Monday, October 6, 2008

Are we there yet?

While I don't mean to discourage those hopeless optimists out there, it is important to look at where we are and where we're headed in the "bigger picture." We don't want to get swung around in circles by the latest Cramer rant or by the hopelessly clueless Ben Stein.

Long-term cycles do exist and the reason they continue to exist is because people haven't changed all that much when it comes to fear and greed. Every other generation has to re-learn the same old mistakes. You know the old quote about the history thing and being doomed to repeat it? While every cycle is a little different, the waves of prosperity, excess, and subsequent "cleansing" of the excesses built into the system during the "good" times continue to help us map out the macro-environment. The Dow-to-Gold ratio (see prior post on this topic for chart) is an easy way to play/see this cycle and allows you to ignore the question of inflation versus deflation.

But most of us like to watch and play in the general markets and would be bored to death hoarding a barbarous relic for 20 years. So, where are we in this wicked bear market and where are we going? To the charts, to the charts, I say. First, a long-term chart of bull and bear market periods in the Dow Jones over the past 100 years or so (Note: another cyberspace chart theft and I can't remember where I stole it from).

If we want to be optimists, we would say the secular bear began in 2000 and will end in 15 years (instead of 20). Thinking it will be shorter means you are thinking wrong. Thinking Bernanke will try to save your 401k means you are wrong, naive, and probably high. Next up, an INFLATION-ADJUSTED chart of the Dow over 200 years (from Stephen Williams).

This was last updated in 2003 and I can assure you that we have been heading down from the peak of the top channel line drawn on the chart since. Note that this chart exposes the ravages of inflation when comparing the 1966 to 1982 periods between these two charts. In other words, the only difference between the 1930s and 1970s in terms of REAL, inflation-adjusted returns is... ummmm..... not much.

Now for more recent events:

All major trend lines have not just been broken, they've been shattered. We shan't regain these trend lines again anytime soon. Minor support at 1000 and major support at 800 when looking at this chart from a longer-term perspective. Anyone hoping for a resumption of the bull market in general equities is related to Cramer and missing out on big opportunities to profit (and remember that stepping aside and moving to cash is actually VERY profitable in deflationary times because cash is king). Stay with the major, undisputable trend. The trend is your friend and it be down, yo...

I believe the S&P 500 will re-test (i.e. last seen in 2002-3) the 800 level within the next 1-2 years and it may come quicker than most of us can fathom. Are you prepared? From a more intermediate term basis, this leg down should be over by the end of the month. Notice the deeply oversold RSI indicator on the weekly chart. I don't think we're done with this leg quite yet, but 1-3 more weeks should do it. I got rid of my $SPX puts today at around the 1040 level, but may buy some back if we have a decent bounce for the next day or two. Could have just as easily held for another week or two, but the whole "pigs get slaughtered" theme kept popping into my mind this morning.

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