Year end summary of the Dow and stock market trends

This is my year end summary of the stock markets for the year and where I think what might occur in 2012. My first chart below is of thew Dow for the past 10 years on a monthly basis. As you can see below, for 2011 the Dow managed to stay between 11,000 and 12,800. Looking at the big drop in 2009, where we went all the way down to 7,000 on a monthly basis and 6440 as a low daily close.

It is interesting to notice the Volume chart for the Dow. We averaged about 600 Billion shares a month from 2002 to mid 2009. Since then we have had a significant drop to 380 Billion shares. So the rise from 7,000 was built on significantly less volume than the rise from 2002 to 2009, which was a Bull market rally. It looks to me that since 2009 we have been in a Bear Market rally, as the volume has been too low for a true Bull rally.

The key to watch on this Dow chart are the 2 red lines. We will need a breakout either to the upside or to the downside to determine longer term trends from this chart alone. However, looking at the Dow 25 year monthly chart, we get more clarity, as seen below.

I do still expect a drop below current levels during 2012. The Head and Shoulder patters or "W" pattern as I call it does point to lower lows going forward and limited upside potential.

Given the chart readings, the next thing to do is see if world events suggest a more optimistic or pessimistic view for 2012. We have a Presidential year election in November 2012 and we have had gridlock in the Congress in 2011. I don't see the gridlock easing and many issues including our own debt which must be dealt with as well as continually funding the government. The Unemployment scene isn't going to get much better because we have structural unemployment which will be around for a long time unless somehow we retrain workers in new skills to meet a more technological demand than typical blue collar workers have brought to the work environment. We also have the Supreme Court making a decision on President Obama's Health care bill legislation as to whether it is Constitutional or not.

Then we have the Sovereign Debt issues in Europe, the Arab Spring and new leadership in North Korea, a test of the government of Iraq to function without our military presence and then there is Iran's pursuit of Nuclear weapons. The Euro is in crisis and Russians are challenging Putin's grasp of the presidency there. And last but not least, we have all those who believe the world will end on Dec 21st 2012 because of the Mayan predictions.

Let's conclude with the fact that 2012 will have many volatility swings ands most likely testing the previous extremes of those swings. It is a year to be cautious with your financial assets. My belief is that we humans will do almost anything to avoid pain rather than to risk succeeding. Therefore, I believe it is wiser to be on that side of the investment strategy by being short from time to time. It is also wise to take profits sooner rather than being greedy and waiting for more profit before selling.

Good luck this coming year. Thanks for taking the time to visit my Blog. This new year marks 7 years of my blogging. I have had 79,000 visitors to my site in that period. Happy New Year!

Market comments for the week ahead and beyond

Let there be no doubt, the Dow will go as low as 11,600 shortly. From there we may have a bounce up but the odds are we will continue to see this and the other stock market indexes drop lower because much concern still lies with the issue of raising the debt ceiling. We have less than 3 weeks for this issue to get resolved before the markets start to get very nervous and volatile, even though we have until Aug. 2nd before the government defaults on its debt obligation and the government shuts down. The sides are still miles apart and it seems to be playing along in a similar game of chicken as to when Newt Gingrich was the Speaker of the House during the Clinton Administration. The Republicans miscalculated then and appear to be again now. Only this time the consequences our governments credit will face is much worse as the United States has never defaulted on its debt obligation. So you see this is very serious indeed.

I have added a 6 month chart of the Dow this morning as is seen below. Notice that on Friday, which is often a low volume day, the Dow was down 172 points at the close. Notice also that the Volume was indeed higher than the entire rest of the week.

Also noteworthy was the fact that the Put to Call ratio continues to be greater than 1.00 now for 8 consecutive market days, not seen since Sept. 9, 2008. All the signs are warning investors this is serious. Don't say you didn't know it would get so bad. You have been warned!

How far down is the market going to go is subject of many guesses. My guess is that we will be first going all the way down to the 10,000 level after testing 11,600. A look at the 2 year chart below shows just how easy the Dow and other Indexes can unwind. I have identified 3 levels to test in what could be a drop as far down ultimately to test the Dow at 6,400. Yes, that's right, Dow 6,400. You read that correctly. Much depends on when and what the Fed is allowed to do. If the Fed stops its quantitative easing (QE2) and not do more, we could get there sooner rather than later. If the Fed decides it needs QE3, this drop and crash will be postponed for a while, but it will be inevitable, we will crash to test 6,400 eventually. A defense will be better than any offensive market move going forward as the odds are against a Bull market now. Fair Warning! We are in a Bear market now.

