Dazed and Confused? Let’s Look at the Long Term Trend

What has been happening to the Economy as of late?

The past two weeks have accelerated the understanding of the US recession in the minds of Americans and general consumers, based on the bombardment in the news, local and national, of the “bailout plan.” It is a little disturbing that many people did not realize the importance of the financial issues casting a dark shadow on the entire US economy until the bailout plan was sent out all over news broadcasting networks.

This makes it clear that the markets are not properly responding to economic news, as it was seen last week when the 6th largest bank in the US, WaMu, failed over night and the DJIA was up nearly 150 points the next day; however, the failure to pass the bailout plan sent the market down 777 points last Monday.

This is the reality of the US market today.

It is more surprising that people did not foresee the market going down than it was surprising that the market went down 777 points. I expect to see more of these days through this year. Though, the market did create an almost 500 point bounce back the next day. Rally or largest dead cat bounce ever? Perhaps the latter.

It is true that the market will be affected again by whether or not the “bailout plan #2” passes, but it is clear that the ultimate result will be the same for the market. If the plan fails to pass through Congress, the market will fall and continue to do so. If the plan passes, the market will rally briefly on news alone, then resume to normal service after a few weeks (and a few more jobs reports). I will concede, however, that this is extremely important legislation because of the liquidity and flexibility it opens for the market in order for consumer confidence and economic growth to rise.

However, this legislation will only temporarily stop the markets from freezing. Parts of our market are on the timetable for destruction and this economic bailout is meant to be our almighty vanguard in the coming weeks, but much more help will be needed to stave off economic collapse. I believe this policy is only meant to act as a cushion for our economy’s long-term downward trend, a small speed bump on the path to what could be a very deep recession.

This doesn’t even take into account the fact that we are now a “global” economy and these market seizures have already been felt around the world in countries such as Singapore, Russia, the U.K., etc. With such a mass of bad credit leaking into the global markets, a much broader economic seizure is quite a possible result.

Let’s get a chartist’s view:

click to enlarge

This is a representation of the DJIA over 10 years using monthly time frames. We are currently sitting on some nice support at that 11,000 level, after breaking through the 50-day moving average only very recently. However, the heavy selling we’ve seen over the past few months leads me to believe that it is not a question of whether we’ll break support here, but a question of when. Many investors claimed that -777 point day to be just terrifying. My view: I am more afraid of the market’s next moves to the downside– that’s plural.

Now let’s take a look at the S&P:

This is a representation of the S&P over 10 year using monthly time frames. We are currently sitting at support at that 1150 area on the S&P. We’ve had a clean break through the 50-day on heavy selling volume and now that 200-day looks to be within reach. Note that double toping formation on the S&P as well. And who said technical analysis isn’t useful?

Now let’s look at the Homebuilder Index:

This graph above illustrates the XHB since its inception. Resistance has been at this $23 level for some time now. Those who have traded the XHB from this level over the past few months would have done very well, as this area has been tested three times this year. I would look for that level to hold into the next few weeks, considering our current economic situation/recession.

The -777 point day seems to only be the start to bad days. The market faces a downward trend as the markets unravel or “deleverage” and there may not be a way around this steep cliff that we’ll most likely encounter sooner rather than later.

Disclosure: No positions