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.

Summary comments on market: Has anything really changed in my outlook?

The market closed the week today with what apparently looked like indecision. But to the contrary, today's market confirmed a reversal in all Indexes, the S&P 500 Index, the Nasdaq composite Index and finally the Dow. The Nasdaq closed down only 1 point but the Candlestick pattern was a Hammer. The S&P closed at 940, down only 2 points, but it confirmed the Hammer candlestick pattern of Wednesday's close. The Dow closed at 8,763, up about 13 points.

The Unemployment rate rose more than expected and closed up 9.4% for the month of May. Employers eliminated the fewest jobs in eight months in May, strengthening signs that the recession is easing, while a drop in wage growth offered a warning the recovery may be muted. The job losses were lower than expected but more people were added to the ranks as eligible workers, so the rate rose higher than expected. The country needs to create about 200,000 jobs a month just to be at break-even. When you add in the losses the rate goes higher quickly. Many commentators on CNBC and Bloomberg today said that there the real Unemployment rate is about 16% because many are working part-time and can't get a full time job. Also a number of the unemployed have given up filing for Government Unemployment Insurance Benefits, as either their benefits have run out or they have given up looking for work.

Nonetheless, the media and commentators are continually hyping we have turned a corner and that we should be out of the recession by the end of the year. This does not make any sense at all as it appears we are headed for another poor Christmas season with so many unemployed. Since the Consumer represents 70% of the economy, it seems delusional to think that we are going to be out of this mess anytime soon, let alone by year end. I wish it were true but the facts do not support the optimism.

Several other measures give pause regarding the Consumer's ability or willingness to stimulate or drive the economy. First that there are going to be new rules governing Credit Card issuance for younger people of college age. Secondly, this was not that widely reported but Consumer Borrowing plunged $15.7 Billion in April. That is both good and bad news. It is good because maybe people are only paying now for what they can afford and have stopped borrowing beyond their means. On the other hand, maybe they can't borrow because they can't pay the debt back easily. The category in Friday's report that includes credit card debt dropped at an annual rate of 11 percent in April, following an 11.2 percent plunge in March. And a complimentary story I reported earlier in the week, Consumers saving rate jumped to 5.7% in April.

The banks also made news today. From Bloomberg news: Bank of America Corp. and nine U.S. lenders, facing a June 8 deadline to explain their capital- raising plans to regulators, are relying on preferred-stock conversions for 22 percent of their fundraising. Collectively, the 10 banks told by regulators to raise $74.6 billion have announced plans covering $70.6 billion of the gap, with some including Bank of America expecting to “comfortably” beat its target. They’ll get about $15.4 billion from preferred stock conversions, a tactic that improves the gauges of financial health that the government is focusing on without bringing additional cash into the company. “Conversions from preferred to common don’t do anything; you can just ignore them,” said Christopher Whalen, managing director of Institutional Risk Analytics, in an interview this week. “It makes the ratios look better, but it doesn’t increase the capital in the house.”

And another related Bloomberg story about the banks: Analysts who have examined the quarterly profits and government tests say that accounting rule changes and rosy assumptions are making the institutions look healthier than they are.

The government probably wants to win time for the banks, keeping them alive as they struggle to earn their way out of the mess, says economist Joseph Stiglitz of Columbia University in New York. The danger is that weak banks will remain reluctant to lend, hobbling President Barack Obama’s efforts to pull the economy out of recession.

So while we hear things are getting better and that they see more "Green Chutes" there does not seem to be fact based data to support the market hype. Bill Gross, of Pimco, has started to raise the alarm as has Fed Chairman Bernanke in his recent testimony before Congress. I would listen to Bernanke and Gross as they have a front seat to what is happening here. I don't see a "V" shaped recovery but that is what the stock market movement is implying. I see more of an L shaped recovery. If that does prove to be the chart outlook, then we will retest the lows and stay in a tight range for the next 6 months to a year. This a a longer outlook than I have stated here in the past but the good news in this scenario is that we aren't going to go below the lows and are going to eventually recover. I think it is a good thing that many are saving now. It took many a lifetime to learn this lesson. But we have been affected permanently and spending patterns have changed for the foreseeable future. It may bring families closer together as well and learning new ways of being present with loved ones, without the distraction of material things. When i grew up my family would play games at home almost every Friday and Saturday evening. Looking back, those were some of the best times I spent in my youth with my family.

