The above chart depicts the obvious head and shoulders pattern that has developed in the DJIA. The head of this pattern was put in place on April 26th at 11,258 and shortly there after we experienced the "flash crash" on May 7th in which the Dow lost 1,000 points in a matter of minutes and then rallied back to close the day only down 375 points. Over the past couple months since those events we have formed the right shoulder. We are now trending lower with a large amount of bearish potential ahead of us.
To the keen market obvserver, there is ABSOLUTELY no reason to go long stocks right now. The fundamentals are terrible and getting worse everyday. The vast majority of leading economic inidcators are flashing red. Today we had weekly jobless claims increase to 500,000 when economists had been looking for 478,000. Not only is this a bad # it reinforces my view that the employment situation in this country is getting worse, not better. Let me reiterate that employment is going to get MUCH WORSE than this before it gets any better.
Much of what kept the market afloat for essentially the entire month of July was 2nd quarter earnings season. Many companies reported earnings that beat the street by a few cents and the market was able to rally behind the blatantly manipulated earnings numbers. The reality is that top-line sales for nearly EVERY company that reported had dropped significantly from where they were a year ago, and were down even more signifcantly from where they were 3 years ago before the current depression began to take hold. To levitate their bottom line, companies reduced new investment, decreased payrolls, slashed inventories, and generally changed their spending habits one of a more risk averse nature. Companies are not likely to be able to repeat this stategy again when 3rd and 4th quarter earnings roll around. They have essentially sliced and diced their companies to the bone to make them as lean and profitable as they can be, and top line revenue is projected to shrink even more in the remaing quarters of 2010. So, in light of this information, one can confidently conclude that the next couple go-around of earnings reports are likely to have the opposite effect on the stock market that they did in July. Just as the autumn leaves will be turning color, social mood and the overall market sentiment are going to turn negative. This will manifest itself in a severe and sharp market downturn while the autumn leaves are falling simultaneously.
In the immediate future people are going to wake up to the fact that the entire stimulus monstrocity was a sham; a lie that as bought and paid for by the American taxpayer. It has done nothing to help solve our economic problems.It has produced nothing and we are $3.5 trillion dollars further in debt. Such insanity!
In addition to such poor fundamentals the technical picture if equally, if not even more, bleak. The head and shoulder's patter above pretty much says it all. If you do not know what a head and shoulders pattern is, you can learn about it here; http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:chart_patterns:head_and_shoulders_t. You should also know that is arguably the most reliable trend reversal that chart technicians have at their disposal when interpreting market direction. We will hit 8,500 this year on the Dow at a minum, but there is further bearish potential after that as we head into 2011. If the March 2009 lows are broken at 6,450, this market is going to into critical condition and panic selling will likely encompass the landscape.
It should be obvious that we are going down, and going down hard. I have tried to layout some of the more basic reasons in this post so the common man might understand and get his money to safety. Cash is going to be king in the years ahead. Now is not a time to be thinking "return-on-capital" but rather the time to be thinking "return-'OF'-capital" Making sure you have substantial cash on hand so you can take part of the coming "generational buying opportunity" should be your be a #1 priority.
In regards to the dollar, in the foreign exchange market last week the EUR/USD pair hit $1.3333 and had a impulsive move down all the way to $1.2735. I am betting that $1.3333 will be a long term top in this pair as investors begin to scramble to accumulate dollars in what will be a wild flight to safety. I expect the banking and soverign debt problem in the eurozone to come full circlce and drive the EUR/USD pair down to below parity (<$1.00) with the greenback. I am long the dollar.
For the remainder of the year expect increased volatility, higher sell volume, and substantially lower equity prices.
Until next time,
-Phil
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