I have been waiting for yesterday's action since July 1. Let’s face it, “you don’t need a weatherman to know which way the wind blows.” The market has run up so far and so fast that these last few days were long overdue and I said so in July. I didn’t advise readers to take cash and hide it under their mattresses, but I did advise that they lithely move in and out of positions in an effort to make a few dollars and build up their cash position for the inevitable sell off. In Thursday’s post, I conceded that I was wrong that the S&P would hit 30 as I had steadfastly predicted and told everyone to look to buy slowly into the market as it had breached the 200-day moving average on the Dow and on the S&P.
Well I was wrong. I was a day early. Yesterday the market sold off with a vengeance. The Dow closed down 512 points or 609 points under the 200-day moving average at 11383. The S&P sold off 60 points or 86 points under the 200-day moving average at 1200. The S&P VIX, which had baffled me for a month, finally acted as scripted, closing at 31.63 and sold the market sold off with a vengeance. So this now begs the question: Where do we go from here?
Let’s begin with the premise that most investors believed that Congress would extend the debt ceiling at the 11th hour and everything would be just fine. What I believe that most investors missed is that everything is not fine. We are pressing the envelope and the patient is in intensive care. The fact is that I have been encouraging readers to move to the safe havens of gold and silver because Uncle Sam is dead broke.
Forecasting the market by gut instinct is sheer folly because its great drawback is that we are all human and therefore we are susceptible to human frailties. The real money doesn’t want opinion or clairvoyance, but cold, hard facts. There are specific criteria or prices that must be met. Using the Dow as an example, 12686 was the monthly closing resistance. Until that is broken and held, there can be no breakout possible to the upside. In the opposite direction, support lies at 11006. A monthly closing below that level focuses our attention on 10810 and a closing below that level warns of a retest of the 2009 6440 low.
Panic is filling the financial streets. There are institutions so frightened that they are actually depositing cash in the Bank of New York Mellon (BK). So much cash has been deposited that the bank sent out a press release yesterday that it would charge a fee for large deposits of cash, fearing that interest rates could go negative. Amazingly, traders are trading on their concept of how things should move. They are buying bonds and moving to cash while they sell equities, yet buying government debt is the epicenter of all of the problems. Sadly this is normal. In times of fear and panic, human beings will act in all-too-human a fashion. From 1932 until 1937, the Dow more than doubled as did unemployment. The markets taught us that it was government, not corporations, that were at risk.
For now, August and September look to be very volatile months. The big turning point appears to be next December and January. The trend should begin to change at that time. For now we are confronted by “Black Swans” on so many fronts. If there is anything good about a stock market correction, it is that it gets those in Congress to pay attention. Certainly it is not because they care about the people. Rather, it is because when they see their own portfolios start dropping, they start asking about QE3. Until that happens, they couldn’t care less.
For now, it is correction time. It is not the end of the world. Indeed, we may look back on this as an opportunity to pick up some names at great valuations. Do not to wade into the water too deeply, because while this is the beginning of the correction I have been writing about, it is just the beginning. There may well be more 500-point drops ahead, so if one's buying is disciplined and carefully planned, I see this as an opportunity. In years to come, we or our children will see the Dow hit 50,000, but that comes with the caveat of continued debasement of currencies. So as I have written and will continue to write, I see gold and silver as the safe ports in this storm. With the correction now in full-blown mode, I also see a great opportunity to short this market in select areas. As I have written, corrections like this should not be feared but rather embraced. Be very patient and judicious in your buys because we could go lower. Today I plan on watching the parade march by and if there is another 500 point selloff on the Dow, I will pick my spots and buy at the end.