If The Market Crashes This Month, This Is Why It Happened

I'm starting to feel like a real pessimist these days--always predicting a stock market crash that hasn't come yet.  But it's scary to me that the stock market can go up for months and months like this on no volume.  Stock market rallies are supposed to occur on heavy volume with all the big money buying in.  That's not what has happened since August 2010.  It has "floated" higher and higher on no volume, thanks largely in part to the Federal Reserve's QE2.

But there have been signs of cracks in the walls lately.  Some of the high flying stocks and commodities have gone parabolic and already begun to sell off--creating what Bill O'Neill referred to in his books as a "climax top." 

Let's look at a few other reasons why this market may correct (or even crash) this month (May 2011).

1)  Historical:  Dow Jones, May 1940 -21.55%.  The worst May in recorded history for the Dow and it only took 8 trading days to decline that much.  It occurred in the 11th year after the 1929 market crash.  We are in 2011--the 11th year following the 2000 market crash.  Coincidence?  Take a look at a NASDAQ chart since 2000 and compare it to a Dow Jones chart from 1929 through 1940.  Similarities?  (Hint: Yes!)

2)  Lunar:  Most people dismiss the lunar cycle and how it relates to the stock market, but I saw some interesting movements last year and decided to track it.  It's not always predictable, based upon lunar cycles, but two trends have emerged.  The first is that the market's biggest gains have always come in the quarter leading up to the New Moon.  It's not even a contest compared to the other parts of the lunar cycle.  If you had bought the S&P 500 seven or eights days prior to the New Moon and sold it on the day of the New Moon, you made money every time.  The other trend is that market corrections always begin just after the New Moon.  We don't always have a correction, but when we do have one, that's when it begins.  Oh, by the way, we had a New Moon on May 3, 2011.

3)  Biblical:  Okay, so this one is very controversial and I am not a follower nor a believer of Harold Camping, the man who predicted judgement day on May 21, 2011.  But there are enough other people who perhaps believe this or at least fear it until that day comes and goes.  By itself, I don't think it's a strong enough reason for a market crash, but we're piling onto other reasons at this point.  It could contribute.


4)  Newsworthy:  The market always peaks on good news.  What news could have been better than the death of Osama Bin Laden?  If the market sells off from where it is today, it will have peaked on Monday morning, May 2nd, right after we heard about the raid that took out Bin Laden on Sunday night.  Coincidence, of course, but if you look back at market peaks in the past--they always somehow coincide with very good news stories.  More importantly, the Monday rally fizzled out.  If nothing else, that's a good indicator that even the best news can't keep the market going higher.
I was wrong in August and wrong in November about a market peak.  I'm not saying I'll be right.  I am saying beware.

Why The Federal Reserve's Plan Will Fail

While the extent of the rally has been a little unexpected, the stock market's movement this year has not been surprising.  It was basically predicted by Robert Kiyosaki in his article way back at the beginning of the year ("Doing the Dead Cat Bounce").  Even the great Mr. Kiyosaki was wrong about the timing.  He thought the entire thing would play out by the end of the year, I believe.  It has not, but it will over time.

I've been expecting a market decline for some time now.  History, technical analysis, and fundamentals are all aligning to predict this decline.  It hasn't begun yet and we've seen a remarkable rally since the end of August, but I believe the market is on borrowed time.

The reason why the market has rallied is almost universally recognized at this point.  At the end of September, a hedge fund manager got on CNBC and said that we're in a win/win situation.  Either the economy improves, and the market rallies.  Or the economy doesn't improve, and the Federal Reserve prints more money, and the market rallies.  Either way, we all win.  Well, the past month's data has shown that both the economy has improved somewhat AND the Federal Reserve plans to print more money in an attempt to create inflation/devalue the U.S. dollar.  The result?--a breathtaking rally in the U.S. stock market and basically every commodity on the planet.

So what's next?  How can we lose?  We've got inflation, an improving economy, people spending money.  What can go wrong?

The Federal Reserve already told us what is going wrong.  Their statement released last Wednesday paints a grim picture of the U.S. economy.   Slow growth, higher unemployment, no job growth, stagnant wages, low inflation (the last one's a joke).  And how does the market react?  Up another 250 points or so on the Dow Jones Industrial Average.  Why?  Because the Fed is printing money.

