On Wednesday’s two-year anniversary of the bull market, cycle watcher Charles Nenner is sticking with a forecast of Dow 5000 sometime over the next three years.
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stock market
Mad Hedge Fund Trader at OilPrice.com penned an piece on the various levels that the stock market could find itself at now that the “Risk Off” trade is back on. These are all S&P technical levels, with a short explanation.
*1,300 – The first big figure. Already broken intraday, but it held the first time.
*1,286 – The 50 day moving average, the no brainer, most bullish target. The “buy the dip” crowd takes a first bite here.
*1,280 – 38.2% Fibonacci support level.
*1,260 – 50% Fibonacci support level.
*1,230 – Broken resistance from the November high. Europe blows up again. Take your pick: Spain, Ireland, Britain, Portugal…
*1,167 – The 200 day moving average. It must hold for the bull market to stay intact. This is where $5/gallon takes us. Double dip recession talk reemerges. The “buy the dip” crowd takes a second bite.
*1,117 – The November low. The “buy the dip” crowd throws up on its shoes and pukes out the last two “buys”. We spike down, triggering another “flash crash.”
*1,000 – The next really big figure. Ben Bernanke, with the greatest reluctance, announces QE3. Bond prices soar, taking ten year yields to 2%. Homes prices collapse again, triggering a secondary banking crisis.
*666 – The Saudi regime falls, and 12 million barrels a day disappears from the market for the indefinite future. Unemployment hits 15%. Obama is toast. Your broker turns bearish and tells you to sell everything. Welcome to the Great Depression II. It starts raining frogs.
To view the charts that go with these numbers, go to the story.
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As it currently stands, the Fed is assigned by law “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” The last two goals are really one, thus the term “dual mandate.” There is call now to remove the goal of promoting maximum employment, and turning it into a single mandate. But it sounds like that while we’re talking about removing one mandate, Fed Chairmain Ben Bernanke has already given himself a third one.
Listen to this exchange on CNBC, where Steve Liesman interviewed Mr. Bernanke, and you’ll see what I’m talking about:
If you didn’t catch what went on, read the take from John Mauldin, who describes the exchange well, in his commentary is taken from his free weekly newsletter, Comments from the Frontline, one to which I highly recommend you subscribe.
In a paper with Alan Blinder early last decade, Bernanke made the case for the Fed to target a specific inflation number, and the number that came to be accepted as his target was 2%. In his famous helicopter speech in late 2002, he assured us that inflation could not happen “here,” even if the short-term rate was zero, because the Fed would move out the yield curve by buying large amounts of medium-term bonds. This would have the effect of lowering yields all along the upper edge of the curve. This became known as quantitative easing. In Jackson Hole last summer, he made very clear his intention to launch a second round of liquidity-injecting quantitative easing (QE2). In that speech, in later speeches in the fall, and in op-ed pieces he said that such a program would lower rates.
Then a funny thing happened on the way to QE2: long-term rates began to rise all over the developed world. As Yogi Berra noted, “In theory, there is no difference between theory and practice. In practice, there is.” It’s got to be driving Fed types nuts to see the theory of QE, so lovingly advanced and believed in by so many economists, be relegated to the trash heap, along with so many other economic theories (like that of efficient markets). The market has a way of doing that.
So, Liesman asked Bernanke about one minute into the clip (link below) about the little snafu that, following QE2, both interest rates and commodity prices have risen. How can that be a success? Ben’s answer (paraphrased):
“We have seen the stock market go up and the small-cap stock indexes go up even more.”
Really? Is it the third mandate of the Fed now to foster a rising stock market? I wonder what the Fed’s target for the S&P is for the end of the year? That would be an interesting bit of information. Are we going to target other asset classes?
Understand, I am not against a rising stock market. But that is not the purview of the Fed. And certainly not a reason to add $600 billion to the balance sheet of the Fed when we clearly do not understand the consequences. If it looks like they’re making up the rules as they go along, it’s because they are.
The Chairman has no business worrying about the stock market, let alone trying to manipulate it. The power grab of the Federal Reserve is out of control, and we wish Ron Paul and the rest of the like-minded reformers in Washington God speed in stripping power from the Fed.
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After easy gains in the stock market, sudden drops are not taken lightly by retail investors. They tend to think that their gains will continue on and on, and any decline is looked at in disbelief. This seems to be the case in Bangladesh, where people are rioting over yesterday’s flash crash of 9.7%, before trading was halted. Investors were already in a sour mood since the Bangladesh Dhaka benchmark index fell 27% since early December.
But there’s no reason to feel sorry for them. In 2010 alone, the market appreciated by 100%. In the three years (2007-2010), the average return was over 50%.
The rioters took to the streets Monday at the country’s main stock exchange in the capital Dhaka. Authorities used batons to try to break up the crowds. But protesters continued to demonstrate in Dhaka’s Motijheel commercial district, where the stock exchange is located, smashing vehicles, burning tyres and chanting anti-government slogans. Protests have also spread to the coastal city of Chittagong which has its own stock exchange.
The IBTimes.com reports:
Rumors have abounded that large institutional investors have abandoned the market after recording big gains, prompting other investors to exit equities. The pull-out was also precipitated by regulators’ decision to limit the percentage of deposits that banks may invest in the equity markets.
Translated: the smart money waited until all the dumb money was invested, and then took their profits, leaving the late to the party retail investors taking the loss.
America, beware. A stock market is a stock market, in Bangladesh or here in the U.S. Are you the smart money or the dumb money?
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Feeling good about the 10% the U.S. stock market gained in 2010? Forget about it. Or as Peter Schiff says in this video, big deal. Against other currencies, metals and commodities, you lost ground.
While we’re in Peter Schiff mode, here’s a debate he was in yesterday on some of the same subjects, and offers predictions for 2011:
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We’re so focused on the short term trends in the stock market, that it’s important that we step back and take a look at the big picture now and again, to remind us of the big trends. The following chart shows the DOW since 1900, adjusted for inflation.
We’re not showing you this chart to illustrate just how little the stock market actually provided in gains for long term investors (just about double since it’s 1929 peak). We what to show you the potential drop that the stock market could face in the near future.
First of all, know that we are no chartists here at Economic Collapse, but we do know enough to pick out a few important things.
Take a look at the last time the DOW hit, resistance (the red line). It did so in 1929 and in 1966. In each of those two instances, it suffered a devastating fall all the way down to support (the green line). The decline after 1929 was rather quick, and the fall after 1966 took almost two decades.
We once again hit resistance in 2000. After that, you can see that it fell and subsequently came back even with that last 2000 top, forming a “double top,” which is not a good sign.
Now, if the DOW follows the same general pattern as the last two declines from the 1929 and 1966 tops, it seems to us that it suggests the DOW could fall to as low as 4,500, depending upon how long it takes to hit the support line.
We know everyone on CNBC seems to be excited about the level of the stock market right now, but we’re cautious.
Chart by ChartOfTheDay.com
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Here’s a chart found on the pages of the Wall Street Journal today that shows the last year and a half’s stock market overlaid on a chart of the market in 1937. This week corresponds to mid-August 1937. From that point forward the second-deepest and longest bear market in history ensued.
We could point to differences policy then and now, and there are differences. But there are similarities, too: massively rising taxes and a president whose favorite pastime in the bashing of American business.
The chart was created by Donald Luskin, chief investment officer at Trend Macrolytics LLC.
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