Can a Stock Market Meltdown Happen from Here? 38 comments
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The short answer is "of course it can". No matter how many reasons we come up with for a March 9th bottom and the idea that there is "still plenty of upside from here", reality dictates that there could be an unexpected downside to stocks that could unfold soon... in fact, sooner than we might want to believe.
I've written recently that there are many big economic issues yet to be worked through. Investors don't like negative surprises or high levels of uncertainty. The stock market can climb a "wall of worry" in more economically stable times. But many of us see several versions of "the sword of Damocles" that can't be ignored.
Cicero told the story of the Sword of Damocles in his Tusculan Disputations. The story is based on a legend about the Syracusan tyrant Dionysius II and the fawning Damocles, who called Dionysius the most fortunate person ever.
Dionysius offered him the opportunity to try out his lucky life, and Damocles readily agreed. Amid all the gold and luxuries that Damocles could enjoy, there was a sharp sword hanging from a slender thread (and in imminent danger of dropping) above Damocles' head. Damocles quickly wished to go back to his less fortunate life.
Are you feeling lucky, comfortable and secure right now? Then do nothing and see what happens. Are you seeing some "swords" dangling from slender threads that could drop at any time? Then ask yourself how you can protect what's left of your net worth from the potential consequences.
For many of us it reduces stress and manages uncertainty to make sure we have enough cash for future investing opportunities and to protect at least part of the current value of our investment portfolio. After all, do you and I really know what shoe will drop next (the modern equivalent for the "Sword of Damocles").
That is why we must candidly and honestly admit the downside risks at this moment when it comes to the stock market indices.
We've been moving sideways since April 3rd, and although this week we barely cleared the 8,100 level on the DJIA and closed at almost 870 for the S&P 500 last Friday, the markets are struggling at this point to hold their gains.
I read a European perspective concerning a potential reversal in the US stock markets. Thanks to the BNW Business Newswire we can all be aware of this viewpoint that might be difficult for US investors since we might be too close to "the tree" to see "the forest".
Having correctly anticipated the timing and extent of the March 9th to April 3rd market rally, this is the latest dire warning from Heiko Seibel, a leading German stock market strategist.
"The Director of Research for Munich-based CM-Equity AG now believes that the U.S. benchmark S&P 500 Index will dramatically drop to an ultimate low of around 450 points in late June or in July. The odds favour him being proven right - that is if his talent for correctly anticipating market moves continues.
"Within a few weeks, we will see the stock lows of our lifetimes," he nonchalantly declares.
"Indeed, he was right on the money when he told BNW Business Newswire on March 2nd that the S&P 500 Index was about to reverse a pronounced downward trend. He suggested at the time that it would rally to a high of not much more than 850 points during April before it begins an orderly retreat that soon turns into a panic-stricken rout.
"The S&P 500 closed at 856.56 on April 9th - the culmination of a very impressive five-week gain of 26% over its March 09th low. However, this rebound cannot gloss over the fact that the bellwether index's had lost 58% of its value by the time it ended its slide in early March. And now the S&P 500 is likely destined to trade in an uninspiring sideways pattern for the balance of the month, Seibel suggests.
"Seibel believes that a growing sense of economic optimism shared by many U.S. investors and the Obama Administration, alike, is completely misplaced. He suggests that the rally during March and early April (with the Dow Jones Industrial Average closing at 8,018 points on April 3rd after enjoying the best four-week run since 1933) is merely a false dawn.
"Soon enough investors will be seriously rattled yet again - this time by a devastating after-shock to October's global financial earthquake. One that will see the S&P 500 Index nose-dive up to 40% before it hits rock bottom at around the 450 points level. This bleak scenario contrasts starkly to the S&P's heady high of over 1,550 points in October of 2007.
"A proponent of quantitative analysis, Seibel says this pending nightmarish sell-off will cause plenty of already shell-shocked investors to relinquish their remaining equity holdings. However, investors in gold bullion and gold-backed Exchange Traded Funds (ETFs) will likely be spared the widespread misery, Seibel believes.
