Finally a rally!

After six record sessions on the down side, the market finally rallied up 619 points. This kind of rally was pretty much expected and overdue. However, a lot of damage has been done. In a very short time the Dow made our Intermediate downside objectives of 15,370, NASDAQ Intermediate downside objective of the 4,116 and the Intermediate downside objective of the S&P 500 1,820. All these downside intermediate objectives were given to you in The INVESTMENT STRATEGY letter, before the decline. Our next downside objective for the Dow is 13,377 and then 10,000!

Read the book book: This Time Is Different, Eight Centuries of Economic Folly by Carmen M Reinhart.

Now what? I would imagine that for a while the technical damage will be ignored and so will the possibility of problems occurring because of my bearish scenario. It will be interesting to see what happens on Friday, when traders have to face another weekend of uncertainty. Before the market collapsed, Chinese stocks reached a market capitalization close to 10 trillion, making it the second most valuable exchange. Once  governments encourage an equity bubble, it will collapse. However, China’s markets were not the only ones that collapsed. The Brazilian stock market is down 45%, Russian bonds down 43%, Indonesia equities down 26%, Turkish and Korean equities down 25%, Mexican equities 22%, the Australian stock market down 20%.

If you want to see how crazy this is getting, just look at the chart below. In 1990 China had the capacity to manufacture 1 million tons of steel. That figure today is 1.1 billion tons of steel, which is almost twice the amount of annual demand for steel.. The price of oil has gone down from 140 dollars per barrel to below 38 dollars a barrel. The price of iron ore has gone down from $200 per ton, to fifty dollars per ton.The prices of other commodities are down 50% such as copper, zinc, tin, nickel and molyddenum. The falling price of COMMODITIES  such as iron and the price of oil per barrel is the canary in the mine, when we’re looking at a deflation scenario.

Historical Iron Ore Fines Prices - Iron Ore Fines Price History Chart

I have heard some comments from my readers that believe I am against capitalism.

That’s not true. Capitalism and free markets are definitely the way to go. However, there are inequities within the capitalistic system that create inequalities between capital and labor. When capital and labor are out of balance, drastic economic and market volatility occurs. That’s not good for anybody. Both capitalism and socialism are selfish. The answer lies somewhere in between with bipartisan solutions. It is discouraging for me to see  no bipartisan cooperation and 24% of the Republicans following a radical ideological huckster.


The markets are collapsing and the bad news hasn’t even been announced yet

Today, 8/25/15, markets unsuccessfully tried to rally. The Dow had 661 points between its high and low. Investors are nervous and blaming the decline in the weakness Chinese market. However, in my opinion, that’s not why the markets are going down. Wait till the bad news does come out. That’s when you’ll really see the market drop. As of now, corporate earnings (except for oil related issues) are doing very well. Today, research reports came out recommending the Bank of America and J.P. Morgan. The banks are not the solution to the problem; they are part of problem . So, in my opinion, investors still don’t get it yet. They believe that this is just another correction. I don’t think so!

Read the book; This Time It’s Different, Eight Centuries of Economic Folly. The problem as I see it is an unsustainable economy with half the population unable to afford basic human needs. If upward mobility is over, because consumers cannot sustain a viable economy, then prices will go down. If it is a deflationary economy, then real estate prices and oil prices go down. If real estate prices and oil prices go down, then the debt backed by his entities will be in trouble. If bonds and mortgages are in trouble, then the derivatives that speculate on these entities will be in trouble. If derivatives are in trouble, then the banks are in trouble. If the banks are in trouble, then the Federal Reserve will be helpless, as they have no plan to deal with deflation. With QE 123, purchases of bonds, they will hold trillions of dollars of worthless paper. If the Feds are in trouble and the banks are in trouble, then the US economy is in trouble. If the US economy is in trouble, the world and its stock markets have a problem. Dow support at 15,336, 13,377,10,000/6,666

All this won’t happen at once. ‘The Panics’ are just beginning!

Read the book 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!

 Current Dow NASDAQ S&P 500
16,285 4,697 1,940
Long Term Down? Down? Down?
Forecasted Trend DJIA NASDAQ S&P 500
Short Term Down Down Down
Int. Term Down Down Down
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)       /15,370 /14,688/ 13,377 4,116/ 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.O8% Gold 1,145 Oil 39.31