Dr Bubb's argument
WHAT LIES AHEAD?
I am currently short and worried about some adverse events which could lead to a market crash between now and October. I see several important vulnearbilities in the markets that leave me nervous - Mainly, I think we have had excess optimism about the global economy's chances if returning to normal. The reality is, that only ultra-low interest rates and a massive global stimulus program has restored the ILLUSION OF NORMALITY, and that illusion is about to come tumbling down, as the news turns negative and stock prices collapse.
I have been expecting 2010 to be a bad year for some time, and back in 2009 and early 2010, I wrote several articles about Manic Swings
, and the Coming Y-Shaped Depresssion
for Financial Sense. My basic argument was that ultra-low interest rates were robbing savers,a nd forcing them to invest their money somewhere in pursuit of higher returns. The shift of funds into stocks, property, bonds, and precious metals has pushed asset prices to levels that are not justified by a poorly-performing economy.
Once the temporary buying from the "sugar rush" of low-rates and stimulus was done, prices would collapse back towards more normal levels.
Some key indicators that I am using, suggested that an important top was made in May 2010, and the stock market slide is beginning to get serious.SPY / etf for S&P500
The technical & fundamental indicators that most worried me were:
+ The high was made on a key Moving Average (MA), and now those MA's are rolling over
+ The volume in the rise was weak, and it is now heavier in the drop (a technique that Tom Obrien uses)
+ Year-on-year inflation rates are rising in most countries, and so are interest rates in the healhier countries
+ Leading Indicators are negative, and staying negative, and not improving as they were in the July 2009 stock market dip (thnx DD)
+ Some early warning signs like: commodity prices, LQD-to-TLT ratio, China Stocks, and the Baltic Dry Index turned down months ago, and they continue to fall
Despite all these negative indications, if you listen to most financial news, it seems to be afloat on a cloud of optimism, and expectations about earning prospects in the secong half of 2010 and beyoind seem way too high. The "moment realisation" may hit in the second half of July, and drive stocks lower for some time.
Finally, late last week, as we came into options expiry, the market made a Hanging man formation, and that seemed to fit right in, making a perfect fractal comparison with the Oct. 6th, 1987 Hanging Man, and the big drop which followed inb on October 7th, 1987 (see below). I noticed this interesting comparison before the market opened last Friday. The market was still expected to open higher, and the big -2.97% drop in the SPX on Friday
caught many less-historically minded traders by surprise.
October 1987 chart
/source: DrB's Diary, post #173 : http://www.greenener.......0476&st=160
I am not saying the Stocks must fall as far and as fast as in 1987, but I do think that a serious correction lies dead ahead.