Market breaks down officially, Dow below 7000.

As I wrote a few days ago, the market found itself at a very critical level and had to hold in terms of supply and demand. Down 7,000 is both a psychological and technical level that if breached would usher in a new wave of selling and it did so with 4-5% across the board drops.

The MSM will certainly try to explain this as a response to AIG’s 60+ billion loss, but of course that is not true and has little to do with today’s action. In fact AIG’s cash losses are a mere 2 billion, but the assets that they insure dropped 60B in value. Oops? If anything, our mindless torpid government pledging ANOTHER 30 Billion to this company would be a catalyst for a sell-off.

So right now, one would wonder what the correct course of action is for those who have been holding on desperately to their 401Ks and watching their accounts wither away. At about these levels, we are looking for capitulation, a mental white flag where the pain becomes too great and people sell in droves. We should experience a strong washout day, where the market opens down and sells off hard only to reverse and stage an impressive comeback on massive volume. Once this happens, a rally lasting anywhere from 20-30% could start. Why? Because history shows that no bear market goes past 40-50% without some kind of rally. As in everything with the stock market, patterns can provide a beacon in the all too foggy landscape of investing.

Those seriously considering closing down their 401k and moving to cash, could be rewarded with an exit point.

Rough targets for the capitulation area on the S&P500 could be somewhere in the 650 range and then rally back into the 800-900 range. Problem with washout days of course, is that they always get retested, since we have such a broken market with such a broken economy that this retest will be a scary situation. However this could be months from now and if we DO see a rally, then the most likely time for a retest will be in September or late August – two of the worst months of the year for the stock market. As of now, focusing on the short term is the most important and easiest in terms of prognostics.

Disclosure:
As of now I am still long on my 401k because someone my age really does not care, but even I will exit if I see S&P 800-900 again.
Short term, despite all the bounces and head fakes a washout day is a must and I hold my short positions.

Obama’s stock market on the brink of collapse

I have not done a stock market post in a while, but this one is important considering the latest developments. The latest time I spoke about Dow 7000 and why a hold of that support line is extremely crucial.

Unfortunately it seems like the break will happen inevitably and doing so will essentially open the flood gates. I have provided a chart for you that someone else made and it illustrates a very obvious long term pattern, a chart of the S&P 500.

Don’t mind the wave count, but do realize that flirting with 2001 lows really illustrates the weakness of this market. If in the next few weeks Dow 7000 or in this case S&P 750~ is broken then expect the market to shave off another 50% of it’s value! There is good news in all of this though, once a breach of that vital support occurs, a reflexive bounce will occur via a powerful bear rally. Thi rally could be a 30-50% move and will provide an opportunity to exit all long-term positions, however for the most part it will only suck more unsuspected individuals into a powerful move down to the ultimate lows of (Dow ~4000, S&P ~400). This happens in history all the time and will happen again.

If these long term projections are met, then it might take anywhere from 5-12 years to recover back to the highs of 2007!

I call this the Obama stock market because his administration and his policies are completely and utterly responsible for this vicious sell off. Even though the financial collapse is not his doing, the amount of damage his promises and policies do to the market cannot even be measured. War on the wealthy, nationalization of banks, corporate tax increases via loop holes and wealth distribution all have massively detrimental effects. Suffice it to say that we have broken all records for post inauguration week, January, February and will continue making new records. Consequently Obama can be blamed for the destruction of 401ks and I am just afraid at this point that we will go the way of Argentina and confiscation of private IRA accounts. In fact, the worse the market performs the more reason our government officials can procure to exercise control of our moneys. Certainly a very foreboding cycle considering they are very much responsible for the current decline.

Full Disclosure:
I am long on my 401k, given my time projection of about 40+ years.
I am short the market for the short term given the possible collapse of support levels.

Sick market, sick congress

Two quick points.

1) Democrats asked the auto industry to formulate a plan and get back to congress by December 2nd. You know my position on the matter and I find it sickening to see this kind of government involvement.

Let the free market work! If people are not buying American cars, then it is a clear signal that these American cars are over priced. The price information being telegraphed from the auto industry is being rejected by the population, the answer is to adjust the price – not grovel to Congress. Absolutely appalling. Is there anyone out there that thinks we should bail out the auto industry? Let me know and if so, explain to me why we should violate free market principles. Do not use the financial bailout as a benchmark, because according to Wall St. the financial bailout did nothing to stem our declines.

2) Stock market is extremely weak. Today’s bounce attempt should be shorted for short term traders, because they underlying weakness is glaring. Energy shares are leading while small caps are in the red. This is a perfect recipe for Dow 6,900-7,000. This is a magnet support line and will be hit within the next few days.

Key sector overview as of 1:40pm, Friday November 21st.
This is the opposite of what you want to see on a bounce.

XLE
Energy
41.42
+1.46
+3.65%
2008-11-21, 13:22ET
XLF
Financial
9.00
-0.39
-4.15%
2008-11-21, 13:22ET
XLI
Industrial
19.49
-0.51
-2.55%
2008-11-21, 13:22ET

Obama market continues…how to invest?

As of today the market has lost 22% since Obama won the election. Can we attribute this decline to Obama? Not completely. There are several factors that must be taken into account.

1) We are in a bear market (this is the prevalent direction)
2) There has been a disruption in natural market activity via the bailout.
3) Least important, some economic news is worse than expected.

However, under normal circumstances there are these considerations

1) We are in the seasonally best time to be in the market (November to January)
2) We only had one appreciable bear market rally (week before election)
3) Commodities have been falling at a tremendous rate (oil especially) and this alleviates inflation.

The fact that this market has been unable to mount any kind of serious move despite the substantial drop in commodities and considering that government intervention has been largely priced in, there remains only one major wild card.

President-elect Obama.

As discussed in a previous article, the week immediately after the election was the worst in history and the trend continues. Every time Obama opens his mouth and bashes “thriving Wall St” or chooses another Clintonista appointee, the market shudders. Investors can forgive candidates for saying outrageous crap during the campaign, but when the rhetoric continues after the election – investors will not be so forgiving.

So in conclusion, we can certainly blame Obama for this decline, acknowledging of course that he is no 100% responsible.

So where do we stand?

The market is now facing critical support at Dow 6,900-7,000. This represents long-term bottoms form the ’03 bear market and the ’98 Asian currency crisis. These levels will hold with a roughly 85% likelihood. If they hold, expect a massive bear market rally that can propel this market a good 30-40% in the upcoming months. But rest assured, that this will not be a V bottom and these lows will be revisited. So from a strategy standpoint, establishing intermediate longs in virtually any sector (except energy) is a good bet.

IF, IF this support fails and Dow 7000 is breached – look out below. We can discuss it if it happens.

Let me know if you have any questions about the market!