Entering the Bye Zone

The markets have spoken.  Time to listen.  Today they crashed through the Mar low, the 2000 high and the Jan intraday low without hesitation today.  They are decisively below the 34 year trendline from the 1974 low and the 2002 low.  The Dow is back to Sep06, when this final leg up until Jul07 began.  Any bounce (and it should come, maybe off Dow11.2-11.3K) will be fast and furious, but short-lived .. buying the dips right now is like catching a falling knife. Housing is still falling off its cliff.  Oil seems destined to spike above $150.  Asian markets have plummetted overnight - Shanghai down 4.5% as this goes to press (~50% off the recent irrationally-exuberant peak). "The worst June since the Great Depression" and similar headlines should be popular tomorrow. 

EWI and Neely both called this one. Paraphrasing Tony Caldero, this is what a C wave feels like.  This is at least a little Big One.  And we are only part way through it. 

Oil spikes can drive recessions.  The US can weather it by hunkering down.  China has to keep the magic going at least through the Olympics, in August.  Think it bad now?  September will be very interesting ...

To stop the impending disaster, the Fed will have to raise rates.  Right now the world financial markets are caught in a huge game of chicken between the Fed, the ECB and the BoJ.  Short term Treasuries have gone up, putting pressure on the Fed to raise. The ECB has put pressure on the Fed to raise. The Fed seems stubbornly prepared to keep rates stable through September (let me guess, is this an election year?), while the ECB may raise again in September, wary of inflation.  September will be very interesting ...

Comments

[cribrange]

Dow Predator? Where are you hiding? You are proving to be quite useful on this blog as the perfect "contre indicateur" as the french put it. All this bashing of Neely and using vulgar language now makes you look just rude and wrong. The last time I spoke I recommended buying Natural Gas at the beginning of February (up 60%) and that the long term configuration of the US markets implied that no surge was possible as we were still in the throes of a giant wave C. So, once again, Dow Predator, where are you?

Cribrange

[BH]

Prechter may have called this one. But he has called about 15 of the last 3 decent selloffs.

[coricidan]

Yelnik - GREAT summary. You pulled it all together in a few short paragraphs. "At least a little Big One..." Stepping back, that's actually a scary thought, considering the implications beyond stocks. Listening to TV anchors, candidates and many TV "guest analysts" you get the idea that they understand neither terms they employ nor the context in which this occurs. And give credit where it's due. I am impressed by the ability of Eliot theory to forecast the depth and intensity of this move. Like a kife through butter the way the averages took out support yesterday. There wasn't even a skirmish at MAJOR support levels. That means the Bulls were hiding. Where is the SIZE money going right now? It' can't be buying oil, can it? Can it go to gold? Or is the smart SIZE money simply being taken off the table? That means someone's gonna have a liquidity problem, no?

[Eventhorizon]

"To stop the impending disaster, the Fed will have to raise rates. "

I just don't see it. We are in the midst of a deflationary credit contraction. The 3 month yield has already dropped 40bp from its recent high. The Fed usually follows 3 month yields with a lag of zero to 100 bp.

I think we are more likely in a pause before further cuts similar to 2002 and 2003 (see my comments on "The Fed Will RAise Rates") where the 3 month spiked down then bounced up, the Fed went on hold for a few months, then the 3 month dropped again and the Fed followed.

If you think you see inflation, you are being fooled by observation biases.

[Holy Moses]

OMG. This is JUST like the Great Depression.

Almost exactly.

Un-employment is at 30% and stocks have lost 70% of their value. Its an exact match.

[TObject]

Holy Moses, he said worst June since the GD, not LIKE theGD!

Yelnick, your "mini-Surge" starts next week :)

The rally from that test will be 7 to 11 trading days and then run down and test the lows again. If that support holds then the index will go into a two month choppy sideways move. If it starts to trend below that support then 1180 could be the next downside objective. I am assuming the end to this current move down for the forecasted 11 day rally will be around July 3rd.
http://www.safehaven.com/article-10604.htm

[min]

BH:

You are not giving the man enough credit. It is probably closer to 150 of the last three. And there is more!

According to J Bob, a retired institutional investor and actual subscriber during the 1987 crash market call , his most famous 1987 call was called on the day it happened so J Bob, as a subscriber, got the news after stocks had already gapped down that morning.

Well whatta ya know….. hmmm….

[Larry C]

Yesterday's action certainly does not solidify Prechter's deflation thesis...quite the contrary. As I type the DJIA is down 450 points over two days and gold is UP $50 in two days. That along with the dollar continuing to make fools of those who thought it was starting a bull market is almost certainly an indication of a developing inflationary depression...not a deflationary depression. Prechter is invested wrong and will lose money for his subscribers again because his overall thesis is wrong.

