Friday, November 7, 2008
The credit bubble has burst. Twenty-five years of spending more than we’ve earned has finally caught up with us. Now that the continuous expansion of credit has ceased, it is no longer possible to finance the carrying costs of the prior debt, and collapse is the inevitable outcome. But how will it play out?
In my last Martenson Report, I said, "Stocks. If I were holding any at this stage (and I am not), I would continue to hold them with a relatively tight stop trailing beneath. My target for lightening up on them would be between 9,800 and 10,000 on the Dow."
In the chart below, we can see that the Dow made it to 9654 before reversing, whereas my predicted target was at the green circle. The green arrow denotes the day I published the report, which was (frustratingly) written the day before. Oh well, it’s pretty rare that a 1000 point rally comes along to mess up your newsletter.
At any rate, getting to 9654 was close enough to 9800 for me to consider the target reached. Were I trying to lighten up on stocks or protect a long position, my trailing stops would have been hit at the 9300 level on Wednesday (11/5/08). The blue arrow shows the intraday bottom that I am confident we’ll be revisiting on this next leg down. That stands at 7885, or 811 points lower than our close today of 8696.
Most interestingly, and quite unexpectedly, the Dow has now lost nearly 1000 points since its Tuesday closing value. That’s nearly 1000 points in the two days since the Presidential election. I say unexpectedly, because the usual response after an election is a strong stock market bounce, as the uncertainty over the outcome is lifted. Also, this is typically a strong time of the year for stocks. Where "Sell in May and go away!" has been pretty good advice for stocks over the past decades, the November-to-January timeframe is historically strong. Some call it the "Santa Rally."
What does this mean? I suspect it means that the stock market is fighting some demons too large for the "Presidential Bounce" to come into play.