"When there is a total loss in confidence in the stock market, then gold will rally. Gold bullion is historically an inverse proxy to the stock market. So, it's only logical that this will happen," he says.
"We should see a culmination of massive price weakness in stocks within weeks, which will cause gold to reverse its current trend to establish new highs beyond $1,000 early in the third quarter of this year - maybe even testing the $1,200 mark," he adds.
"Interestingly, gold equities will not be immune to the market meltdown because investors will engage in "panic selling," to preserve whatever capital they have left, he predicts.
"Meanwhile, the catalyst to the stock market's final capitulation during the coming months will be a combination of the collapse of more landmark U.S. companies, a renewed banking crisis, and other forms of "major economic upheaval," Seibel explains.
However, it is always darkest before dawn. And Seibel reasons that a gradual rebound in equities will finally assert itself during the last quarter of 2009 in anticipation of a spring economic revitalization. One that is already being germinated by massive government-backed infusions of money into the U.S. economy.
"History shows that economic recoveries typically get underway about six to nine months after the markets hit their ultimate lows. So a spring economic recovery appears very probable," he says.
"And gold stocks will lead the way during the market recovery as they're already ridiculously cheap and will get cheaper. But as gold prices begin to push higher, then gold producing companies will become attractive because they will offer investors leveraged exposure to these rising prices," he adds.
When we realize that it is never obvious as to when to sell and when to buy, Herr Seibel's point-of-view stirs in me a reconnection with the lessons we learned in the second half of 2008 and the shocking turn-around in the markets from the end of December 2008 to March 9, 2009.
I've been very happy with the recent resiliency of energy stocks like Chesapeake Energy (CHK), and Devon Energy (DVN), technology stocks like Amazon.com (AMZN), EMC (EMC), Texas Instruments (TXN) and DJIA stocks like American Express (AXP) and Procter & Gamble (PG), I'm not convinced these gains can be sustained or increased.
So if we only partially agree with researchers like Herr Seibel, shouldn't we be formulating a reasonable response? Right now the bias of the media and the marketplace is admittedly positive, but we have all learned how fickle both have been the last 12 months.
I'm not saying it is "all or nothing" but I am saying the warning signals are becoming more prevalent with every passing week. We've paid quite the "tuition" to learn the lessons of this costly credit crisis and financial implosion. Now is the time to put what we have learned to good use. An ounce of prevention might again be worth much more than a "pound of cure".
Disclosure: Long CHK, EMC, TXN Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please remember investments can fall as well as rise. And they will! - Advanced Investor Technologies LLC accepts no responsibility for any loss or damage resulting directly or indirectly from the use of this content
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All I found was that this fruitcake has been a Goldbug for years -- you know the sort that thinks that civilized world is coming to an end and guns and ammunition and a cabin up in the woods with gold buried in the backyard is the safest course of action for all to follow. Or do I really have this down all wrong?
Dear author (or another worldly SeekingAlpha reader), could you please publish the Fruitcake's Munich fund's performance just for the record? If he truly called the financial meltdown AND THEN this recent rally almost precisely plus or minus a few points on the S&P and now an impending immense meltdown then this genius is probably on his way to loads of personal wealth and a fund track record that will put all money managers to shame.
Marc, why are you so pleased with BNW? It's nothing more than a news aggregator powered by Moreover. On their site they have exactly *4* original articles. All of them are pushing precious metals.
More telling... they have *NO* article archive that I could find. So it's impossible to go back and verify how accurate their editorials have been.
Even more damning, if you search for 'Heiko Seibel' you will find the same article as you quoted posted in many places... but never will you find this mythical March 2nd article which supposedly shows him predicting the turnaround & length of the last rally.
So where's the proof that he's been prescient in the past? Smells like a big publicity campaign.
Then everyone will be talking about the macros the uber-bears keep touting:
$50 trillion in Social Security/Medicare Liability
Aggregate debt is 3.5X US GDP
70% of the US Economy is Consumer Spending
Baby Boomers Retiring, new generation is Eco - killing consumption
See Japan, Germany, Scandinavia
Decent Housing and comm'l real estate still needs to drop 30%+
Banks are insolvent whether people want to admit it or not
It's worse than the depression for the US
So I think Stocks are going to way overshoot down to 6X trailing 10 yr earnings< around this 450 level.
