I would expect a false rally to occur either Tuesday or Wednesday. Use it for selling and buying US treasuries.
Today, the Dow opened up 1000 points down. An obvious rally was expected. However, the Dow could not rise above -250 points down. So it closed down -588 for the day at 15 870. Incidentally the low for the day was exactly at our support level mentioned in our Lone Bear Letter at 15 370. and the close was close to our othher support area at 15,855! How’s that, for being exact. The NASDAQ closed down 179 at 4,528. Our support level mentioned in her Lone Bear Letter is 4,545. The S&P 500 closed at 1,893, down 77 for the day.Support is at 1,820 All 3 averages were down across 3 3/4% for the day. Apple broke all support and had a low of 92 closing at 103 down 2.6%. This market leader is showing just how weak the market is. As support area have been reached, a shot term rally is expected. If not , Watch our much lower below.
Thanks to all my readers for your comments. Thanks to Noell for responding, “capitalism only works when there is free and equal access to opportunity. When you have the winners restrict the opportunity through lobbying, it becomes near impossible to enter the marketplace with your goods, services or labor. It’s not that the bottom 49% of Americans are not participating in capitalistic growth, it’s just that they can’t participate.” Yes Noel I agree, upward economic mobility is no longer available the bottom 50%, except under unusual circumstances. Thanks to Diane for saying, “Why does China matter? It is now the 2nd largest economy after the US. It’s middle-class is getting hit. This means weakness abroad, particularly among emerging nations which rely on China to buy their exports. It also means weakness for multinationals that belived China would grow, not shrink. Social unrest in China is a particular concern.” I agree. China is faced with the same problem that we have, in that technological changes are increasing productivity without the use of labor. Thanks to Susan and Bill who like many of you said, “Carl, I hope you’re wrong too,” I responded by saying,”Yes, I hope I’m wrong too. However, I think this is more than just a normal correction. I am particularly worried about the banks that hold of bonds and derivatives for companies and countries that depend upon the price of oil, for payment. Our Fed and the European central banks and trying to stimulate our economies and the inflation rate by low interest rates and quantitative easing bond buying. And yet, deflation form lower oil prices, could tip the scale to a general economic deflationary scenario.” Thanks to Marty who said, Every bear has his day, but if this correction is different and permanent that would be something new and dangerous.” I would refer Marty and all of you to the book This Time Is Different, Eight Centuries of Economic Folly by Carmen M Reinhart.
The Fed is not prepared deflation. Today oil prices were down to $38.35 a barell. Lower commodity prices are down worldwide by 20%. Smart investors are galloping into US Treasuries. The 10 year yield is now 2% down 2.8% for the day and the five-year yield is 1.36% down 5.5% for the day. Not an attractive rate, but it is better than seeing your capital shrink by 50% or more. We should see a rally in the next couple days, as some support areas held today. However, I don’t believe the support areas will hold and I look for much lower levels. this is just the tip of the iceberg! Europe is on vacation. Wait till they get back in September. October is usually the worst month for the market. Use rallies for selling and buying US treasuries. It can get a lot worse!
LONE BEAR #7/This is just the beginning! 8/19/2015
This is the 7th Lone Bear Market Letter I have written. Have I got your attention yet? Are you self-satisfied with your investments in the stock market? After all, what else could you do, but invest in the stock market, as interest rates are so low. Just like Pavlov’s dog you have been trained to stay in the stock market. On the long run the market goes up? Right? However, as economist John Maynard Keynes said. “On the long run, we are all dead!” I don’t expect this to be a normal correction. For reasons stated below, this could be another 1929 depression scenario. Sorry, I hope I’m wrong
Capitalism doesn’t work for everybody. I have never been sure what will start the fall. It could be that lower oil prices will bankrupt countries like Brazil, Russia and Mexico causing a cascade of bank failures? I am concerned about social unrest in places like Ferguson Missouri and the possibilities of terrorism. Or, it could be that the Fed is unprepared to deal with a deflationary scenario. (See Surprise Deflation above on my blog). It could be a crisis in China, because of their overwhelming debt (200% of GDP) and falsely stimulated economy. Or, It could come from something unexpected like North Korea attacking South Korea. However, in my opinion, I have stated that the big problem for me, continues to be weak economic conditions that permeate our economy because of the bottom 49% of Americans are not participating in our capitalistic growth. Productivity has increased because of technology, leaving the common worker behind. The bottom 49% of Americans continues to suffer, with all the increase in income going to the top 1%. According to the book, CAPITAL IN THE TWENTY-FIRST CENTURY by Thomas Piketty, and Karl Marx’s Das Kapital, capitalism is in trouble when capital and labor are out of balance.. During the 1960’s, the Johnson administration, besides giving us civil rights, brought poverty down from 23% to 11%, with Medicare and the ‘war on poverty’ leading the way. Today 16% of American children and 14% of Americans live in poverty. That’s 47 million people with an income level of $19,000 per person or $24,000 per year per family. Capitalism and free markets have given the United States greatest lifestyles in the world. However, with capitalism there are winners and losers and when there are too many losers, without a safety net, the system has a potential for folding. How many bars of soap, how many houses and how many cars can a multi billionaire own? We have a consumer oriented economy, where capital and labor now seems to be out of balance. The advantage of our capitalistic system is when these imbalances occur, there is dramatic shifts in the economy which can cause a stock market crash, which will eventually lead to solutions. As Churchill’s famous of saying, ‘the Americans finally decide to do the right thing, after they tried everything else’.
