Tuesday, June 21, 2011

Market Update

As it turns out, the stock market did move on to new highs, but only in three waves, not five. That could have marked a weak end to the bear market rally, or the other option is that the market has been corrective mode for most of 2011. It is possible that the market is in an expanded flat correction from the 1344 high in Feburary 2011. Under this scenario, the market should ideally retest the SPX 1249 low, although it is not required in this type of correction. If this is the case, then the bear market rally will continue after this correction is over, and likely top in early to mid 2012.

As Bob Prechter points out, the only thing holding up the market is the 7.25-year cycle and the Federal Reserve's accommodation to speculators by adding reserves to the banking system  through the purchasing of treasury bills that has allowed banks to speculate in markets rather than lend the money out. This has been the driving force behind the recent rise in commodities and other inflationary assets (including stocks). However, in my view, when this cycle tops out, and investor psychology turns negative again, the Fed will not be able to stop the decline in what I belive is the worst portion of the bear market yet to come. They will pull all sorts of tricks out of the hat, but the coming collapse in credit will be too fast and too strong for them to handle. The FDIC may even have a hard time honoring all the claims from patrons of failing banks. Whether or not this bear market rally is over, it is still a bear market rally, and it is very important that people understand the risks inherent in this market and stay CLEAR of all traditional investments and get positioned in the safest possible cash equivalents. This includes Short-term t-bills (anywhere from 1-month to1 year), swiss money market claims, as well as physical cash. I believe the U.S. Dollar is at the very end of its bear market that has lasted so long, and will go through a massive short-squeeze where debtors are being forced to liquidiate assets to pay off their debt. As the U.S. Dollar gets stronger, it will be harder and harder for debtors to maintain their position, and will either have to pay their debt off, default or restructure. The size of the credit bubble that is bursting is the biggest in human history. This financial debacle we are in is one for the record books and has highly deflationary implications. As I have stated int the past, my target for the final low of this bear market is below 800 on the DOW, and most likely below 570, the 1974 low. The Social implications of this are extremely negative as well, and since this is a much bigger bear market than the one that ended in 1974, the social unrest should be that much worse. We are already seeing this manifest around the world, especially in the middle eastern countries (such as Bahrain and Libya), and Greece, where leaders are being overthrown because Social Mood is decidedly negative. This is all implied by Robert Prechter's Socionomic Theory of Finance. The Following is a great presentation done by Prechter on Socionomics. The link includes parts one and two. To view parts 3 and 4, you will need to register for free using the link at the bottom of the page.

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