Ok so the market is dropping, and as per my earlier comments you should wait until the Dow hits 11,750 before thinking of stepping in. I am changing my opinion. Yes I think the Dow will drop, but I think there is something more going on here.

Look at the following chart of the S&P.

Look at Oct 1980. Look at how the market went up, then down, hit the 125 moving average and bounced back again, and then to bounce down again. Right now I feel we are in Jan 1981. Look at where the stock market goes from then on, and notice only only after July 1982 does the market bounce up again.

I am not saying that the market will do as it did in 1981 because that is not how the market works. Though I think a similar behavior is happening.

  • Analysts and brokers have been in denial that anything in the economy has changed. So they keep saying, “buy, buy, bull, bull.” There are even folks saying shift into “defensive” stocks. What’s a defensive stock? In my opinion treasury! Why gamble when you can be sure.
  • There is a discrepancy between what the blogger’s are saying and what “professional” analysts are saying. I am not saying blogger’s are more accurate, but blogger’s tend to see day to day behavior, whereas “professional” analysts, IMO, tend to focus more on abstract statistics and past historical behavior.
  • People are broke! People are trying to consolidate their finances. This is a good thing!
  • Oil will go higher, I am not saying 100USD. But even with 65 USD oil will strain the pocket books of people when they are struggling.
  • Inflation will remain a problem and thus cause the Feds of the world to not lower their interest rates.
  • There is a multiplier effect happening. I think “professional” analysts are missing this. Let’s say that you are a family and due to one thing or another your pocket book is now being strained. If the grocery store were to increase the price of milk by say 10 cents, which is not much, the multiplier would be about 50 cents. Let me illustrated what I mean by multiplier. Let’s say that the family before being strained were 100 USD in the positive. With the family being strained they are now only 10 USD in the positive. In percentage terms a 10cent increase in the price of milk has a much stronger impact when you are only 10 USD in the positive than when you are 100 USD in the positive. This is why even though there might not be that much inflation, I feel it is inflation that could potentially break the camels back.

NOTE: If you have not gotten out of the market then I do not suggest that you step out now. As much as I would like to say buy or sell we are in a traders market and thus the timing to any buy or sell action is the responsibility of the individual.

Thinking that the pattern might be possible how would I play this?

  • We are in a traders market and thus if you want to make some money begin day trading. I am sure you will profit handsomely from it.
  • If you look at the chart the year to come goes down thus the portfolio value will go down. Historical events do not dictate future events, though you can estimate a probability of where the market will go. Right now my indicators say down to slightly above break-even.
  • For the money you have sitting around buy into fixed income products. Even if the market breaks-even you missing the roller-coaster while making interest.
  • The current pullback is a technical pullback based on the assumption of some future economic problem, and as such people are predicting we will hit x and everything will be pretty again. Focus on the next earnings. Right now companies are reporting relatively good quarters, but the stock market down turn happened in this quarter. We need to see consumer behavior for this quarter. Thus any market action that happens right now is based on traders buying and selling on some thing they think is the benefit or problem not actual data.
  • I don’t see any support or resistance levels! Everything is on the table. We could go sky high, but we also could drop like a rock. We will know what the support and resistance levels were once we reach the end of the year.

I am not trying to create panic or be the ultimate bear. If you look at the chart about 2 years later the market rebounds with a vengeance, so those folks sitting with equity can relax. I just happen to be a trader/investor and this is how I see things for good or bad.