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5 "Tells" that the Stock Markets Are About to Reverse

Dow 15,000 By Year Ben - Uh... I Mean Year End

Stock-Markets / Stock Markets 2011 Jan 08, 2011 - 08:19 AM GMT

By: Barry_M_Ferguson

Stock-Markets

Best Financial Markets Analysis ArticleAnd....., we’re off! The New Year is off and running and the Federal Reserve is busier than ever. The first day of the new trading year started off with a bang. The Dow bolted up some 100 points as the trading continued from the ferocious last 15-minutes of the last day of trading on New Year’s Eve that I documented in my last post (http://bmfinvest.blogspot.com/2010/12/does-new-year-change-anything.html). The rest of the week turned a bit more pessimistic as Friday was looking downright ugly until one o’clock. What happened at one o’clock? Oh yeah - the great Bernanke finished up his meeting of the Village Idiots (he testified before the bozos we call ‘Congress’) and got back to his real job, juicing the stock markets. If there is anybody that still thinks we really have ‘stock markets’ anymore, you should go read a book or something. All we have is Bernanke and his printing press.


Of course, the Fed is trying desperately to spin an economic recovery so they don’t look so stupid in all their efforts to save the big banks from the oblivion of their ineptitude and stupidity. And, the Federal Reserve was shoulder to shoulder with the lenders of lunacy egging on the derivatives and credit default swaps that drowned the world in debt. Yes, all the rest of us have to pay for the banksters’ folly but this is the new era. Greetings, fellow suckers! The US just passed the $14 trillion mark in the national debt.

So we got some good news on employment. The official unemployment rate dropped to 9.4% and more jobs were created, more people than expected filed for new claims, and more people dropped out of statistical relevancy. Yippee! The service sector was up, home sales were up, consumer spending was up, Christmas was good, blah, blah, blah. Fill in whatever ‘happy news’ you want to. Stock indices need the happy news and the dopes of the world never get tired of hearing it. Pabulum and a binky is all the investing world needs. So be it.

I have included two charts for our discussion this week. The first chart is a one-week intraday look at the ETF, the DIA, for the first week of January, 2011. Here’s the deal. In this new era of complete Fed dominance, we have to go on feelings and instinct. I look at this chart and I get a little nervous. Yes, it is a one-week chart but it is a head-and-shoulder looking kind of thing and that is bearish. The past two Januarys have been ugly and it seems like the real money players are trying to play the rest of us for suckers. Selling has picked up in the wake of economic nirvana. Maybe next week we see some weakness. Why? Well, it’s the same old story - just another year. Europe is a basket case and the weaving is getting even more loose. The broke countries were allowed to borrow their way into insolvency through the magic of derivatives and credit default swaps that were sold by German and French  banks. The debt that can’t be repaid is pummeling the swaps and the banks that are on the hook for the bad debt. The Euro currency is fading against the US dollar. That pushes the valuation of the dollar higher and when the dollar goes higher, stocks generally go lower. So, my guess is if the indices begin to roll over early next week, we could see a little correction. Go to the next chart.

Chart 1 - Intraday 15-minute bars 01/03/2011 - 01/07/2011 DIA
Chart courtesy StockCharts.com

The next chart (Chart 2) is the past two years of the Dow Jones Industrial Average. Forget everything that you think you know. It no longer matters. Forget earnings. Forget growth. Forget sales or profits or debt. The Dow will hit 15,000 before the end of the Ben - uh..., I mean, the end of the year. Why? Call it ‘quantitative easing’ or anything you like. I prefer ‘stock and manipulation’. The old S & M. The chart is all that matters. Yes, the whole thing is one big con game and it gets more silly each day. So I drew football goalposts in orange to outline the first wave of Fed stock manipulation. Starting in March, 2009, the Fed started buying Treasuries and garbage paper from the banks and this first phase ended in August, 2010. As it ended, the stock indices looked poised to fall apart. How could a Dow decline be arrested?

The solution was the same as all stock solutions in the new era. The Fed announced the start of QE2 in September and all was good. I drew the QE2 goalposts in green but of course QE2 will last until the end of June. The important thing is that QE1 drove the Dow up some 46%. Let’s call it 50%. So, if we get the same kind of effect from QE2 that we got from QE1, then the Dow should add another 50% before the summer and that would put us at Dow 15,000. Maybe Bernanke got one of those bubble blowing kits for Christmas! It is also worth noting to the doubters out there that since the announcement of QE2 on September1, 2010, the Dow only had 4 weeks of negativity through the end of the year. Wow! Talk about complete control. And two of those negative weeks were very minor losses. As we get to the end of ‘S&M’2, look for ‘S&M’3 and that will likely include large index purchasing from the Fed. Only now they will do so in plain view! 

Chart 2 - Past 2 years DJIA weekly
Chart courtesy StockCharts.com

To summarize, the short run looks a little dicey and the long run looks a little like a roulette wheel whose pockets all have the same number. Europe may still be the driver as it tries to tighten up its basket of debt insanity. The two biggest economies in the world, the US and Europe, are indebted to infinity and have not yet realized that the only way out is through the door labeled ‘Default’. Most investors are enamored with their modicum of stock picking prowess unaware they are playing gin rummy at a poker table as the dealer is just letting them win until the pot is big enough for the kill. A lot of money can be made in a bubble. A lot more money can be made when the bubble pops. For now, the Fed just needs a week or so to load up the bubble machine for another puff of expansion. Tread carefully and time it accurately!

Barry M. Ferguson, RFC
President, BMF Investments, Inc.
Primary Tel: 704.563.2960
Other Tel: 866.264.4980
Industry: Investment Advisory
barry@bmfinvest.com
www.bmfinvest.com
www.bmfinvest.blogspot.com

Barry M. Ferguson, RFC is President and founder of BMF Investments, Inc. - a fee-based Investment Advisor in Charlotte, NC. He manages several different portfolios that are designed to be market driven and actively managed. Barry shares his unique perspective through his irreverent and very popular newsletter, Barry’s Bulls, authored the book, Navigating the Mind Fields of Investing Money, lectures on investing, and contributes investment articles to various professional publications. He is a member of the International Association of Registered Financial Consultants, the International Speakers Network, and was presented with the prestigious Cato Award for Distinguished Journalism in the Field of Financial Services in 2009.

© 2010 Copyright © 2010 Copyright BMF Investments, Inc. - All Rights Reserved
Disclaimer: The views discussed in this article are solely the opinion of the writer and have been presented for educational purposes. They are not meant to serve as individual investment advice and should not be taken as such. This is not a solicitation to buy or sell anything. Readers should consult their registered financial representative to determine the suitability of any investment strategies undertaken or implemented.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Obie Wan
10 Jan 11, 11:51
Nothing new

With the levels of market sentiment and therefore sentiment about economy where they are, we know we are getting the best we can get under circumstances. Pouring oil into the fire will bring us exactly into the same bubble we've got into back in Greenspan's days. But at least we made a few bucks on those short sellers. And so it goes in America from crisis to crisis as our leaders take advantage.


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