to wash this medicine down. Everywhere I look tonight, there is more talk about the Fed, and what they are going to do.
Stupidity. Insanity. Ignorance.
The Fed is not trying to prop up the markets. As Ducati has been saying, the Fed is trying to save the banks. I have been beating what I feel is a dead horse for months now, but there is only one direction for the markets, and that is down. Do not fool yourself into thinking the Fed is going to stop the markets from taking their medicine. That is not their goal. The Fed’s first and foremost priority is to keep the entire banking industry from imploding. The market’s chips are going to fall where they may.
 
If you think, for a second, that the Fed is going to be able to go POOF, with their magic wand, and make all this go away, then I implore you to look at the chart above. This chart shows a major breakdown. While I have 120 as my near-term target, the magnitude of this breakdown could certainly take the SPY much lower than 120. As much as I do not want to develop any sort of perma-bear tendencies, and as much as I do not want to miss the bottom as I become mired in doom and gloom, this chart is no where near showing a bottom. Even worse, it looks to me like the move may just be beginning.
Take a cup, and begin to pour the water out of it. Just as the water starts to pour over the edge, jerk the cup upright to keep the water from spilling. What happens?
While very little water may spill, the violent turmoil created when the cup is turned upright takes time to dissipate. Now look at the chart above. It is spilling over the edge. Any act by the government to keep it from spilling over is going to create turmoil. I do not think they can keep the water from spilling. I know for sure that the longs, as smart as they think they are for buying here, will not survive the turmoil, should more magic tricks be employed to slow down the fall. They will get washed out long before stability returns.
I have written before that the only way to be profitable here is to get short, and then sit. We are witnessing a spectacular trend. I’m amazed at the amount of traders who still want to fight it.
The Non Farm Payroll report may be mediocre, ugly, or better than I expect. No doubt, the cheap greenback is helping with our exports and manufacturing. For this reason, I still have a large cash position. I do not want to get caught 100% short with a good jobs number tomorrow. I think the report is going to cause the remaining bulls to slit their throats. If I’m right, then I will deploy more cash into inverse ETFs. As noted above, I’m looking for another leg down to the targets shown on the charts. Once my targets are hit, I expect more bottom calling, posturing by various agencies, new bailouts, new blowups, etc. and more trading sideways. We will evaluate our next move when we get to down to some more round numbers.
The market must take its medicine. This prolonging of the inevitable is just wrecking the free market ideals on which this country is built.
Take a look at my analysis of the prospect for an additional 10% or so downside over the next 40-60 days based on a statistical analysis of similar market action over past 44 years at http://www.stockchartist.blogspot.com
The Fed explicitly tries to prop up equity markets, via inter meeting cuts. Do not fool yourself or listen to old hacks who call bottoms on the banks, right before they go down another 10%.
The negative wealth effect of dropping equities is something Bernanke often talks about.
However, considering the weak dollar, there is little he can do.
The cynic in me feels the bears have been running commodity prices up, in order to box in the Fed.
I’m not calling a bottom in banks. I agree with Ducati though, the cuts are for the Banks. The inter meeting cuts are to respond to equities, only insomuch that tanking equities, due to the ultra-leverage throughout the system, threaten the existence of the banks.
The “negative wealth effect” talk is just lipservice to the fucking idiots in Congress. Most of joey bag-o-donuts does not have enough money in the markets to feel the negative wealth effect. Evidence WMTs numbers today. Joey bag o donuts has no clue that he’s poorer, due to the market dropping.
Bernanke is no fool. I feel certain that he went home and punched himself in the face when he realized he cut .75 because of some Frenchie.
Interesting theory, re: commodity prices. I entertained that one myself, a few weeks ago.
Payback is a bitch though when Bernanke puts the inverse thruster pedal to the “metal” … but of course by then the bigs will have off loaded to Mr Retail Customer ….
The truth shall prevail…the markets are taking multiple pork swords up the rear. Write it down and read it thrice.
Once again, excellent commentary Woodshedder.
Great post Shed.
You’ve been oh so right Shed, great analysis. After Friday’s performance and weak buying near the close to save the day, I think we go down further Monday and it could be a very tough week next week. What say you?
Thanks folks.
Boca, I’m not sure, honestly.
I did not cover any shorts, in fact I added Friday. However, I’m very nervous. I’m more short now than ever so far in this correction. I may have waited to long to get this short. We’ll see…
By the way, I have sold off every long, including CPHD. I managed to offload it during that short bounce.
To me, more downside seems so sure, that I’m wondering if it isn’t TOO certain, which means there will be those setting out to squeeze me.