It would be nice if Congress could address the problem first, but they don’t seem ready to act. As a matter fact, forces in the Republican Party are leaning towards radical negative changes, such as the exportation of undocumented 11 million workers and 4 million US-born children born of undocumented workers. It is estimated that this would cost the economy approximately $1 trillion. All the issues that were talked about in the Republican debate were non economic. At the center of discussion was the appeal of Obama care, undocumented immigrants, abortion rights, birth control, and voter registration and government interference. With the weakening of Dodd Frank, the potential for bank failures being disastrous to our economy has increased, as banks have become much larger than too big to fail and are more highly concentrated than they were 2008. What should have been discussed is the unregulated effect of Citizens United on our political system, the reinstatement of Glass Steagall Act, the limitations of derivative ownership by banks, OR, to break up the banks so that ‘too big to fail’ is no longer a problem. In addition, the solution I see is spending by the federal government for capital improvements for our roads and infrastructure, education and retraining and a new war on poverty. None, of this under current political conditions is a possibility. If a market crash occurs, the 2016 elections are up for grabs and anything can happen, including a Donald Trump presidency and a Republican dominated Congress. The ‘laissez fair’ administration of Hover would be back in control; which I assume will have similar outcomes to 1929. A recent article in the New York Times indicated that federal courts have said that the 2008 bailout of banks and AIG was not legal. If bailouts are not allowed, if another crash occurs, what is the alternative? A 1929 type shake up?
Today 8/21/2015 Stocks are taking a tumble today because of lower oil prices, a consumer price index report that it rose a slightly less than expected 0.1% in July and problems between North and South Korea. The Fed has no scenario to save the economy from deflation. Crude oil was trading down at $40.14. This is the lowest price in 6 ½ years and a break below 40 dollars would indicate my deflation worries are justified. The Fed is in a quandary. On one hand it knows that eventually it has to raise interest rates. On the other hand, with a low inflation rate, it is concerned about a deflationary economy. With interest rates near 0, how will the Fed stimulate the economy?
|This week||Month ago||Year ago|
|Federal Discount Rate||0.75||0.75||0.75|
Rallies are expected. However, the Dow below 15,885 has as a downside projection of 13,377!
At the time of this writing the Dow today 8/21/15, is at 16,459 down 531!!!!!. I show support at 15,885. However, if that is broken on the downside, the Dow will have a head and shoulders top, with a downside projection of 13,377. If the downside scenario is as bad as I think, the ultimate test for the Dow will occur at approximately 10,000. The NASDAQ and Standard & Poor’s are the only major averages holding their own. However if the NASDAQ, now 4,706, breaks below 4,545, we don’t have support until 2,500. If the S&P 500, now 1,970 breaks below 1,820, we see downward support at about 1,177 New highs are diminishing and new lows are increasing. Technically, in my opinion, this market is ready for a big drop. The market’s leader Apple is down 7% today at 106. Its downside projection is 64. As a side note, the DAX at 10,124 has already broken below it’s head and shoulder neck line and has a projection of about 5000. The Shanghai index also has broken below an important low at 3,507 and has a downside projection of 2000. Of particular concern is the Russian market, which could indicate an unstable Russia, which will not be good for anybody.
|Forecasted Trend||DJIA||NASDAQ||S&P 500|
|Long Term||Bear Market?||Bear Market?||Bear Market?|
|Breakout Points||DJIA||NASDAQ||S&P 500|
|Short Term Up (Resistance)||18,352||5,231||2,134|
|Short Term Down (Support)||15,855/||4605/4,545||1970|
|Int. Term Up (Resistance)||18,352||5,157||2,134|
|Int. Term Down (Support)||15,855 /15,356 /14,688||4,166 3,986/3294||1,820 /1,560|
|Long Term Up (Resistance)||18,312||5,231||2,131|
|Long Term Down Fibonacci Support||50%12,000 62% 10,750||50%2,958 62% 2,555||50%1,390 62% 1,177|
|10 yr Treasury2.O6%||Gold 1,156||Oil 40.48|