again another subtle sign that things could get significantly worse in the years to come as our economy is funded by consumer spending.
Other factors that suggest a long term bull is not in the marking are
Volume in general has been concentrated in just a fistful of stocks, for example, on many days AIG has accounted for over 30% and in some instances 40% of the total volume traded. Other large volume generators are Fannie mae and Freddie Mac. This is not a problem in the short and intermediate time frames but long term it means the trend is not sustainable.
One other compelling indicator is Global trade; Japanese exports are still off by 37% from their peak. Toyota the largest car maker in the world announced for the 1st time in over 70 years that it will be shutting down an assembly plan. Consumer confidence continues to fall and this is bad news as consumer spending accounts for over 70% of our GDP.
Consider the following
The highest volume day for the past 30 days occurred on the 1st of September and the 2nd highest volume day took place on the 17th, the common factor is that markets closed in the red on both days. This indicates that smart money was basically taking money of the table. This fact becomes more evident when one takes into account that the Dow ended the day on a negative note after putting in a new 11 month intra day high on the 23rd of September. If the Dow closes below 9600 on a weekly basis it will have confirmed that it has entered into a corrective phase. Volatility readings have shot past 1000 and so traders should expect extreme action on both sides of the market (up and down). As the Dow has taken so long to correct, this correction is going to most likely be the strongest one the Dow has experienced since the start of this rally (March 09).
Extracted from the Sept 2009 Market update
New notes 10/02/2009
The Dow appears to have topped on the 23rd after trading as high as 9917 and ending the day on a negative note. Such an occurrence is called a key reversal day and usually marks the beginning of a corrective phase. If the Dow does not trade past 9600 soon and for a period of at least 5 days, then the odds favour that this correction is going to start to intensify. Our outlook for now (based on the current pattern) calls for a correction and not a crash. There is still a pretty decent chance that the markets will rally to new highs after this correction ends. However, we will be in a better position to determine this when and if it trades below 9000. Taking a longer term view we eventually expect the Dow to take out its March 09 lows and resume its downtrend. We will discuss this in more detail in future updates.
"There are more things to alarm us than to harm us, and we suffer more often in apprehension than reality." ~ Seneca, 4 B.C. - 65 A.D., Spanish-born Roman Statesman, philosopher
