Tuesday, May 18, 2010

Market summary for May 18th: Continuation of the decline.

The Dow wiped out an early gain of 90 points from this morning to close down 115 points. The VIX (Volatility Index) rose again 8% today, closing at 33.31. As I look at the candlestick pattern at the close today, the Dow did not close at the lows of 10,482 and therefore it is possible that tomorrow could be another down day. Why do I say that? Well, it's because I believe we are in the process of forming a "W" pattern, often referred to a head and shoulder pattern. And since I believe we are in the completion of Wave B and forming Wave C now, as part of a Super Grand Cycle going back 30 years, I expect this leg down of the "W" pattern to be lower than the 10,400 previous low close thus setting up a slanted down "W" pattern and more down pressure to come. The chart above is from Investopdia and they are a great source of information and reference material. It is not a current chart of any market Index but rather posted to show what a pattern looks like. On another point, the Volume today was higher than yesterday's, making the drop more real.

I was asked today if I see, as many analysts on TV proclaim, that the economy is doing great and this is the time to buy the stocks cheaper as there is more upside to come in this market before a correction. I do not agree with that position. When I listen to their advocacy of that position they say things like, "I can feel it in my gut". They don't present any rationale other than this week's action and last are because Options Expiration is Friday. You can't argue with that. It is a fact Options will expire for May on Friday, but just because Options are expiring doesn't mean the market could just as easily be pushing up to newer highs from the recovery. The arguments are weak for that viewpoint.

On the other side of the argument, there are valid models such as Elliott Wave Theory, that put all the data into perspective and are predictive. And one needs to look at every claim in light of the smell test for reality. Yes, the economy is better than it was a year ago, but not by much. Unemployment rates have stayed pretty constant the past 6 months or so, at very high levels. If the market drops significantly and scares business leaders again, they will downsize their employees again.

If you know where things might go, you are more prepared than keeping your head in the sand. I offer several critical pieces of data to show you habits are changing for Americans. The first piece of data is of the U.S. Savings rate amongst Americans. If things are going so well, why are so many paying off debt and increasing savings if they believe everything is getting better. It was the American Consumer who kept this economy going and contributed 70% of the economy. They are changing habits as is evidenced in the chart above, which shows Americans Saving vs. Japan's. Americans have started to change the trend of spending and are now starting to save. This chart covers the period of 1980 to 2008 where in 2008 the Savings rate was about 4.8%. In 2009, the Savings Rate hit a high of 5.0%. This is a good thing. Unfortunately, it now stands at a little over 3%, as Americans become complacent and believe they hype by both the Fed's Bernanke and Administration officials. They're not. It reminds me of that movie "A Few Good Men" where Tom Cruise character was questioning Jack Nicholson's character and Nicholson yells, "You can't handle the truth!" That's what's going on here. They don't believe we can handle the truth and are hoping if they can just convince us everything is Hunky dory.

My friends, you must be tired of me saying this but I do because I get new readers every day and many of them. For my repeat visitors I apologize. It's just someone has to shout Fire once in a while when they see smoke and know the flames are right behind it.

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