That Sinking Feeling: Stocks on Edge of Cliff

The drop today increases the potential for a deep drop tomorrow. We are right on the edge of running below the Feb5 low and confirming the next big drop. The primary two trajectories are the Leading Diagonal discussed in the prior post and picked up by Daneric and other sites, and the Big One down now elevated to very likely by tonight's STU. 

While we saw less downward pressure today than Friday, this does not so much support the fading bullish case as suggest Mother Market has a little surprise in store: we may set up a third nested 1-2 before the coiled string of the Big One unfolds. The first 1-2 is the Flash Crash and Flash Bounce. The second 1-2 is the inside Flash Retest and smaller bounce. The third 1-2 could come from the wave structure in the following chart (courtesy Wave Principle): we are finishing a small degree wave (i) down, and seem to be in the fifth and final wave of it. This sets up a little wave 2 bounce either right away tomorrow or after a little more downside (eg. to Sp1047). If that bounce comes, it might get back to the Sp1071 level before the Big One. 

Comments

[Steven_737]

Hello Duncan;

Have you established (or read about) any pattern or bellwether so as to expect that a wave 3 will expand?

cheers :)

[JT]

A leading diagonal would obviously require a new low under 1040 and not allow for truncation. We shouldn't have to wait too long to find out, that's for sure!

Interestingly enough, FCX has now broken down and retraced 68% of the rally since the July 2009 lows.

[yelnick]

JT, yes, if this is an LD, it should break into a larger set of 5 waves than we see so far (ie this looks like wave 1 of 5 so far), and we would crush below 1040. But we would have a wave 2 bounce and then a later wave 4 jitter first.

[joe pacheco]

I am not that afraid of now - I am getting scared to death what may happen at end Q3 - begining Q4.

Frankly, your "end of the hope rally thesis" - is looking about right to me Yelnik.

Joe

[joe pacheco]

You were wrong about FDR though - you know.

You judge things based on hindsight - it is a mistake.

The United States came through all that - largely because of him - not just the depression. He got us ready for a war that by any logical measure - we should have lost.

He did that - and you micromanage his judgement - it is not right.

Joe

[yelnick]

Joe, we will have to disagree on FDR's economics. I give him great credit for the war, and fighting to unconditional surrender. Who has done that since?

On his economics, however, we are getting the chance to replay history and see if all the Keynesian prescriptions really changed things back then or simply prolonged the agony. Hoover ramped spending to 5% deficits and FDR essentially continued that pace of fiscal stimulus. We had 10 years of that level until the war and we were still mired in a depression. This time around we have run up to 12% deficits, and Keynesians are calling for more! more!

We will see if we indeed are in a slow recovery, or an unsustainable blip due to government life support that will soon roll over. If we roll over, the Keynesians might complain that we should be doing more! more! but the rollover down would refute their economics. We may know by Q4.

The Keynesian argument iwil then be, how much worse might it be if we hadn't tried? Well, if 12% doesn't work and we fall back, we now have an answer to that. We spent over $2T to gain very little GDP benefit or protection against a deeper fall, are on a course to elevate that to eventually $10T, and have to pay it back. If the $10T does not buy a recovery, how do we do that?

This takes nothing away from FDR's leadership, since he had to improvise in dire times with little guidance. The great Austrian works from Mises were not translated into English until well into the GD, and the most respected US economist was on his back heels until he figured out the debt-deflatin explanation. Even Keynes as we have commented back and forth did not sit well with FDR, albeit his advisors seemed to take to Keynesian solutions.

As with many things, what was experimental and innovative back then has turned into orthodoxy and gospel today.

[joe pacheco]

Understand - the efforts were one. Do I think FDR would go blindly with Keyes - no I don't.

But two goals presented at the same time - and he made his best judgement.

I think of revisionist historians - ecconomic or otherwise - as lowly as I do of used car salesmen.

Yelnik - what makes you think this will not turn out the same way??

I think this goes very badin a few months - and we get to make similar choices as presented in the late 30's - it is a cycle.

And we do not have an FDR at the helm now.

I think we are screwed.

Joe

[joe pacheco]

And so you know - I think you made cogent arguments - thoughtful.

Actually I think highly of you.

Joe

We are screwed though.

[DG]

We will see if we indeed are in a slow recovery, or an unsustainable blip due to government life support that will soon roll over. If we roll over, the Keynesians might complain that we should be doing more! more! but the rollover down would refute their economics.

