Over the past 30 days, the market has plummeted through support after support after support, technically. This weekend, the pundits are all but screaming we are either in or will soon be in another recession. This could see the market move down through its next support level (10,700 on the DJIA). The average recessional loss in the market is about 40%. Assuming a recent high of 12,876 on the DJIA, this means a recession low could take us all the way back down to the 7,700 level. Is this possible? Yes (see my historical charts on the DJIA, below). At the same time, though, many companies are the leanest (most efficiently manned) and the healthiest (strongest balance sheet) they have been in many years.
Unemployment and the depression in housing is still a major overhang on the market. The financial crises in Europe that could have a major deleterious impact on our markets is also a major worry. There has always been more than a fair amount of future economic uncertainty throughout history, but there seems to be an elevated level of uncertainty today. This has all the makings of a massive move lower in the market. I am not suggesting that this will happen, but the ingredients are certainly in place.
Technically, should the DJIA index move down through the 10,700 support level, there would need to be a failed retest of that (then resistance) level before declaring that the market is headed down toward the next support level of about 10,000. I see nothing, technically nor from my time-cycle forecasts that suggests the market is headed down to the 7,700 level. But that does not mean it can't.
Below is one of my 10,000-foot-market-analysis charts of the current consolidation period of the DJIA.
As you can see, the range is roughly between 14,000 on the upside and 8,000 on the downside. There have been 4 somewhat similar consolidations in history where the market traded in a reasonably well-defined range. These consolidation periods have averaged about 14 years in duration. The one we are currently in is nearly 12 years old. Could we retest the bottom of the range? Yes, we could.
The good news is that over the past 112 years of my historical data on the DJIA, once the market breaks out of a consolidation range the market generally moves on to a decade-plus bull market (see historical chart, below). The only exception to this occurred in the 1929 crash. The scary thing is, some big players in global economics are warning that if 'things do not change', we could be facing another 1929 event. There are always going to be dooms-dayer's... I am not one of them, but at the same time, I do believe the prudent thing is to go short if the trend is telling us that we are in a bear market. My approach is to take small rifle-shots at shorting where I get in and right back out once a profit is made. I am not ready to take a long-term short position on the market... not yet, anyway.
Below is the current time-cycle 90-day forecast for the Dow 30.
As you can see, the market closed on Friday only about 117 points above a support level of 10,700. If the DJIA falls below that level, the support becomes a resistance to the market moving back up through that level. That's the theory, at least.
You have seen in recent days, this market has shown the ability to generate wild swings up and down, whipsawing many investors/traders into oblivion. Last week saw the Dow 30 index drop more than 600 points. The S&P 500 plummeted nearly 7% from Wednesday's high to its low for the week at the close on Friday. More downward movement is certainly positive given the upcoming week's economic news cycle.
On the other hand, I am very pleased to report that our trading last week worked to perfection. In my managed accounts, we shorted the market late on Monday and again Wednesday morning. We went long in gold at the beginning of the week. We closed out of most of our short positions late on Friday and generated healthy gains for our clients while the market was tanking.
All of our trades last week were SuperCycle driven. We went short the DJIA, the Brazilian market, Oil and the Financials and made solid profits in all. In fact, we didn't have a losing trade last week during an incredibly difficult week for anyone long in the market. The SuperCycle told us what day to get in; what segment of the market to short (we used inverse ETFs and bought out-of-the-money puts when inverse ETFs were not available); and, rather than hold our short positions through the weekend, we took the conservative route and booked all but one of our short positions (we are still short Brazil) by taking profits late on Friday.
Speaking of the SuperCycle trading... this is where we use the SuperCycle oscillator (wave) to pick direction and timing for entry points. You will note in the chart above, we are in the process of adding some of the SuperCycle data to the time-cycle charts. If you are a subscriber to CycleProphet Tools, you will get this new feature once it is fully implemented.
What the Elves Have to Say...
