One of the most frequently asked questions on CNBC, Bloomberg, and by any other simpleton investor who lacks the common sense that would keep him/her from blowing their life savings.
As I go forward with this blog, I will try and fill in some of the blanks for the new readers.
The first notion that I would like to talk about is that I believe we entered a bear market in general equities, such as the industrials, in 2000. This gets us back to the idea of an equities supercycle.
In a nutshell, a full equities supercycle takes about 33 years to run its route. In that time, half the period is spent in a bear market, and the other half in a bull market.
Let's just get rid of a misnomer before we move on. The 17 years of bear market is not a period of great decline in equities. Instead it is an extended period of sideways trading, during which there are shorter periods of serious declines. The losses are experienced in the form of inflationary decay.
So my interpretation is that we are 7 years into the bear half of the supercycle. I believe that the 10% correction we saw just a few short weeks ago is just the beginning. I expect something of a 40-50% correction to ensue.
Now 10 years from now, I expect the DOW to be trading in the range of 12-14k still. With REAL inflation running at an annual rate of 10+%, the amount of wealth lost will be tremendous for the schmucks who have their money in general equities are playing a dangerous game in my opinion.
Again, if you have any questions regarding this topic, or would like a more in depth explanation, you can do one of two things. The first is go to stockcharts.com or bigcharts.com and look at a chart of the S&P or Russel 2000.
These are much broader indexes than the 30 companies that the DOW encompasses. Look at the double top formed in the S&P at 1526, and if you were throwing darts at a board, you would actually have a negative return over the past 7 years if you have been investing in the S&P, not to mention the inflation that has occurred over that period as well.
Now, for those of you who prefer to discus the first question, the short term outlook on the DOW, let's look at the following chart.
Please refer to the following URL http://stockcharts.com/h-sc/ui to view the chart that the rest of this post will be referring to.
I've already told you what what my fundamental outlook for the general equities market is. I haven't necessarily told you why I feel that way, but that is a something we can get into at a later date.
So looking at this graph we can take a couple of things from this. Let's view this with a couple of possible scenarios.
The DOW has found strong support at its 200 day MA when it nearly erased a 300+ point intraday decline. After initially breaking below its 50 day MA, it has essentially traded in between its 50 and 200 day MAs.
The DOW is obviously at a fairly critical point if we are talking short term move. Let's assume that the DOW breaks above it's 50 day MA. This would be bullish with the DOW finding its next resistance at the 13690 level. If it continues to push past 13700, its next resistance is at the 14k level.
Looking at the technical indicators, the MACD has remains on a buy signal while the DMI is still on a sell signal and has been for some time. This usually indicats a period of sideways trading, but these indicators have a slight lag to them.
Taking another look, the MACD has taking a recent turn upwards, and the DMI almost appears to be on its way to another buy signal. If the DMI triggers, I would look for the DOW to push past 14k.
Let's look at the other side of this picture. Say the DOW fails to break through its 50 day MA. A couple of things could happen at this point. The first is that it could just break through its 200 day MA and head south from there. This scenario seems unlikely in the immediate future.
The other option is that it could again find support at its 200 day MA. At this point I would expect the DOW to coninue to bounce back and forth between its 50 and 200 day MA while pulling the averages closer and closer together.
Once the MA converge, this usually signifies a strong price move coming. The problem is when the MAs converge, it is often difficult to predict which way, up or down, the price will jump. At this point we would have to reasses the situation from a fundamental stand point, but with the vast amount of option ARMs resetting this fall and winter, I would expect that the DOW doesn't have much life left in it.
So what should we look for?
Well, it is very common that in a bear market in equities, there is usually one final wild move up in price. Was the run to 14k that move? It's hard to say, but I really wouldn't be surprised to see another jump.
I would be watching tomorrow's pending home sales statistic as well as the jobless claims and productivity numbers that are set to come out later this week.
Watch the yen exchange rates. The carry trade is one of, if not the most vital indicators of market volatility.
September happens to be a seasonally bearish month for equitites. We'll have to keep that in mind.
So essentially I have said nothing. You probably think that I have strattled the fence and that I haven't done anything close to throwing my neck out there.
Although it is difficult to judge, here's what I see in the coming months for the DOW. Unles the DOW surpasses 14k by the end of Oct., I find it highly unlikely that it will in the next 5 years.
A driving force in the equities markets is obviously the credit turmoil which I expect to get much worse going forward. This thing is a ticking time bomb, and some great ways to protect yourself are with inverse ETFs and my favorite yellow metal GOLD!