The problem is--they can't print fast enough.  Sure they can create inflation--over time.  But the U.S. Dollar Index has declined 15% or so since July already.  How fast does the market really think those printing presses can go?  High estimates of the Fed's "QE2" show that they could, perhaps, pump (print) $120 Billion per month into U.S. markets over the next several months.  $120 Billion sounds like a lot of money, and it is.  But let's compare that to how much money changes hands worldwide on a daily basis.  Take a look at your favorite large cap stock.  Apple, Exxon Mobil, JP Morgan, Goldman Sachs.  How much money is traded in that one company's stock every single day?  How many millions or billions?  How many stocks, ETFs, commodities, options, currencies get traded every single day?  Now how many countries have stock markets?  $120 Billion a month doesn't sound like such a big number anymore, does it.

The Federal Reserve would like to create inflation.  Guess what?--they have!  Cotton, gold, oil, wheat, silver...you name it.  All way up.  Many at record highs.  What's left to buy?  What's left to go up?  Not much.

If a worldwide recession, depression, or even just a small pause in growth occurs in the near future, securities have no where to go but down.  The Federal Reserve will be powerless to prevent it.  They can't print enough money.  QE2 will be a drop in the bucket.  They're throwing a handful of sand on the beach. 

If you're like me, you've been critical of the Fed, angry that they've created inflation and diluted the value of the dollar.  Gas has gone up at the pump.  Coffee costs more at the grocery store.  It's frustrating, but it's going to end (temporarily at least).  Inflation is over for now.  The Fed is out of ammunition.  There's nothing left in their arsenal and they know it.  QE2 is more symbolic than anything else.  When deflation hits, at least Mr. Bernanke can say that he saw it coming and he tried to stop it.  He's a powerful man, and the Fed does have quite a bit of power.  Too much, in my opinion.  It won't be enough.  It never has been before.  Why should this time be any different?

Dow's Final Days Above 10,000

After a volatile summer in U.S. equities, the stock market finally looks exhausted--it has fought the hard fight for months and gotten nowhere.  A 1 1/2 month rally from early July through mid-August was wiped out completely in a matter of weeks.  Now we are entering the always dangerous months of September and October--historically the most difficult months of the year for the stock market.  Technical analysis shows us to be at the beginning of another major downtrend, and I fear this is one we will not soon recover from.  The Dow Jones Industrial Average is currently above the all-important 10,000 level, but just barely.  The trend will be lower--much lower.  It may not be a crash, but more likely a slow, painful slide back down to March 2009 levels and, perhaps, even lower.  It could take a few years, and it will take even longer for the 10,000 level to be reached to the upside once again.  Everyone out there currently holding equities, mutual funds, ETFs--any investment tied to the stock market--should ask themselves this question:  can I afford for my investments to lose half their value again, and is there anything I can do to avoid that fate?

Stop Jim Cramer!

Ha ha, a play on the CNBC segment with Jim Cramer they call "Stop Trading! with Jim Cramer".  Just take out the "Trading!" and "with" part, and you have a more logical title.  Really this is just an attention getter--I hope it worked for someone.  Not that anyone will likely read this blog, but if you are reading it and you do take what I have to say seriously, you could save yourself some pain and some money. 

This is the 1st part of a 5 part series I have written about the future of world stock markets between now and 2013.  The next 4 parts break it down by year.  Read on...

Look, Jim Cramer is wrong but he's not the only one.  He's just the most visible one.  A former successful hedge fund manager/trader who has become a caricature of his former self.  "Confessions of a Street Addict" is a phenomenal book and I put it up there with Michael Lewis's "Liar's Poker" in terms of an insiders look at Wall Street.  But if you are listening to advice from that guy, you may as well be burning your money in a garbage can.  You are better off making 1.29% in a savings account than you are investing in the stock market right now.  Have you seen what has happened the past month and a half?  Do you think the market is really going to rebound?  It might, but it won't last.