[Francis Schutte]

What we see now will go into the history books of Technical Analysis as a perfect example of Huge Double Top distribution patterns confirmed by death crosses on the Moving Averages. The next step is to see how far markets will slide and if we shall see Zimbabwean like style stock markets as hyperinflation unfolds. We are entering a very interesting but also scary era that will resemble to the Weimar and Zimbabwe inflationary depression rather than to the 1930 deflationary depression as experienced in the USA.

[yelnick]

LarryC - Prechter has speculated that a hyperinflation spike may precede the deflationary depression that follows from a credit collapse, driven by precisely what has occurred: a huge flood of liquidity to attempt to prolong the credit bubble. In other words, we are not there yet, and this is unfolding unlike the Great Depression; more like the 1893-1896 period.

[TObject]

Interesting commentary on Bloomberg today.
Chrysler is about to file for bankruptcy. If GM and/or Ford to follow
it will trigger US economic collapse. And the reason was given - for each 1 automotive job lost there will be 7 supporting jobs lost as well

[TObject]

Video
http://www.bloomberg.com/avp/avp.htm?N=av&clipSRC=mms://media2.bloomberg.com/cache/v3.bYDpovlQw.asf

[Francis Schutte]

Prechter is right. A deflationary collapse normally follows a hyperinflation cycle once there is a confidence crisis. What we are going to experience has been explained in detail by Ludwig von Mises: "Each time bankers have been operating against the general moral principles, with a fractional reserve ratio, it brings about a credit expansion, unbacked by real savings that leads to an artificial, inflationary economic boom, which finally reverts in a crisis and economic recession in which banks inexorably fail". It is not hard to understand that failing banks = deflation.

The difference between what we are experiencing today, is that in the late 1920's and the 1930's , the creation of money was limited because of Gold. Today this limitation is unexisting. Theoretically, the end result will be worse.

Last but not least, it is regretable to see how some people mock the research made by Prechter. I think he is excellent. But people have little and no patience. They want everything that is forecasted to happen now and here. Financial markets do not work like this. Knowledge, understanding, patience and perseverance are important tools for a good investment.

[Mike Laird]

On June 23, you and Yves were buying into The Surge. On June 26, there is no mention of The Surge. What was this? - a passing fancy? a sweetie to kiss and pass by?

Then there's the statement "To stop the impending disaster, the Fed will have to raise rates." Boy, is that mis-guided. The Fed follows the trend of the 3 month bill. Go put the chart together and look at it, if you need proof. The Fed does not have the assets to be a rate setter in a global debt market. With the 3 month bill rate headed down, the Fed will cut rates. The Fed could even do an out of sequence special announcement that (temporarily) turns the market back up for a while.

Get factual. Get real.

[yelnick]

Mike Laird, what happened was the markets slicing through major support levels as if they were butter. The situation has changed, and hence my views have changed. As to interest rates, I buy the thesis that the Fed follows the market, but it also needs to support the currency, as Volcker did in 1979.

[min]

I think that it is utterly fascinating how some people think that Prechter's little 20+ year faux pas —nothing close to what he says will happen has yet happened although it looks right now like it may; represents good work from the standpoint of "Timely Market Research", which is what he vigorously markets himself as being able to deliver, and the main ingredient his luckless subscribers (except for one I guess) subscribed to in the first place.

His books are well written and make for good possible scenarios to theorize with. On the other hand when those theories permeate his day to day work to the point where he becomes blind to missing out 4 year long uptrends and even complete decade long bull markets, well, I think one would have to admit that is a bit loony.

I think Prechter's work is excellent —at losing you money that is. Unless your original focus was on making sure your children or grandchildren would one day be able to benefit. Even then I don't know
.

[TObject]

Based strictly on millenial pattern The Crash will be in 2029 :)
If we cryogenically freeze Prechter now - he will Survive the crash ;-)

[Rogue Poster]

Francis S - Re Inflation/Hyperinflation: Let's be sure to use the correct terminology. We haven't experienced hyperinflation yet. I wouldn't even call what we are experiencing now serious inflation - it's certainly not as bad as the 1970s. Also, I believe what Prechter said specifically was "A deflationary collapse always follows a massive expansion in credit." This in turn can be followed by hyperinflation (if I got this wrong I'm sure someone here will correct me).

Weimar style hyperinflation is the most probable outcome IMO. It is much easier for a government to inflate its way out of an economic mess than do do the heavy lifting and suffer any real pain. And as you know, we have a Federal Reserve Chairman, Ben Bernanke, who has proven himself to be absolutely spineless; when speaking he sounds as though his voice is going to crack at any second. This coupled with a Congress that has almost no understanding of basic economics and always, ALWAYS, chooses the easy and sleazy way out of any problem, e.g., bailouts, socialization, nationalization, higher taxes, etc.

I do not see any hope for a Volker-style reform. We've become a fat, stupid and lazy nation, and we have elected a government that represents us. Perfectly.