Wednesday, October 20, 2010

The Stock Market's Long Decline Has Begun

The Fed's campaign to boost the risk-trade in equities by destroying the dollar has reached its limits. Now gravity will take hold as stocks enter a Long Decline.

On Monday, Daily Finance published my article Is the Market Ready to Roll Over? These Signs Say Yes. On Tuesday, October 19, the market did roll over.

Is this merely a brief hiccup on the way to S&P500 1,500 and Dow 15,000, or the first stages in a Long Decline? Here is the evidence to support the idea that stocks are entering a Long Decline.

Back on October 8 I looked at some of these issues in Look Out Below (I've got a bad feeling about this).

As always, please note this is not investment advice, it is merely the musings of an amateur observer; please review the HUGE GIANT BIG FAT DISCLAIMER below.

First up, the U.S. dollar, which the Fed has been destroying to prop up equities before the election:

Alas, there is pushback from various forces against this destruction of the dollar, and as the dollar climbs then the see-saw tips and equities decline.

Those predicting the continued destruction of the dollar see a double-top pattern suggesting "the top is in;" I see a long-term uptrend line and a line of resistance around 90 that will eventually be broken to the upside. Time will tell who is right, the dollar Bears or the dollar Bulls.

Mr. VIX is waving the yellow flag of "crash ahead." Complacency in the face of sobering financial realities is not just unreal but completely deranged. To note but a few:

1. A Eurozone debt crisis which has not been resolved, despite the propaganda.

2. A massive credit/real estate bubble in China which will burst, just like every other bubble in history, despite the many voices claiming "there is no bubble in Chinese real estate."

3. A foreclosure/MBS/bank insolvency structural crisis in the U.S. which has barely started.

Note that the VIX is marking out a long-term uptrend of higher lows, meaning increasing volatility is the backdrop against which the market acts out its various dramatics.

The broad-based S&P 500 (SPX) is looking toppy and vulnerable on the weekly chart. Note the declining volume as retail investors continue pulling tens of billions of dollars out of the pump-and-dump charade known as the U.S. stock market. Also note the bearish cross of the 20-day MA dipping below the 50-day MA, signaling the start of a downtrend, and the weakening MACD trend.

Kissing the resistance of the 200-day moving average and then rolling over is a classic market move.

Beneath the new high notched by the NADAQ 100 (NDX) we see marked weakness.Now that Apple has rolled over, then who's left to keep the tech-heavy NDX afloat? Google, Amazon and Priceline? Three companies out of 100 is a very narrow market, and one vulnerable to just the sort of rollover we are now witnessing.

The other "market leader" sector, the financials, are running a high fever. Bogus "earnings" from the money-center banks (reduce your reserves against losses by $6 billion and surprise, you "booked a profit" on paper) have lifted the financial ETF XLF off the crumbling edge of meltdown, but at some point the flag/wedge pattern here will break big up or down.

Does anyone with skin in the game seriously think banks are poised to reap vast new profits? Really? From where? Enough to offset the tens of billions they will be losing as the MBS/foreclosure fraud bills come due?

There is very little support in this chart once it breaks below $12.50: next stop, $7.50 and then $5.

Disclosure: I am short the XLF via puts and long FAZ.

Special podcast: Steve over at Two Beers with Steve was kind enough to let me ramble semi-coherently for an hour; we had a great time and I think I should have interviewed him.... Check it out if you have an hour of sitting in traffic to invest: Two Beers with Steve podcast.

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