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It's been a while since I've done a
market update, and today was a pretty big day, so let's get started:
The Dow Tests 34 Year Trendline!
While it may not be the best
representation of the overall market, everyone watches the Dow. It is a
handful of the bluest of the blue chips, so whatever happens to the Dow will
likely happen to the broader market as well. The Dow is in the midst of a 200
point Friday afternoon decline, in the larger context of one-month slide, falling
once again below 12,000. It looks like we're headed for a retest of the
January and March lows. The
watchword is: CAUTION!
 
According to our friends at Elliott Wave International,
should the Dow break its March lows, it will also break the long term trend
line dating back to 1974!
(You can read the most recent three
months of Elliott Wave's US Market Analysis this week only - free signup
required, no obligation.)
Ladies and gentlemen, this is a big
deal. The US
stock market, measured by the nominal Dow, has been in an uptrend for the
last 34 years. Of course, the Dow measured in gold began its crash long ago,
resulting in the decimation of over 75% of the Dow's real value. Should the
Dow break its 1974 uptrend line, it will send an ominous signal that
inflation alone is not sufficient to keep up appearances on the Dow. This
will likely signal that a long term decline is directly ahead.
In the past, I would make market
pronouncements with absolute certainty, but I have since learned my lesson. I
don't know what will happen, but I do know that all good things come to an
end. Nearly everyone who doesn't work for the government believes the economy
is in recession. The second quarter ends this month and companies will start
releasing earnings reports in early July. What will they say? How was
business? The market already seems to be getting the jitters.
Common sense dictates slow to no growth
for a long time coming:
- High gas
prices with no sign of abating
- Higher food
prices, especially in light of Midwest
floods
- No end in
sight to housing bust
- Continued tight credit
- Rising unemployment
- Consumers
maxed out, little savings and starting to save what they can
- The possibility of war before
the election
It is that last item that could result
in catastrophe. A war with Iran,
as is being discussed, would send oil prices skyrocketing overnight. Americans
may be able to get by - barely - on $4 gas, but what if that doubles? What
would happen to the economy at $8 gas? How would people get to work? What
would happen to the price of food, and to heating our homes come winter? Printing
more money for the war would send the dollar's value down further. Inflation
would go into overdrive.
Considering the cavalier attitude this
administration has shown towards war, it simply cannot be ruled out. The
drums of war are getting louder. The stock market is clearly getting nervous
about something heading into
summer.
The only thing on the horizon that
appears it could possibly save us all is if that Japanese car that they say
runs on water along turns out to be true. I hope it is.
If not, the decline could go on for
years as all the false gains of the last few decades are taken back by the
market. Prechter projects a market low around 2016.
Depending on how old you are, you may have never seen a decline of that
length, so you might not believe it. But we all saw it happen recently in Japan (13
straight years of declines since 1990). Most of the people who remember the
Great Depression in this country have died off, so the timing seems right to
introduce the concept to a new generation.
Read Prechter's long term forecast (the June 9 Theorist) here
for free for the next week only. You may not agree, but I guarantee it will
make you think!
Apple Short Update
A couple weeks ago I suggested -- for
entertainment purposes only -- a gambler's play to short Apple. From
time to time, gamblers win and that was the case this time. So far, so good.
Here is an updated chart of what's going on:
The stock dropped hard after the Apple
show as rumors swirled about Steve Jobs' health,
but then recovered just as sharply. In a bull market, that would be the
perfect time to buy - weak sellers get spooked and unload the stock, and
stronger hands move in for the long haul. That still may be the case, but I
don't think so. In a bear market, the reasoning is exactly opposite: Strong
hands sell out, and weak hands step in to be left holding the bag. Volume was
weak. Even the new, cheap, 3G iPhone wasn't enough
to excite the stock back to a new high.
If the above big picture scenario is
correct - i.e. a slowing economy and protracted bear market - Apple will go
down with the rest of the market. Their nifty gadgets will become luxuries to
cash strapped and hungry Americans. I'm sticking with the short, and
remaining cautious.
Emerging Markets
The thesis here is that if the Dow
breaks down, as it looks like it will, it will bring the rest of the stock
market down with it, including the emerging markets. Look at today's gap down
from the flag consolidation in today's action. Not good, and poised to fall much further,
methinks.
How to profit from it? Check out the proshares double inverse emerging markets fund, symbol
EEV. It yields double the inverse of EEM's
moves. But again, be careful. This is a volatile instrument - up 5+% just
today!
Conclusion
Watchword of the coming days and weeks: Caution. Keep
an eye on the Dow. War is a possibility that is spooking the markets, and if
it becomes a reality, could be a catastrophe for the US economy. Corporate
earnings season is dead ahead. For some food for thought and copious weekend
reading, sign up for the U.S. Markets Free
Week at EWI.
Michael
A. Nystrom
Editor, Bull not Bull
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