Then it will be an epic buying opportunity..because the numbers will really improve for the real companies in Q4 reporting (once the shock is lapped), mid Feb 2010, and the market will double (or more) in the following year.
I suggest that the "major economic upheaval" Seibel talks about will be realization by the populace, that:
1. We've been robbed;
2. Our currency won't be worth the paper it is written on; and
3. This could lead to civil unrest.
That's why Stewart Dougherty's comment has relevance to me, in light of the Seibel quotes. Dougherty quantifies the bail out in terms of America's gold.
My conclusion is that the price of gold will escalate, and this stock rally will be nothing but a faint memory.
Thank you for asking for giving me the opportunity to clarify.
On Apr 20 10:07 PM GrantQ wrote:
> Optionsgirl, your quote does not appear directly relevant to the
> article... could you connect the dots?
optionsgirl, you are confused. if gold becomes more valuable, the gold in fort knox will also be more valuable. no one has been robbed. i don't want to reveal the ending if you haven't seen the movie, but james bond slept with pussy galore and she secretly sent a message to the cia. the guards are just pretending to be knocked out.
furthermore, our money is not printed on paper. it is printed on cloth and will make an excellent wall covering, unlike german hyperinflated money.
(considered a store of value)? Each dollar's worth of debt would have to equal $4980 worth of gold for there to be parity, would it not? The coffers are empty, friend. We have been robbed.
If anything, it will only get worse, because Geitner and company have just gotten started spending.
So far, the demonstrations have been peaceful. That can deteriorate very rapidly. In the meantime, our president seems to have his fingers in everything at once. You'd think he'd concentrate on the big issues. No, he is busy sniffing around Cuba and guaranteeing GM warranties.
On Apr 21 12:46 AM curious cat wrote:
> suncatcher, you don't stop a surgeon until they cut into the bone.
>
>
> optionsgirl, you are confused. if gold becomes more valuable, the
> gold in fort knox will also be more valuable. no one has been robbed.
> i don't want to reveal the ending if you haven't seen the movie,
> but james bond slept with pussy galore and she secretly sent a message
> to the cia. the guards are just pretending to be knocked out.
>
>
> furthermore, our money is not printed on paper. it is printed on
> cloth and will make an excellent wall covering, unlike german hyperinflated
> money.
"Who is John Galt?"
Better?
The Obama administration is printing money faster than they can get the paper to print it on. Run away inflation is right around the corner after you commit $7 trillion dollars.
Total lack of transparency from our government about how much is being spent, what it is being spent on, what the entry and exit strategies are, taking over entire industries with total lack of judgement.........What type of confidence does this leave us with?
Banking is going to get pounded by personal credit card defaults, more residential mortgage defaults, commercial real estate defaults, existing toxic assets, credit default swaps, hanky panky accounting practices to cook the books...and who the heck knows what else is hiding in the bushes that they are not telling us about.
Our consumer economy has quit consuming! Oops, there goes more job losses and the end of many retailers.
The auto industry is about to collapse along with major stress being put on John Deere, Catepillar, and many other heavy industry suppliers. More job losses, bad for the banks.
The insurance industry is on the brink of a meltdown. Lets hope life insurance holders don't make a run on their companies or I'm sure that many states that guarantee the policies will suffer tremendous losses.
California and 7 other states are almost bankrupt. They will have to borrow a few of Obama's printing presses to stay afloat. I'm sure that this won't cause any panic.
Folks, I don't know about U, but I am scared, very scared because Uncle Sam cannot print enough money to save this sinking ship.
Get ready to short this market and lets just wait for a recovery by 2012 if there are any companies left to work for.
But i also predict this market will rally up to 1000 or higher in the s&p before reversing, bringing a new low early next year, or late this year.
Just because i predicted the current bottom to the exact point on the s&p dose not mean im a guru though!
Thought for the day,
"Even a broken clock is correct two times a day."
