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All year long, as I have guided my subscribers into the intermediate-term rallies and then the subsequent corrections, I said that the rallies would be worth going after but should be sold into as they failed, and downside positions should be taken, as our work called for "the market's low for the year to take place in the Oct/Nov timeframe".

But this far down? No, I did not expect this. Our downside target for the Oct/Nov low was the lower limit of the Dow's bear market trading band, which was around 10,250. That would have been a serious decline of 23% for the year, and a 28% decline from the bull market peak last October.

This is being written mid-day on Friday. The Dow closed yesterday at 8,579, down 35% for the year so far, down 39.4% from the bull market peak a year ago. The Dow is at more than a five-year low, and has given back almost all of its gains of the 2002-2007 bull market. So much for buy and hold investing – again! So much for Wall Street’s claim that the market can’t be timed - again!

As some guy on TV joked this morning, the market has now been down 7 days in a row, the Dow losing 21% in the process, and 12 more days like yesterday’s 678 point decline would have it at zero.

That's not going to happen. But this is certainly serious. I described it the other day on my free blog as a slow-motion crash. The charts don't look so slow-motion now.

The only good news is that I have been saying all year that I expected the low for the year in the Oct/Nov timeframe, and then for a new buy signal and a substantial rally in the final months of the year – although not enough rally to get the market into positive territory for the year.

With the Dow now down 35% for the year, it would take a 55% rally to get it back to even. That leaves a lot of room for a very substantial rally, which would still fall within my parameters of not getting the market back to a positive close for the year. So we shall see.

Meanwhile, surrounding conditions could not look worse.

The serious problems of financial firm failures and required bailouts that were shocking investors every couple of months earlier in the year, began hitting every couple of weeks, and now seem to hit every couple of days. They have spread rapidly around the globe, with virtually all countries now trying to deal with similar bank failures and stock market collapses with massive government interventions.

A year and a half ago much smaller bailout efforts were sending stock markets soaring into intermediate-term rallies each time they were announced.

However, as each effort failed, and was followed by ever worsening conditions, requiring ever larger and more costly responses, hope that any efforts will help seems to have disappeared, and markets have spiraled down at a more rapid pace.

But this too will end.

Keep in mind that the market does not move now based on what is happening now. The market always looks ahead and moves now based on what it anticipates conditions will be six to nine months ahead.

For instance, it topped out into this bear market 12 months ago, when in looking ahead, it anticipated the conditions we are currently seeing.

So the question now is, even though we are probably in a recession that will get worse, at what point will the market anticipate the probability of the economy bottoming six to nine months ahead, and beginning to improve, at least temporarily? When it can make that assessment, even as current conditions worsen, is when the stock market will begin to rally in a sustainable way.

Thus do markets top out before recessions arrive, and begin to rally before recessions end. Thus do markets bottom and begin to rally when surrounding conditions are terrible and the consensus opinion has become that they cannot improve, can only get worse.

We, nor no one else, can give you the answer to that question 'when?' quite yet. Even those supposedly in charge, the Fed, the Treasury Department, Congress, don't know at this point how it will shake out short-term.

They keep bailing but the boat keeps taking on water faster than they can bail.

We will simply continue to follow our indicators, which have been taking pretty good care of us for many years. At some point, and I suspect soon, this will end.

Meanwhile, this is the week before this month's options expirations week, and the week before tends to be negative, and this week certainly has been. The potential upside of that is that next week is the options expirations week, and they tend to be positive.

So we shall see.

Source: This Too Will End