Yes, they remind one of the Communists in this respect. Let's take something that has never worked on anything but a small scale (I do think that the government can make small investments in things the market won't fund because the payoffs are too uncertain and far into the future) and force the whole world to participate. It's absurd.

[yelnick]

Joe, we agree on this: Obama is no FDR. His approval is cratering and his actions seem academic, cautious and at times incoherent (health reform, financial reform). Just compare the huge reforms of FDR (33 act, 34 act, glass-steagall) with the joke of financial reform. FDR was a giant compared with our recent string of gnats (clinton, bush, obama). 

I think that the Austrian view will gain credence. Mises said that one can postpone the day of reckoning of excess credit, but not avoid it, and the attempts to kick the can down the road just make the eventual problem worse. So I expect a pretty serious fall soon. 

On the other hand I doubt it gets as bad as the GD. We might have a sharp and deep GDP drop in the double dip, but we seem to be avoiding the abject meddling in wages/prices that so prolonged the GD. Something of sensible economics has stuck since Reagan. 

What saddens me is how corrupt and craven our Congress has become. If I could, I would urge the future Congress to launch a series of Repeal Acts and simply rid us of tortuous and problematic legislation, such as:
CRA of 1977 and its amendments that led to subprime loansThe various acts that created and funded Fannie/Freddie and the rest of the GSEsThe act that repealed Glass SteagallThe act that excluded derivatives from oversightPatriot ActNo Child Left BehindObamaCareFinancial Reform (if it passes)Farm subsidies which go back to FDR

[joe pacheco]

I know we agree on the deeper level - and it scares me.

Look back just what happens within six years of a financial event - over the last 400 years.

He isn't an FDR - and we had to have an FDR to get through this. We are screwed alright.

Joe

[joe pacheco]

You get the same drop dead date I do - right??

End Q3.

You do don't you?

Joe

You don't have to answer, you know. I will think no less of you - you make good arguments.

[joe pacheco]

"Yes, they remind one of the Communists in this respect."

Is that right??

And you know just what about that??

Joe

[joe pacheco]

I would say this - my dad was in the 315th sqaudron of the 324tgh group. My mom was in the 81st hospital tains I am tht only one of my brothers to not go the the Viet Nam war - I am it.

And we have similar business school credentials Yelnik - but I am really good at war. It is genetic. And I even got to watch my little kid get sucked into this last one.

Hell, I have most of my masters degree in military history too -

Hell - I even got a book published about war.

Joe

[DG]

Is that right??

And you know just what about that??

How am I wrong, joe? In what way don't the Keynesians try to make the argument that only if their plans were bigger, they'd work, just like if only Communism was implemented globally, it would work?

[joe pacheco]

I am so impressed.

Tell me - what did you do to stop those "communists"

Isn't that the pertinent question?

Joe

[DG]

joe,

I'm not going to give you a platform to talk about your family's history. I'm just not that interested.

[joe pacheco]

I probably should not have responded to that way.

But tell me this - what do you think a wave really is - but some "hitorical response" to circumstance??

That is what it is alright - And we are in unchartered circumstance.

Joe

[Pup]

Joey;

It's time for you to go back into your trench and play some more make believe war games.

Run along now...

[joe pacheco]

Sure.

What is funny to me - is that I can go thru all those war gamess and get all those degrees - just to liten to you tell me to "'make belive in (sic) more war games"

Are you an idiot??

Joe

[joe pacheco]

You know - I;ll just "run along"

There was no need to call you an idiot - other people will come to their own conclusions.

So I apologize for that.

Joe

[Pup]

That's ok Joey.

People have already come to their own conclusions.

That's why Yelnick already started another thread and left you here being the big Frog in the little pond

[joe pacheco]

Sure - whatever you want to believe.

Joe

[Pup]

And with that, Joey went back into his trench sand box and played war games happily ever after

[joe pacheco]

Shove it -

The difference between you and I - is that I know how to shove it - in a Clausewitz kind of way.

[Joey's Mom]

Joey;

There will be no desert for a week for that outburst.

Now go back in your sandbox and play nice with your plastic soldiers and imaginary monsters.

[Joe's loser friend]

Joe;

I'm glad you didn't talk back to your mom. She could've kicked you out of her basement Santa Clausewitz!

Where would we setup mock battles and store all the war toys?

Be careful man, just keep a low profile for a while.