Following the bounce off Oct 2008, very few analysts would consider that a bottom has already been set. Most, including myself, have concluded that the worse were yet to come. The sell-off into Oct 2008 has so much conviction in it that all momentum charts in weekly and monthly time-frames went into extreme ranges including the VIX. Extreme momentums don't dissipate suddenly, they have to be "worked out" first before a recovery can happen.
Time flies and many predictions following Oct 2008 bounce did happen. Dow Jones went down further to 6,500 and SnP to 666.
After the March 2009 bounce, we have a conundrum, if you will, we really don't know what is going to happen next.
One thing is of higher probability in technical analysis; the monthly charts for Dow Jones, SnP, and Compq are either at or entering the 4th-wave of the C wave that started Oct. 2007.
For those technically inclined, 4th wave is the most confusing part of a C wave. This usually results in a lower low for the final capitulation sell-off we call the 5th-wave. There are too many technical problems to be worked out (much like fundamental problems the American economy is facing). Nothing is for certain at this stage. 4th-wave cannot happen without any sign of hope. Now we do have signs of hope. Nor is it a stage where problems have already been solved. We still have tons of problems to work out. Whether nor not most of them are on the mend with the massive Fed and Treasury bail-outs is a major question that will be answered in time.
Seasoned traders and investors are not going wait until all of them got solved before buying stocks and funds. They call it either the glass is half-full or half-empty.
One thing is for sure despite being a neophyte investor as I am:
This current "crisis of the century" is another "opportunity of a lifetime" similar to the 1929 to 1932 market market meltdown. Investors who bought stocks in 1932 were never given any chance to buy stocks at such unprecedented discount after only 3 years of correction. Likewise, without government assistance, many companies went into wholesale bankcrupcy during and after 1929 to 1932 market meltdown - taking investors with them. Overall, it was a one-time "investment opportunity of the 20th century" for the lucky ones.
Stock markets and the American economy have considerably matured since then. Mistakes, big and small, had been made and more mistakes will be committed in the future. It is a never-ending learning process until mankind no longer exist.
Unlike the 1929 to 1932 stock market correction. We are now in the 9th-year of stock market correction that has started since year 2000. The Tech Meltdown of 2000 to 2002 was the initial correction to the sustained rally of 1980's to year 2000 where Dow Jones went parabolically up from 1,000 to 11,750. Such a bubble rally of 1980-2000 have proven throughout history to be unsustainable in the long run and will have to correct one way or another.
The rally from year 2002 to 2007 was not an impulsive rally or a bubble rally but rather a corrective rally. We call it a bear market rally and as such was not sustainable for a prolonged period of time. This market sell-off of 2007 to 2009 confirmed the rally from 2002 to 2007 was a bear market rally, it was a short-lived rally.
The sell-off from 2007 to 2009 was not confined to a single sector but rather involved the housing, banking and finance, retail, manufacturing, etc. But the experience of 2000 to 2007 is not lost; they provided a buffer in order to prevent a shock correction to the 1980 to 2000 rally. Many companies (outside of housing, banking and finance, and retail) were able to implement conservative corporate policies that should enable them to survive the current crisis. Banks and the housing sectors, who are at the most risk, likewise, got massive government assistance that should enable them to survive in an otherwise dire situtation. The lessons of the Great Depression is not lost to the Fed and the Treasuries. Unlike Bush who left everything to Paulson and Bernanke; Obama is doing a fine job of trying to change public perception of the current crisis in order to prevent the onset of a self-fulfilling prophecy of us digging ourselves further into this mess. What is still lacking is a credible sign of leadership needed in order for us to dig ourselves OUT of this mess.
If Obama gives us the much needed Credible Leadership at this dire hours of American history, it is going to change the stock markets overnight and specially the American psychology over time on global economics not seen since after WWII.
One big missing piece of the puzzle at the current stage of American economics history that was founded on consumerism but is now entering the tailspin of an aging baby boomer population.
Ronald Reagan's SDI was for defence psychology that propelled America into a global military dominance. We need something akin to SDI but on the economics side in order to usher a "new world" for the American economy.
