August 4, 2011

I see I haven't posted since March. Just got too busy, plus I was feeling a bit stupid. I was predicting a crash because of the numbers I look at, but it just wasn't happening. But, unfortunately, I think the crash has begun.

You may recall if you've read my earlier posts that I am mainly relying on two sets of numbers. The S&P 500 does an amazing job of showing why things are happening short term, and the Nasdaq 100 does an amazing job of showing why things are happening longer term. Short term, it's almost a daily thing that if there is more money on the positive side versus money on the negative side in the S&P 500 funds I watch, we go down, and vice versa.

More important is the longer term numbers. I started watching these numbers over a decade ago, figuring these people that trade both sides probably know what they're doing. Actually, I found just the opposite. Longer term, we could move up in a nice bull market if the numbers stayed less than 2.0 money on the positive side versus the negative side. If we got above 2.0, we would generally reach some sort of high, and then the markets would correct until that number would get down near zero or go negative, meaning more money on the negative side than on the positive side. When I say negative and positive, these are funds where you can play either direction. You can have your money in the positive funds, where you make money if the index they're based on go up, or you can play the dark side and have your money in inverse funds, where you make money if the market goes down and lose money if it goes up.

We reached the all-time high in the Dow in late 2007 with the highest positive/negative number I had ever seen, around 2.6 times the money on the positive side versus the negative side. And we went down, of course, pretty hard, which you would expect with such a high number. We reached our low when that number finally went negative. Then we started up again. Around this time, I happened to see a chart of the Dow from 1900 to the present, which scared me to death because I could see we had formed an incredibly large head-and-shoulders pattern stretching all the way from 2000 to the present. A head-and-shoulders pattern is generally a top. I think the Fed saw that pattern too. More on that later.

Our numbers in 2010 started getting higher than I've ever seen. I started this blog, talking about that 2.6 number in 2007, that we had this head-and-shoulders pattern, and now the numbers were getting even higher than that 2.6. In fact, it got up to 4 and even over 5 in late 2010. I was telling people this is it. But it wasn't. We kept going up, making me look stupid and leaving me wondering about my numbers theory. We reached a temporary high in the markets in mid-January with the positive/negative number up to an astounding 6.45 times money on the positive side versus the negative. There was a little correction, not a whole lot, and then we continued up, with the positive/negative numbers still very high. Up to 6.26 on February 22. We corrected down to mid-march, with the positive/negative numbers plummeting all the way down to 1.71 on March 16. But then we started up strong again, with those volume numbers climbing quickly. We had a high on April 27 with the positive/negative numbers at a new high of 6.88! Then we broke 7, up to 7.01 on May 3, and finally up to the highest volume numbers ever on May 11 of 7.25. And then we corrected down into mid-June, with those volume numbers plummeting again to 1.71.

How could we not correct more with such large numbers? How could we keep coming back to such high positive/negative numbers so quickly? That's about when I stopped blogging as things weren't making a whole lot of sense. But I think I now know what was going on. Mom was sending me some reports from this guy named Dennis Slothower, who was ranting and raving about the Fed propping up the market with its Treasury buy-back program, also known as "quantitative easing." I believe it was the Fed's moves that were acting like an invisible hand to hold up the markets, keeping them from going way, way down. People got used to a certain amount of correction, raising their confidence, causing the outrageously large positive/numbers that we have seen this year in 2011. That quantitative easing program ended on July 1 of this year. No more invisible hand.

The debt ceiling debates I think led to kind of a perfect psychological situation to get this crash going. The S&P 500 numbers went very positive early last week. I know the traders were thinking we'll get that debt ceiling agreement any day now, and when we do, the markets will rejoice. We started down, with the kind of drop that usually would get the S&P 500 number to go negative and thus reach a short-term bottom. But this time, the S&P 500 numbers didn't budge, even as we dropped all last week. Again, I'm sure it was because they were now thinking it would be like the NFL negotiations, where they waited until the last possible day to reach a deal. So we finally get the debt ceiling deal at the start of this week, and that S&P 500 number was still way positive. And down we go. Even after the large down day on Tuesday, I was amazed to see that number not budging on Wednesday. And now we have today, a monster down day. I think they are now thinking, well, we've come down so far, this is where there is usually some sort of bottom, or at least that's the way it's been so far this year, I don't want to miss that rally.

So I think the crash I've feared for so long has finally gotten going in earnest. I think it technically started at the highs back in late April with that super-high positive/negative number. While there will certainly be rallies along the way as we move down, I think we have to continue down longer term until the Nasdaq 100 numbers turn negative. That number was still at a ridiculously high 5.12 just yesterday (which by the way was higher than the day before, so the traders actually saw Tuesday's large down day as a buying opportunity). So will that 5.12 number shrink quickly or not, is the big question. Remember, no more invisible hand to prop up the market, at least for now. I've heard the Fed has said it's ready to do some more quantitative easing if necessary. If they do, it will only put off the inevitable, while throwing billions and billions of dollars away at a time when we're hopelessly in debt.

Where might this be headed? Just from a charting standpoint, I think we're headed down to a minimum of below 1,000 in the Dow. That's 1,000, not 10,000. I say that because that appears to be the last level of strong support, if you look at a chart of the Dow from 1900 to the present.

Once again, I hope I look totally stupid on this. Imagine all the retirement and pension funds that are way over-invested in the stock markets losing so much. How are they going to pay? Government is responsible for paying many of those funds. Go further in debt to pay them, I suppose. Print money, I suppose, making dollars worth less and less. I'm personally going to stock up on food as much as I can, while I can. It's going to be the era of looking out for your family and neighbors.

What to do? I wish I could answer that. I'm thinking of slowly but surely buying a government bond fund. This tracks the price of the bonds, not the yield. The more the market goes down, the more this fund would ordinarily go up. But what if the government defaults and the bonds become worthless? So I don't know, I really don't. Gold is probably good, but it's so high already.

I'm taking the time to do this blog because I think history is going to get this story wrong. Already people are blaming Obama big time. The "N" word will make a comeback, as in "see what happens when we elect a n_________"? I was so proud of our country for looking past the color of a person's skin, but now I'm afraid everything bad in this country in terms of racism and pointing fingers will come bubbling to the surface. I insist the villain, besides our own greed, is the Fed.

I hope I'm wrong, I hope I'm wrong, I hope I'm wrong.

Rob