This will be a particularly long post today. I have gone back in time to see what I wrote back on Saturday, Sept. 4th, 2010 about the stock market and at that time the coming election, along with the stock market charts of that time to see what came true and what didn't. What's the point of this, you ask? Well in part because I was wrong in some of my predictions because I had no idea the impact of QE2 by the Fed and what that was going to be. Remember, that was pre election time and just a few weeks after Bernanke announced QE2. The stock market had reached what I thought was going to be its peak before the beginning of its long decline. I thought that top was at 11,400 on the Dow. I was proven wrong on that one.
So here is my entire post from that Saturday back on Sept. 4th, 2010 followed by an update to my thinking:I believe in the coming few weeks there will be a great battle in the stock market for the very soul of the market. One group of players will be those Bears, who like me, believe we have been lied to and the markets manipulated to keep us happy. The other players are the Bulls, who believe the lies of the Government and the Fed and think things have been getting slowly better.
I do believe the stock markets will drop significantly in Sept and Oct., set up a angry Consumer and Electorate, who will then go to the polls in November and vote to "throw all the bums out". This will be followed by a Republican victory in the House of Representatives, which will mean a return to endless investigations using the new subpoena powers they will have in the Congress and they will continue to stop all legislation on Energy, Healthcare and of course any Social agenda to help the Unemployed.
A stock market rally will follow the election in support for the change and a Republican victory and election to a majority in the Congress. They will continue the Bush the tax, which are scheduled to expire in January 2011. They won't allow it to end as it has been big business for them to stop it, so the most affluent can keep their money, which, in part, pays for the politicians to vote their way. The consequence of which will be that deficits will be out of control going forward as will the interest payments we will need to pay each year to pay for all our debt. It will be an irresponsible policy move. Of course these newly elected members of Congress will get us into a catastrophe much quicker with reactionary new policies, and this will drive us faster to the Great Depression, Version 2.0.
I think the Fed has done an amazing job managing our psychology these past 18 months along with the Government. I haven't liked it, as I keep seeing the man behind the curtain pulling the strings, as you do. But the facts of what we see everyday is hard to change by hype and manipulation alone. We need to see positive change in our community with better Home prices and Sales, less For Lease signs from Commercial Real Estate problems, less unemployed and more hiring and the business community taking a bit more of the risk and investing in new capital equipment. That is why the stock market has been in a tight range between 11,600 and 9800 during this period, with no significant breakout in either direction. It has been a tradable range of -15.5% to as high as 18.4%, but the timing has not been very easy to trade as most of those moves happen within a few days in each direction and by the time one reacts 50-75% of the move is over. That works fine for Wall Street with their program trading, but isn't so good for the average individual investor.
The battles in the future are going to be between the have's and the have nots. It has already begun if you haven't noticed these past few years. The Middle Class is being slowly extinguished. Eventually Unions will become stronger again but if we aren't careful as a country, we are going to resemble a country in Central or South America, where workers fight to try and live and governments eventually turn like Venezuela. The wealthy in this country are playing a very dangerous game that is going to come back and bite them badly.
One must ask them the most difficult question, which some amongst them have finally asked themselves. When is enough, really enough! How much wealth must one have and when is it counterproductive to the society one lives in to garner more just for the sake of having it. Bill Gates asked himself that question, as did Warren Buffet. I salute them both. But how many more, which I will not name, come to the same realization. You made as much as you have because of the America of the past, which had a vibrant Middle Class. It is equally important for them to have a strong Middle Class as well. It keeps peace in the streets and hope in people's hearts. We need more of that now.
The anger of those politicians who are riling up voters and has spawned the Tea party, is a prime example of what I mean. Being a politician and saying "No" all the time, does not create great solutions to problems, where all can live with a truly compromised solution. They are one sided solutions and half the population is going to be unhappy with the change. We need genuine compromises by elder Statesmen (and Stateswomen) if we are ever going to attack the deficit, Social Security, Medicare, the Military Industrial complex and ensure our national and individual security.
So that's what I see ahead of us. You can make a difference by not letting your anger get the best of your choices. Think rationally, not emotionally, what is truly best for the majority of people and choose accordingly. As to the stock market, don't let the swings between the ranges drive you crazy. Pick a strategy and stick with it until it is proven correct or false. As the charts of the Dow 6 month, 3 year and 30 year show below, there is a great battle brewing both short term and long term. This too will be the effect and affect on the economy and the stock market as it is impossible to discern which leads which and which follows.
OK, that was back on Sept. 4th. What about now. What inspired me to write this quite honestly is that right now feels like the same wall of price movement we had back in 2000 just prior to the Dot.com bubble bursting. I was warning people when the Nasdaq was at 4,800 to get out and go to cash. People pointed out at that time that the market was still going to go up and break through 5,000 and go up to 6,000. Well if you remember, we did break above 5,000 and went to 5,200 on the Nasdaq before the bubble finally burst. That was a long 11 years ago, but to this day we have not managed to gain back losses many still have to this day. Yes, I was wrong, people did wring out another 600 points or 12.5% gains from when I said to jump ship. Those wise enough to sell at exactly the top made another 12.5%. But those who didn't sell at the exact top are still down over 50% from that time and there is no telling how long, if ever, it will take for the Nasdaq to go back to 5,200. I say this all today because I thought the top of this market should have been 11,400 on the Dow and a comparable level for the S&P 500 and the Russell 2000. But because of market manipulation by the Fed, here we are at Dow 12,273, almost a full 1,000 points higher than the 11.400 top I had predicted. That works out to 8.8% higher than where I thought the top was. I was wrong, period!
But do you now think the market is going to go higher? Do you think we are headed to the market high of 14,000 for the Dow? Maybe you think we are now at the beginning of a new Bull market? Are you now going to venture into the market with fresh money and take a grab for that brass ring? Hear this and hear this clearly. The market is going to have a really bad fall in my view. It has been painful being short in this market as long as I have. But my firm belief is that this market is going to retest the 6,400 level on the Dow again and I don't believe this time it will hold that level. Is it worth the extra gains you might get from here or should you declare victory and sell some of your holdings and pocket the gains? You know what I think. If I'm wrong here you might eek out another 1,500 points on the Dow as the Bulls are declaring. That's a gain now of about 10%. If I'm right and the market does drop and retest 6,400, you will have lost 1/2 of your investment, just like the drop of the Dot.com Nasdaq bubble when it burst. For me, I think we have been in a Bear market rally the past year plus. You decide!
Here are charts below which I had posted in Oct. 2010 of where I saw the market top and I added a new horizontal red line on each to show you how much more we gained since my warnings.
Labels: Bear market, Bull Market, charts of Dow, charts of SP500, Dow, predictions, SP500, The Fed