The Bull-to-Bear ratio (8-to-3 in favor of the Bears) continues to warn of a Bearish trend. The Bull-to-Bear Rating is [ - 4 ]. The Turner CrossOver Oscillator Composite of Signals (black) line is increasing its downward-trend. The Short Sell (red) line is now trending slightly lower indicating a lessening of an oversold condition. This seems counter-intuitive, but the data do not lie. The market could be looking for a bottom, but caution is advised. Take profits, be wary of shorting but be more wary of putting too much money to work on the long side. Cash continues to be king.
Investor Sentiment Forecast
For the Upcoming Week
Investor Sentiment Weekly Forecast
The Turner Investor Sentiment Forecast provides a one-week directional forecast on the market, with [-5] being the most Bearish and a [+5] being the most Bullish. This is predicated on the ratio of number of new Buy Signals to the number of new Short Sell Signals for the previous week. The assumption is investors are becoming more Bullish the more lopsided the ratio becomes in favor of new Buy Signals; and, the converse is true; the more lopsided the ratio becomes in favor of new Short Sell Signals, the more Bearish investor sentiment.
Turner CrossOver Oscillator
The Turner CrossOver Oscillator provides an indication of the over-bought or over-sold condition of the market. The red line (New Short Sell Index) shows a technical direction and strength (or lack thereof) of investors to push stock prices lower, triggering new Short Sell Signals. The higher the Short Sell Signals line, the more Bearish the market. The black line (Composite Index) is the combined impact of both the new Short Sell Signals and the new Buy Signals and is an indication of the degree of oversold or overbought condition of the market. Buying opportunities exist when the Composite Index is moving higher. The higher this line moves, the more Bullish the market. Market bottoms are represented by a change in direction of the Composite Index from moving lower to moving higher. Market corrections become much more likely the Composite Index crosses the Short Sell Index from above the Short Sell Index to below the Short Sell Index. The market is represented by the green shaded area.
Behind the Numbers...
Never in my life have I heard so many of my friends and business associates express abject fear about the future of our economy and way of life. I am concerned about 'where all of this is headed' but I am not fearful. Maybe it's my faith in God. Maybe I'm just a died-in-the-wool optimist. Maybe I am just naive... or all of the above. I believe that smart, astute trading and investing can keep assets growing and inflation hedged.
There are some issues on the immediate horizon that can, and probably will, have a major and potentially devastating impact on the global economies and, by extension, the stock market.
First of all, we have GDP numbers coming out on Friday. If the numbers are bad (particularly if the previous months are significantly adjusted lower), the market could more than plummet lower. Bernanke also speaks next Friday. As I have said often in the past, I don't see how the BBE ("Big Bernanke Experiment"), where the global economy is addicted to the crack-cocaine of hundreds of billions (trillions, in fact) of Fed-created fiat money, can stop. The economy is addicted to free money and is on the verge of massive withdrawal symptoms of deflation, hyper-inflation, depression and/or recession.
Many are saying it is only a matter of time before a Spain, or a France or an Italy collapses under the multi-generational failed policies of nanny-state, socially and politically-correct policies where central governments (ours included) have created a situation of massively over-promising governmental hand-outs (now termed, "entitlements") that cost far more than these governments can offset through conventional and appropriate taxation. If one of these big countries moves into default (or something close to it), the financial melt-down of 2008 triggered by the Lehman bankruptcy will likely pale in comparison.
The bright spot... gold... gold... gold. If Bernanke queue's up QE3 (or some variant of it), gold could hit $2300 and even $3000 before the end of the year. Keep in mind, though... everyone is saying gold will go higher. This is the kind of talk that occurs just before a major correction in gold. Don't put all of your money into gold, but be sure you have some money in gold. I like the ETF GLD rather than holding gold bullion or gold coins. One last warning... gold is getting frothy... If you don't own any gold right now, don't put more than 5% into gold right now. Think about dollar-cost-averaging into a 20% to 30% position in gold over the next year or so. Gold will correct one of these days. When it does, you want to be able to buy with both hands.
Have great week in the market!
Your appreciative-of-every-subscriber-I-have-including-everyone-that-does-not-agree-with-me-but-reads-what-I-have-to-say-anyway portfolio manager,