Young Bui
 |
HAT IS NOT a typo. Yes, the Dow could go as low as 4500 when all of this is over. All of what you might ask? Isn’t the market way up from the last collapse?
When the first leg of the primary bear market ended in the week of March 8 of 2009, there were more than 1,000 selling climaxes on the NYSE. A selling climax is reached when a stock hits a 52-week low in a given week and then closes up for the same period. A buying climax is the opposite.
The last 13 months brought us one of the strongest rallies in modern times, turning fear into overflowing optimism. Headlines in April 2010 were as boastful as they as they had been frightful when the market was at the bottom. If the market drops a bit, it’s an opportunity to load up on more stocks. The week of April 26 recorded an all-time high of more than 1,000 buying climaxes as the market snapped an eight-week winning streak.
The declining market from October 2007 to March 2009 was the first wave down in a Primary Degree bear market. The rally from March 9, 2009, to April 26, 2010, should be viewed as Primary Wave 2, which serves as a correction to Primary Wave 1. According to Elliot Wave theory, Primary Wave 3 is just getting underway. In a typical five-wave bear market, the third wave down is always the most severe and damaging of them all.
Primary Wave 1 started from a high of 14,198 and ended at 6,649 in March 2009, giving up 7,728 or 54 percent in 18 months. The rally retraced out 61.8 percent to peak at 11,258. If you take off 54 percent from there, you will hit the bottom of the next leg at 5,178 in October 2011 for a loss of 6,079 points. Normally the third leg is more severe than the first. If it gives up 60 percent, then the bottom would be 4,503 in the DJIA sometime in February 2012.
What will be the cause of this next collapse? The 2007–2009 sub-prime debt crisis was the catalyst for downward Primary Wave 1. The unfolding crisis in Sovereign Debt, which was started with Greece, will be the downward driver for Primary Wave 3. The European Union will be in total chaos as the fear spreads. The United Kingdom will come next, and then our very own country, the USA. Sovereign entities of all kinds, from nation-states to counties to municipalities, will default on their debts. Americans will initially be smug as the dollar continues to rise while the euro plummets. The ultimate demise of the euro will give a false security that the dollar is the only reserve currency left in the world until it too melts down. Forty-eight of fifty states face bankruptcy unless our government steps in and turns on the printing press. The problem is: who is going to buy our treasury bonds? China has started to sell our bonds and to buy gold instead. The only buyer left is the federal reserve.
Robert Shiller, who predicted the dot-com bust in 2000 and the housing market crash in 2008, says, “We face another seven years of bad times” before the economy turns around. That would put us in 2017. If you look at the stocks and commodities cycle for the last hundred years, you will see some truth in this.
Since the end of 1999, stocks are down; meanwhile, commodities are up more than 100 percent. Commodities could go parabolic from here, and stocks may already have bottomed or will bottom on this next wave.
I hope that I’m wrong about this. This is one scenario I do not want to be on the right side of. If you plan to hold on to your stocks, I would suggest that you hedge against your bet by buying a Put on the S&P 500 (SPY) two years out. If you don’t have any precious metals in your portfolio, my advice is to put at least 15 to 20 percent of your portfolio in precious metals such as gold or silver. I have always liked silver because it has always outperformed gold. Invest safely, and keep this in mind.
October - December 2010
|
What will be the cause of this next collapse?
|