Market comments for March 9th trading

Market action on Tuesday, while an impressive gain from the day's drop on Monday, kept both the Dow and the S&P 500 within an even tighter range. The Bulls are using the day's progress as evidence we are still in a Bull market. The problem is the charts say otherwise. It isn't so clear that we are still in a rising market.

The 2 charts below clearly show that in the past 5 market days the range has been tightening. You will notice that both on the Dow chart and the S&P chart we are forming lower highs and higher lows. This is setting up a breakout either to the upside or to the downside. It is impossible to guess which way it will go, especially because the Fed can trump any downturn with more QE2 funds to prop up the market. Stay tuned to see where we wind up. Oh, and by the way, in the last 15 minutes today over 40 million shares were traded by Institutions!

Looking back on the stock market for predictions of what's to come.

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.

What do the Charts of the Dow, Nasdaq and S&P tell us? Down is inevitable!

As the title suggests, when you look at 3 charts, they point to all Indexes going down from here. There is no other explanation that merits serious consideration. Let's take them one at a time. I know this may seem too technical but I have tried to explain it in a way that you can understand it if you follow along with each chart. It would be wise to click on the chart to enlarge it as a separate page to view while you are reading the text.

Starting with the Nasdaq Composite Index chart you will notice that it looks back a decade to when the Nasdaq reached its peak over 5,000. As I drew a downtrending Blue line from that peak to connect where the Nasdaq reached its high of 2,800 in the Fall of the year 2007, I drew another red line which covers the period of 2007 to now. While there is a slight difference in the 2 lines, it is not significant enough yet to distinguish. However they point to this downtrend line continuing. We will NOT break above these lines and the 200 day Moving Average line, denoted as a yellow line hugging close to the data points, until we truly return to a Bull market. That day looks to me interpreting the way forward, not to occur for at least 1 year and possibly 2 years. That is when we will see if we can go above these downtrend lines. The line at the very bottom in blue says we most likely will not go below 1,300 in that 2 year time from today, if that is of any comfort. The Nasdaq Composite Index closed Friday at 1,692. Now let's turn to the Dow chart.

The Dow chart is also a 10 year look back and a projection of the downtrend line continuing. Here too we hit a peak in the Fall of 2007 and then dropped in a series of stairs, each one up leading to a sharp step down. The blue line dropping from the Spring of 2008 connects to almost exactly where we are today where we closed Friday at 8,277, a little above where this blue line is but very close to the 200 day Moving Average. In fact, if you don't know how to, or like to, draw these charts, using the 200 day Moving average accomplishes almost the same thing. As I look at the chart and the lines I have drawn, we will be lucky if we can stay above the lower floor of the Dow at 6,400. But there is going to be a test of this level, most likely this year. When it will happen is difficult to predict, but I will give it a try. It looks to me it will be tested again this Fall. It may start by testing the low 7,000's like first the 7,800 level followed by the 7,500 level and then the 7,200 level before its final decent. It can bounce up from each of these tests, but remember it is like a staircase. Each test takes us lower.

There is no guarantee we will not break below 6,400. As a matter of fact, there appears to be a 50/50 chance we will. Why do I say that? Because of the steepness of the blue downtrend line. If we do break through the 6,400 level, I am hopeful we will set a new bottom but that bottom could only be at Dow 6,100, not the Dow 4,000 that so many have predicting. If that occurred and we did go to 6,100, we could bounce back up off the low and start to climb and start breaking above the blue downtrend line and form a stable floor for the market to climb out of. Again this looks like Fall is the timeframe as much more news about the health of the economy, unemployment, the Banking system and the auto industry will be clearer than today. If things look more optimistic we then could start a new Bull market, but not until then. We have been, and are, in a Bear Market Rally! The S&P 500 chart looks very similar to the Dow and I would expect this Index to behave the same as the Dow.

So there you have a look into what I see happening over the next 5-6 months and why I still have kept holding my ETF Short Triple Play, symbol TZA. If I am correct in my outlook, this could yield double, to possibly even triple, my original investment. To me it's worth waiting the 5-6 months and find out. If at any time we break above the downtrend line and it appears to hold, I will be the first to post it here and sell my TZA. Indeed, I would be very happy to be wrong here, as I would love everything President Obama and his Administration are doing to succeed. I win on either side of this bet. But your challenge will be to preserve your capital at all costs! Some are doing that buy buying Gold, as it has climbed most recently from $860 to $958 at the close on Friday. Silver also has advanced. Inflation has a way to go before it affects us directly, but that day will come too just when we enter a Bull Market rally. Come back and read my posts as I post almost daily and while it is mostly now about the stock market I also post on the news of the day when the moment or topic moves me. Good luck! And if you haven't taken my Mini poll on the right side of the page, please do. Thanks for coming.