|
It is been my belief that stocks and the economy have
been locked in a secular bear market since March of 2000. During that period
we've had two recessions and two cyclical bear markets. One of those
recessions was the worst since the Great Depression and the last bear market
in stocks was the second worst in history.
I've said all
along that printing money will not cure the problem we've gotten ourselves
into. It's never worked in history and it's not going to work this time
either. We can't solve a problem of too much debt with more debt. All we will
accomplish is to make the problem bigger.
We are now
fast approaching the period when the next crisis should arrive.
On average
the stock market suffers a major correction about every four years. In a
secular bear market that cyclical trough arrives as the economy sinks into
recession and a stock market bear bottoms out.
The last four
year cycle bottom formed in March of '09. That just happened to be the
longest four year cycle in history. I've noted before that long cycles are
often followed by a short cycle that compensates for the extended nature or
the prior cycle. If that's the case then the next four year cycle low is due
sometime in 2012. (My best guess is in the fall.)
 
As we are
still in a secular bear market then the move down into the four year cycle
trough should correspond to another economic recession and cyclical bear
market for stocks. Bear markets tend to last about a year and a half to two
and a half years. If the next four year cycle bottoms in the implied timing
band then the current cyclical bull should be topping soon.
As a matter
of fact the stock market is already flashing warning signs. Three of the
largest and most important sectors in the S&P have not confirmed new
highs.
Another
warning sign; Despite record earnings the market has only been able to move
to marginal new highs and is now in jeopardy of reversing the recent
breakout.
I've noted in
the past that this is how major tops and bottoms are often established. Smart
money sells into the breakout, or buys the break down in the case of a
bottom. The trend then reverses and a major turning point is formed. Both the
'02 bottom and the '07 top were put in this way.
The market is
now at risk of a similar event as we've experienced a marginal breakout to
new highs that is threatening to fail. Don't forget this is happening against
a back drop of record earnings.
When a market
can't move higher on good news something is wrong. And don't forget bull
markets don't top on bad news, they top on good news.
If the market
can recover and move to new highs the cyclical bull will be confirmed, but if
the market continues to fade and drops back below the March 16th
"tsunami" bottom it will constitute a failed intermediate cycle. If
both the Dow and the Transports close back below that level we would have a
Dow Theory sell signal and that would confirm the next leg down in the
secular bear has begun.
It would also
be a signal that the economy was unable to handle the spiking food and energy
costs that were the direct result of Bernanke trying to prop up the financial
system with his printing press. Like I said, printing money has never been
the answer. Every empire in history has tried this approach and not one of
them has ever succeeded with it. We won't either.
Toby Connor
Gold Scents
|
