Dow on the Close
The closing of the Dow at 15666.44 was below support at 15824.73. Additional support lies at 15176.26 and a closing beneath that level will warn of a break down to the 14334 area. We do have four Monthly Bearish Reversals under 15000 with a gap thereafter down to the 13650 area, and the long-term support starting at 12,221. Yearly does not come in until the 10000 level, so we are not talking about a reversal of fortune long-term. We could really break and that sends cash pouring into government bonds beyond anything we would contemplate.
Any paper rated BBB is becoming unsalable. We are starting to see capital even pick up high-rated corporate debt while shunning away from emerging market and local debt. So be on guard for we may be in a real Phase Transition in bonds and to accomplish that we may see really extreme levels in equities on the downside. This may not be 8000 points on the Dow as was the case from 2007 to 2009, but it could be 5000. If this week’s low gives way and we close August BELOW 15555, look out below. We need to wipe out the TV pundits.
We will update you on this development, but keep in mind that a break to new lows opens the pattern to the extreme.
There is More At Stake Than Just China
Dennis Lockhart, President of Federal Reserve Bank of Atlanta, stuck to his guns late Monday by stating that he still expects the Fed to raise short-term interest rates in the next few months. I have been warning that without higher rates, the Fed is facing a pension crisis because rates have been kept way too low for way too long. Lockhart even acknowledged that stress facing the U.S. economy and noted that the financial markets were making the outlook less certain. However, they are damned on the one side or damned on the other. This is the crisis we face from government manipulation.
Lockhart said, “I expect the normalization of monetary policy—that is, interest rates—to begin sometime this year.” The Fed has to get back to higher rates and that is behind the code-word “normalization”. He further stated, “I expect normalization to proceed gradually, the implication being an environment of rather low rates for quite some time.”
This policy has sent pension funds into the red and this is impacting State and local governments who are coming back at us with raising taxes. This is deflationary and a serious problem that we face moving forward. Consequently, we cannot rule out an extended decline into October. Penetrating this week’s low hereafter will warn of a more pronounced decline and a full-blown capitulation before we can reach that sweet spot where capital suddenly realizes that the flight to quality should be from public to private.
The retail investors by and large are still not in this market as they were back in 2007. The bubble this time is foreign and professional for the most part. Just keep in mind that the Monday low does not seem to have cleared the decks with TV pundits calling it a “buying opportunity”. CAUTION is advisable and we will run the pattern analysis for the future to see what comes out. Just keep in mind what DOES NOT RALLY when the cycle turns up, moves down harder when the cycle turns back to bearish.
Thank You – The Future
COMMENT:
I carefully read through all your missives you had sent over the weekend, highlighting the importance of Monday for the Dow, and the levels given. You even said “Pay attention now Monday could be the intraday low. The open will be crucial”. And the low so far indeed did occur in the opening few minutes. And you sent this over the weekend, before the Sunday night meltdown in Asia.
And it is now dawning on everyone the impending economic slowdown you have been warning us of is on the horizon. But you were warning us back when Dow was 18000 and it was blue sky above.
Truly amazing.
I really cant wait for Berlin.
REPLY: Thank you for all the e-mails. The thank you e-mails are running more than 1000:1. I do not know why people bother to write hate mail. I suppose they just wish I would go away so they can have their little manipulated world. I do not pay attention, so no worries. So once again, thanks for all the e-mails.
True, I do not sleep much. It is a long-term effect of being a hedge fund manager. To stay on top of your game you have to give up something. That seems to be sleep and a wife. Dating then becomes the only way to retain your humanity.
The light is going off in so many minds and that is the objective. Traditional promotional analysis always tries to explain a move with some single fundamental event. In truth, the computer just tracks movement. That is ALL you need to know. People will move their positions for a host of reasons, so trying to assert a single fundamental cause for each event is really the witch doctor approach. Things just do not work that way for some people will sell due to domestic issues while others will sell because of currency.
When you enter such a volatile globally correlated event as this, what unfolds is a coordinated ballet. Some markets rise at the expense of others, while others sell-off simply because people need money from losses in an unrelated market.
Today, gold is backing off, as is the euro. Gold showed that the move was over for it stalled and did not rally much on Monday, illustrating that this was NOT a collapse in confidence within government; rather it was the classic Flight to Quality. To accomplish that we needed the crack in equities. Push one end down, and another must rise.
We are NOT out of the woods yet. With nearly every week hereafter being a Directional Change ending with another Panic Cycle the week of October 19, the risk that we will still see an October low in dollars remains in effect. The degree that the market fell on our model was the same as the 1987 Crash — we moved to the third Monthly Bearish Reversal at 15550 reaching intraday 15370.33. So the degree of damage was equivalent. However, the degree that the talking heads are discussing, calling this a buying opportunity, should give us some concern that this may not be over until Obama screams.
We will be updating on this scenario ahead. The long-term still remains intact that we will have to see the market push to new highs and reach at least the 23000 level, but to accomplish that we need the crack in bonds. The Fed is still in a box and will have no choice for the market will price in interest rate advances and they will be compelled to follow the trend.
Keep in mind that this is 13 years up from the 2002 low (lowest yearly closing). That warns we could have a wild swing this year even if the market extended into a 17 to 19-year rally. The furthest outlook to be a high off in 2023 with 2022 as the high close. If we are really dealing with a Sovereign Debt Crisis, then the only place for capital is to hide is private assets. We do not see any chance of a Great Depression in the classic 1929 terms since there is no government that constitutes as a safe-haven as the USA once did back in the 1930s.
Western Share Markets Rebound – Decoupling from China
The Asian contagion that began in Shanghai has now decoupled, leaving Monday the 24th as the low in Europe; it is expected to be the same in the States. A three-day bounce is now possible into Thursday, but there will be another retest of the lows just to make sure traders do not think it is totally safe to go back in the water.
China Cuts Interest Rate & Lowers Reserve Requirements
I keep telling people that the central bank of China is far more professional than any other central bank. When I was invited there during the Asian Crisis, I was stunned to be invited over some academic. When I got there, I found that everyone had experience. They had worked on dealing desks around the world and then returned to run the central bank. The people I met at EVERY other central bank had a ton of PhD’s, but no experience.
China’s People’s Bank of China (central bank) has cut the benchmark interest rates by a quarter of one percent. Granted, that may not seem to be a lot, but it is nonetheless a very significant one given events of recent days, demonstrating that they are in tune with the market movements.
The PBOC has cuts the one-year lending rate to 4.6%, and the one-year deposit rate to 1.75%. However, it has also lowered the Reserve Requirement Ratio, which governs how much money banks can lend to the economy. The punters in China and elsewhere were hoping for a rate cut over the weekend. Better late than never.
What is really going on is that the dollar is borrowing to speculate from Hong Kong for domestic purposes. That also presents some concern about loans as cash is withdrawn back to Hong Kong and elsewhere. This is properly addressed with the rate cut, and the lowering of the reserve requirement.
This will all contribute to fulfilling our computer forecast for the low on Monday in the States to be the low at the very least on a closing basis. It appears so far to be spot on.
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