Well, I am finally getting around to writing about the capital markets. All I can say is, what a week on Wall Street! White House Press Secretary Robert Gibbs has been repeatedly quoted over the past year as explaining that the rising stock market is "validation and evidence" of a nascent recovery in the U.S. economy. This elementary and idiotic explanation by WHP (White House Pawn) Gibbs needs to be called what it is: nothing more than a wishful propagandized lie. It's not surprising that as the Dow fell 376 points on Thursday, we received this refreshing response on the subject from the most annoying man in our nation's capital: Silence.
Ah, bliss...if only Robert Gibbs would shut up forever.
Before today's 125 point retracement in the DOW, the index had declined for 5 out of the last 6 trading sessions to fall from 10,920 to close at 10,068 yesterday. This is the biggest sustained decline since the March lows of 2009. Could the current rebound rally in stocks finally be over?
For the last 14 months since march of 2009, the DJIA has risen almost every month. The only period where the index posted net declines were June of 2009 (6%), January 2010 (7%), and now May of 2010 (12% and counting).
Both selloffs in June and January proved to be temporary corrections for the market to catch it's breath before it headed to new year-to-date highs. So, the question that needs to be asked is, is the current selloff in equities just another retracement correction on our way to Dow 12,000? Or is this an ominous signal of things to come?
Leading up to the previous corrections just mentioned, the market had been on an absolute tear. After hitting its lows on March 9th 2009, it climbed more than 37% before it had it's 6%summer pullback in June. After the modest June decline ended in July, the market again went on an incredible 33% upward charge to hit 10,729 in mid January. After the January pullback was completed in February, the market again climbed 13% to reach a new high for the year at 11,258.
However, you may have noticed a pattern developing. The intensity of each sucessive advance has waned considerably before meeting resistance in the market. Additionally, each correction that has followed has grown from the previous one. Most analysts are calling the current retracement "A textbook correction" since many corrections do indeed pullback approximate 10% before moving higher. However, the market has been ignoring the underlying fundamentals for over a year now, and one can clearly observe that the upward momentum in this market has been losing steam for some time. From a technical perspective, it looks like the DJIA could be forming a head-and-shoulders pattern. If this is indeed what is occuring, that is a deadly bearish signal. I have pegged the neckline at 9,904. If we break this support level, watch out below! We would undoubtedly experience a preciptous drop of a couple thousand points or so. We came dangerous close to breaking that level this morning when the DOW futures opened down 150.
From the graph above, you can see that the volume over the past year for the rising stock market has been rather light compared to times when the stock market is falling. This not only implies that the big money is selling more than it is buying, but also that the prevailing directional trend is down.
In the midst of this economic darkness, the May 6th "Flash Crash" was like a bright and powerful lightning bolt that accurately illuminated what is on the horizon. Storm clouds are all around us now and it is time to batten down the hatches because hard rain is coming. Yet, most American's have their eyes closed and their head in the sand, so they missed the signal and will have little recourse to avoid the financial pain that is so clearly bearing down on us all. With the VIX at its highest point since early 2009, the yellow caution lights are almost blinding. I will be betting on severe economic volatility to the downside over the next 6-12 months.
To be continued...
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