Monday, April 23, 2012

Long way down

We've all heard the saying "If you don't study and learn from history you are destined to repeat it."  Rarely though, do historical similarities make it as blatantly obvious as the chart I am about to post.  I know its very convoluted, there is a lot going on there, but it was necessary.  please take a moment to REALLY LOOK at this chart.

Pretty telling huh?  You've probably heard me or someone else refer to the market as on a "sugar high"  and that is essentially the best metaphor.  What happens if you give a 6 year old Coco pebbles covered in Maple syrup with a can of Coke for breakfast?  The result is a kid who will spend the hours of  8am till 11am running around like a maniac and by 12, they will fall dead asleep where they stand.  Sound familiar with this market?  It's been a fairly straight forward system. 

Step 1.  Pump market with QE, rally is induced.
Step 2.  Market incapable of trending higher forever, breaks up trend line, MACD rolls over
Step 3.  Market makes another attempt to move higher, reaches previous trend line, fails.
Step 4.  Nasty correction ensues.
Step 1.  Pump market with QE, rally is induced...
...and on and on and on.

So were we currently stand is Step 2, market incapable of going up forever, breaks trendline right at the exact same point MACD rolls over.  This untouchable, floating up on a cloud, market that a few weeks ago you wouldn't dare short unless you had a death wish, just started revealing some MAJOR weakness.  The worst part of it comes when you consider the big banks that helped fuel this rally with access to insanely large amounts of money available to them at 0% interest, whom, now want to lock in those profits quickly.  And in MASS size.  From top to bottom a return of about 40% was possible on just the S&P index (Not counting some high flying individual stocks one may have owned, but just going by the index itself.)  That's a serious return for the last 9 months.  On an index no less.  Now consider the mass money they have put into stocks recently.  Numbers that you and I can't fathom.  Now consider the algorithmic trading programs they have that can execute trades in nano seconds, again numbers we can't fathom.  What you get is INSANELY large amounts of money being taken out of the market at INSANELY fast speeds.  By the time you and I realize it may be time to sell, they already have on a massive scale and left for us a market down 800 points already to sell into.  Thanks.  Profiting on our backs once again.  The bailouts continue.

Listen, the market is up, a lot from the lows (in nominal terms I mean).  We really aren't that far from the all time highs. (There's a concept that makes sense.  GDP is anemic, unemployment is still through the roof, the housing market is down across all regions in the realm of 30% from it's highs...all great arguments for a country's stock market to be nearing all time highs.  Ya know, another younger and dumber version of myself can't help but ask if you can share some of those drugs because they MUST be the good stuff.)  I digress, the point simply is there is a lot of money at stake here.  There is a lot of profit that doesn't want to be lost, there's a lot of money that is still hurting from 2008 that is not going to be very flexible with the market and it's mood swings.  It's a LONG way down, so be VERY careful.  Everything from now on will be bigger and faster than it was in the past.  The technology is advancing rapidly, and so is the money supply.  Below is the exact same chart as above, with a superimposed idea of what I THINK will or at least could happen.

If this played out we could see and easy drop to 1200.  That certainly would hurt if you didn't see it coming. Elections in Nov, you can be assured we will see "operation kill the evil monkey"  or whatever they come up with to disguise saying printing money this time around.  The S&P WILL reach, and even break it's all time highs at some point, but understand it will be a currency event not an economic or even a corporate one.  Simply put, as the S&P hit 1500, for the first time in 2000, $1500 would buy you a hell of a lot more than 2012 $1500.  The numbers will need to adjust simply for a rapidly devaluing currency.  When you account for that, what you see in real terms is a market that crashed in 2008 and every rally has been a minor blip as it dredges across the bottom.  So for all of you out there that have been expecting gold to soar and the market to crash hard, congratulations, you were right in real terms.  For all you hyperinflationists who think all asset classes will go up to compensate for a rapidly declining currency, as we can obviously see, you too were right, as there is no way 1400 on the S&P is reflected in any corporate or economic data whatsoever, leaving massive currency devaluation compensation to be the only thing to explain such an anomaly. 

Anyway, I digress again.  Gold is due to rally, but no one is certain of the catalyst.  Gold rallied in the face of a major market correction last year, which went against the grain as people sought safety in the dollar as well seeing both assets spike higher.  This could be the catalyst.  Gold investments I feel are safe so long as they are unleveraged.  Other commodities will likely follow the market so I'd be wary on them.  Most stocks wont buck the trend if it repeats in even a slight way as violent as last summer.  A smart approach, the approach to this I look to be taking is waiting for step 3, which is a rally after the initial trend break and MACD roll over, that will likely take us back above 1400.  I'd then look to liquidate any long positions you want to cash out on when that rally occurs.  You may want to use this opportunity to buy a small short position on the market as a whole or a particular stock you feel might be very vulnerable.  It's the end of April.  A rally to retest the highs could come for most of next month and the crash that could follow it may really cement the phrase "Sell in May and stay away" into some peoples heads.  The initial crash down will likely be quick, and the majority of the losses could be had in June alone.   The consolidation that follows could take us through the rest of the summer.  The fall will likely bring more easy money and a rally to follow it.  Physical Gold and silver look strong.  The miners are weak.  Decide now which ones, and how much money into them you want to have, or can stand to I should say.  A overall market take down with the miners so weak could achieve bottoms that are equal in size to 2008.  Some have already reached there.  It will be painful, there will be blood.  In such a situation as this we need to preserve what we have to take advantage of the situations in the future.  That means physical gold/silver, the miners you know you want that you can stand a little blood in,  NO LEVERAGE, and a possible small short position on equities.  Good dividend companies will be sought for in a big pullback, this will cushion their falls to an extent, and overall outperform the indexes.  Be smart, you have a few weeks to do some spring cleaning in your portfolio.  Cash is king.  If history repeats its self again, I'll meet you back here this summer for some really great, cheap buys.

Hang in there and as always, be careful... especially now.

PS Because of the title of this post and the fact that it's in my head now, I have to post the Goo Goo Dolls song.   :)  

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