If you are long the broad US
stockmarket - Prepare To Get Buried
If you are long the broad US stockmarket - Prepare To Get Buried
By Clive Maund
May 25 2009 10:58AM
www.clivemaund.com
Fundamentally the rally in the broad stockmarket from early in March is
viewed as being the result of a combination of media hype, wishful thinking
and short covering, but there may be more to it than that - it would appear
that a sizeable proportion of the TARP (Troubled Asset Relief Program)
funds not thus far deployed have been used to drive up the stockmarkets in
order to create a positive environment for the banks to issue secondary
shares and thus raise equity. While this is perfectly understandable, it
also means that once the banks have finished selling this stock to the
public, or the market is simply exhausted by being soaked in this way, it
is likely to go into reverse in a big way.
Technically, the rally in the broad stockmarket looks to be over and there
are several important reasons to conclude that this is the case. On the
1-year chart for the S&P500 index we can see that despite the impressive
gains, all the market has managed to do is rally from an extremely oversold
position to approach its falling 200-day moving average, and so there is no
reason thus far to consider that it is anything other than a typical
bearmarket rally, albeit a big one. The rally stalled out a couple of weeks
ago in the important zone of resistance shown and the index has since been
retreating beneath the 200-day moving average, and late last week it
started to break down from the uptrend in force from mid-March, a bearish
development.
On the 6-month chart we can examine recent action in more detail. On this
chart we can see that the breakdown from the uptrend occurred on Thursday,
although thus far the break is not big enough to be conclusive, so we could
yet see a short-term rally back towards the 920 area, especially as the
fast stochastic (not shown) has dropped back to provide the leeway for such
a move. However, the trendline break still has bearish implications that
are definitely amplified by the growing preponderance of downside volume
over the past couple of weeks, as shown by the red volume bars at the
bottom of the chart, which has led to the first significant drop in the
On-balance Volume line since the uptrend started, another negative sign. In
addition a bearish "shooting star" candlestick appeared on Wednesday, when
the market attempted to the challenge the early May highs and failed,
dropping back to close near the day's low. A top area appears to be forming
between the rising 50-day and falling 200-day moving averages, which are
rapidly converging. This top area is bounded by the resistance shown and a
support level which has become evident in the 880 area, breakdown below
which would likely trigger a steep decline.
The abnormal and surreal nature of the recent rally is made starkly clear
by the small charts below, prepared by www.chartoftheday.com. Both of these
charts go way back to the 1930's and the first of them shows the
extraordinary collapse in earnings of the S&P500 companies. The second of
them shows that the resulting overall P/E ratio has risen into the
stratosphere. These charts are most interesting as they demonstrate that
earnings no longer matter to investors - all it takes to make the market go
up these days is hope, TV commentators talking the market up - and a big
dollop of TARP money. This is what is commonly known as a disconnect from
reality. One thing is for sure - you don't want to be around when the
market suddenly realizes that Barack Obama is not going to be able to wave
a magic wand and make everything right, even with the benefit of creating
trillions of dollars out of thin air to bid everything up. All this
manufactured money had better create a recovery soon or the market is
likely to implode. However, recovery is unlikely for, as we know, the banks
are jealously hoarding their government granted largesse, and even if they
made the funds available to the wider world, companies and individuals are
so lamed by debt and fearful that they are in no mood to borrow, no matter
how low the interest rate. So let's put 2 and 2 together - the stockmarket
rallies hugely to discount recovery, but the recovery never materialises.
Well, what a shame - it's an awful long way down from here.
Some market observers have been making comments in the recent past to the
effect that leveraged ETFs are a scam designed to sluice money from retail
investors into the pockets of professionals. While we would concur with
this it shouldn't really be surprising, as to the extent that they are a
scam they are simply following the rich tradition of many Wall St financial
instruments, and compared to sub-prime mortgages, for example, they are a
"mom and pop" operation as many European banks and financial institutions
still smarting from immense losses will attest. This is not to say that you
can't make good money out of them at times - in the same way that an
experienced gambler may enter a casino in Las Vegas with a fair chance of
coming out richer, but knowing that whatever his fortunes, the house will
always win. Right now there are some bear ETFs which have been driven down
almost to zero by the big market rally that look set to do really well if
the market heads south soon as expected, even taking into account the
eroding time value of option elements comprising them and the suspected
tendency of the management of these funds to use them as ATMs.
On www.clivemaund.com we will be looking very soon at the associated effect
on the dollar and the Treasury market of a reversal in the broad market and
also at the likely impact of all this on prices of Precious Metals and oil
and on resource stocks.
We called the big rally in copper back in February before it began, and
called the big rally in oil almost at its inception, and then more recently
for copper to enter a trading range and oil to continue higher, which is
what happened, and finally called the latest rally in gold and silver,
although they were expected to perform better than they have on the recent
dollar weakness. A big issue that we will address soon is whether gold and
silver can break out shortly to new highs or whether they will get caught
up in another downwave of deleveraging.
for billing & subscription questions: clivemaund@gmail.com for all other
inquiries: support@clivemaund.com
The above represents the opinion and analysis of Mr Maund, based on data
available to him, at the time of writing. Mr Maund's opinions are his own,
and are not a recommendation or an offer to buy or sell securities.
Mr Maund is an independent analyst who receives no compensation of any kind
from any groups, individuals or corporations mentioned in his reports. As
trading and investing in any financial markets may involve serious risk of
loss, Mr Maund recommends that you consult with a qualified investment
advisor, one licensed by appropriate regulatory agencies in your legal
jurisdiction and do your own due diligence and research when making any
kind of a transaction with financial ramifications.
Although a qualified and experienced stockmarket analyst, Clive Maund is
not a Registered Securities Advisor. Therefore Mr Maund’s opinions on the
market and stocks can only be construed as a solicitation to buy and sell
securities when they are subject to the prior approval and endorsement of a
Registered Securities Advisor operating in accordance with the appropriate
regulations in your area of jurisdiction.
DISCLAIMER: All of the provided information is believed to be accurate, however errors are possible. The opinions in the Commentary section do not necessarily reflect the opinions of GoldIRAS.com. Past performance of any investment is no guarantee of future performance. All investments have risk.
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