When will you know the economy is getting better? A look at the psychology of the current financial storm.

Most individuals and media outlets have been looking at outside factors to give a signal as to which direction we are headed, in the financial and stock markets. When the fact of the matter is, that the information you need to look at, is right in front of you. You see the changes which have taken place since September, have created a loss of trust and confidence in these markets by most Americans. It started with a stock market drop and then a run on Banks, followed up by the greatest intervention by our government since the Great Depression. This will truly be seen by historians as transformational period in our society.

For the past 40-50 years the messages we get from television advertising and newspapers all were focused to tempt us to shop to buy these great things. There was never any focus or messaging about saving. We were encouraged to borrow to finance our shopping. We were told that 70% of our economy depended on the consumer, even though our tax system was based upon our income, not our consumption.

We embraced the psychology of greed along with the underlying fear that if we weren't in the game, we would lose out on our share of the pie. So we thought we could use "OPM" for everything. What is "OPM?" It stands for "Other People's Money." Many a seminar has been conducted these past 20 years by real estate experts with keynote speakers like Donald Trump and others hyping OPM as the way to become rich. The theory was to put as little, to no, cash down as possible, and borrow the remaining balance from the bank to buy property and then rent them out to have a positive cash flow and use "OPM" to own the property. This was the early hype that caught up so many speculators who wanted to get rich quick. The game worked until the banking industry was also caught up in the idea, overextended itself and ultimately created the Sub-prime mess.

You never saw advertising to encourage consumer saving. Just think about how we define ourselves, "Consumers". That should have been a clue if we paid attention to the use of our language. Occasionally, we would hear that we Americans had one of the lowest savings rates in the world. We did hear that Japan had the highest savings rate in the world and often also heard their economy was "stagnant", that was a "bad" thing and they needed to encourage spending.

We have been heading from the psychology of "abundance" these past 40 years to the psychology of "scarcity" now. Fear has gained the upper hand in our society today. We placed our faith in all banking and insurance institutions. We placed our faith in our government and we thought we had proper oversight and regulations to ensure there was no wrongdoing and we blindly followed as individuals, by trusting people we hardly knew, to manage our money for us. We took little to no responsibility for ourselves and thought everything would be fine as everybody was doing the same thing.

Now we just don't trust anyone anymore. We hear of people like Madoff who used Ponzi schemes to bilk Billions from charitable trusts and philanthropists, who thought they were going to make huge gains by investing with Madoff. When you think about this more deeply one comes to the question as to how did smart people make such stupid mistakes? There is an expression, "If it's too good to be true, it most likely isn't true." But these so called smart people never questioned the reality of the basis of the investments and allowed themselves to be swept up by the gains they saw were possible. Greed ruled the day.

So now fear grips the Nation. We are awaiting the unemployment rate numbers today which most likely will show a 7% unemployment and an acceleration in the unemployed. Many are waiting on the sidelines to catch the "bottom" of the stock market so they can get back in and make a killing on the gain, as a once in a generation opportunity. But what if it doesn't come back for a long time?

Trust has been broken and while some may be waiting for any sign the markets will be turning back up soon, the psychology of our Nation doesn't support this scenario happening any time soon. As I stated in the beginning of this post, "When the fact of the matter is that the information you need to look at, is right in front of you." And what is that information? It is how you are feeling! As long as fear grips you, it most likely is gripping others as well. And no change in the stock market is going to convince you to jump back in until you feel more secure and less afraid. The answer is this. You must start with living within your means all the time going forward. If something seems too good to be true, it probably is too good to be true. Buy only what you can pay for with cash or pay off within a very short period of time, like 30 days. Lend a helping hand to others still trying to recover from the loss of wealth and confidence in themselves and start being more trustworthy to others. It is up to all of us to restore confidence in our fellow citizens. We will need to go from exclusively a Consumption society to a more balanced society, where we consume what we can afford and save a portion of our income regularly. We stop living from paycheck to paycheck. We stop getting caught up in instant gratification. Some things are worth waiting for rather than buying something on impulse. We hopefully wouldn't shop for a spouse that way, as it is too important a decision. Would we?

So we will know things are turning around when we individually are feeling more secure. It takes one person at a time to get there, so you be responsible for getting yourself there first and watch others follow. It starts with you!