A deeper look into China which is now undergoing a credible economic revival sans US and European consumers and that of the developing countries that are starting to follow China's lead might provide him enough insight into what lays ahead for the future of American capitalism.
This is "World War 2 or 3" as far as the US capitalism is concerned in this rapidly expanding global marketplace of the 21st century. The baby boomer consumerism of the Western World has come and gone. It is going to be replaced by more than 2.5 billions of young baby boomers in China and the developing countries for decades to come.
Either the US companies compete in this global marketplace or be left behind and the United States becoming the next England or Spain of the future.
So far, based on 2000 to 2007 Bush MBA performance; the US decided to look inward by proping up the housing sector rather than energizing the manufacturing and technology sectors that were and still are needed to compete against China, India, and the other developing countries.
Too many competitors for global economic dominance? It's not a simple Gulliver vs. Liliputans. It is a Giant Gulliver vs. Two Mid-sized Gullivers and the Liliputans.
The over-extended rallies of the early 1920's to 1929 suffered a punitive correction.
Comparing this current 2000 to 2009 market correction to that of 1929 to 1932 is not correct. Time correction usually prevents punitive sell-off such as the 91% meltdown of Dow Jones in 1929/32 that led to the Great Depression. Thus, the call for wholesale punitive bankcrupcy proceedings for troubled companies are unwarranted at this time.
Dow Jones has gone down 54.23% from Oct 2007 to March 2009. I don't expect it to go much more than 62.8%. Baseline - Dow Jones 5,293 bottom if and when it does happen.
Now that we have finally reached the potential end-game to this 9 years of corrective process. It is hightime to invest in the "investment opportunity of the 21st century".
The bigger problem at this stage is not whether the markets are still going to make the much anticipated capitulation sell-off or not.
It is whether we will be able to invest at the most opportune time and at the right price and which companies are going to go bankcrupt and which surviving companies will provide the most bang for the buck.
This massively confusing conumdrum makes such a task so daunting that many of us will not be able to accomplish our objectives. Many of us may even end up not being able to invest or only be able to invest at much higher prices than we wish to pay in case the expected capitulation sell-off never happens but in fact may already have happened as of Jan to March 2009 sell-off.
Dow Jones gave 40% discount during the 2000 to 2002 sell-off. 54.23% discount is not bad at all this time around just in case we don't get additional discounts.
I'd say BUY the DIPs if they happen.
Buy the breakouts if unable to buy the dips.
Whether we go down to SnP 450 or not, the upside risks of a rally to 1553 and beyond far outweights further sell-offs.
Daily momentum was already able to achieve extreme reading to the upside and is now being "worked off". While that of the weekly has just been able to achieve reasonable extreme momentum to the upside for both DJ, SnP, and Compq. They will have to be "worked out" as needed.
Problem is the monthly momentum which is still trying to work itself out of extreme level to the downside. A small double bottom for the momentum indicators using either a fast MACD or the normal RSI will become a major catalyst for a sustained rally on the monthly chart. It is the shortest path to ending this conundrum in no time. A huge divergence buy signal on the monthly chart will result in a capitulation sell-off called the 5th-wave. Huge divergence needs considerable time to work itself out. It remains to be seen which one is going to happen. A third scenario with much lesser probability is that price simply goes up un-abated thus momentum indicators not providing double bottom nor divergence buy signals to technical traders.
SnP is a double top on the monthly, quarterly, and yearly charts.
They say there is no such thing as a double top. True, since almost all of them end up going higher.
Dow Jones is an expanding flat on the monthly and quarterly charts. Expanding flats have one major characteristic - the ensuing rallies are usually fast and furious that tend to rival that of the last sell-off or the C-wave of an A-B-C consolidation as we call it. Trying to chase the rally with pullbacks will prove futile to many traders and investors who are used to significant pullbacks to the ensuing rallies after a massive sell-off has completed.
Also, people whose jobs are safe should welcome a decline in stocks. Your 401K will do far, far better in a few decades if there is a market meltdown.
Where's the evidence they've been as correct as they claim?