There's no sense in elaborating and rambling on--just read on!  Read the next 4 parts to this series.  It will take you 15 minutes tops, probably much less time.  If you think I'm full of it and have no clue, then go on with your life.  If you feel like taking my warning to heart, you may thank yourself a few years from now...

Prediction: 2010

I'm not going to spend a lot of time on 2010 because it's almost half over.  Having said that, I think we've learned a lot lately from the way the market has acted so far this year.  We've seen three phases:  sell-off to start the year in January and February, then a remarkable and illogical rally that brought the market to new highs not seen since 2007 this April, followed by a sharp (yet very necessary) correction at the end of April and through May.  I think we've hit a support level at around 1050 on the S&P 500, but it won't hold up for very long.  After a brief rally, I see the correction continuing through the summer until a new rally emerges either in August or sometime in the fall.  This will be a last gasp effort by the bulls to push the market to new highs.  It will fail.  There is simply no fundamental justification for a new bull market at this time.  There are way too many issues that must be addressed over the next few years before the world will enter a new era of prosperity and market gains (likely coupled with major inflation).  In any case, I'm not really a technical analysis kind of investor--I dabble in it, but I'm not an expert on it, so I'm not going to get any more specific than that with regard to 2010.  I could be wrong and a last attempt at a rally could start sooner.  If that happens, we could see a major correction at the end of the year.  To summarize and generalize, in the end it will be more profitable to be a bear in 2010.

Prediction: 2011

Another volatile week in world stock markets. Bailout in Europe leads to an excuse to cover short positions and a snap-back rally the first part of the week. This gave those of us who see a correction materializing the chance to get out of any long positions and re-position for the sell-off that is coming. A lot of world markets and many commodities are looking very weak right now. I wouldn't want to be long anything at the moment, other than gold, silver, and the U.S. dollar.

But that is the short term outlook. In the longer term, I see serious roadblocks and hazards emerging in the next 6 months and beyond. This will lead to the realization toward the end of this year that we are not out of the woods yet--not even close. 2011, unfortunately, will be ugly. I have zero faith that this recession is truly over, although many will have you believe that. "Time to buy back in, catch the train before it leaves the station, load up your mutual funds." It makes me ill when I hear such poor advice. Unless you are loading up on precious metals, don't bother. Stay in cash, sell and take profits--get out of the market by the end of this year, or you could see your positions cut in half in 2011. Yes, that's right, I said cut in half!

The market is not the place to be. Not the U.S., not China, not Europe, not Brazil. Not right now and not until the recession is truly over. If you read the next two posts, you'll see that I don't expect that to happen until the end of 2012 or even 2013. Do yourself a favor and let everything play out before you buy back into this market. If you've made a profit or recovered some losses in the past year's rally, good for you! Take profits, open up a money market account, buy a CD even though you're only making a couple percent. Do anything, just don't keep your money in the stock market--any stock market!

2011 will be rough. If there is going to be a market "crash" or major sell-off in the next three years, I believe it will occur in 2011. I have no confidence that it will take that long, though, and I would guard against a 2010 crash as well. Don't listen to the news. Don't believe the media's claim that the recession is over. Do not buy back in now. It's too late--this rally is over and 2011 is looming. Fear is an emotion that sometimes can't be trusted when it comes to investing. Right now it's time to trust your fear.

Prediction: 2012

If this last week's action in world stock markets tells us anything, it's that you shouldn't listen to the media. While rosy reports came in from numerous companies, jobs report data looked fantastic, and Larry Kudlow, Jim Cramer, and other talking heads spoke about the re-emergence of the U.S. economy, stock markets tanked. Failure to use common sense to consider that the stock market was WAY overbought is leading to some horrible predictions. Like Mr. Cramer's insistence that the Dow Jones industrial average is going to 12,000. We'll see 8,000 before we see 12,000.

Which takes me to my prediction, this time for the year 2012. I'm worried about 2012. I truly hope that the U.S. in 2012 does not resemble Greece in 2010, but I honestly have no real confidence that things are going to be back to business as usual by then. In fact, 2012 could very well be worse than 2008, in the stock market and in the economy. Take a quick minute or two to read Robert Kiyosaki's article in Yahoo Finance: 2010: The Best of Times or the Worst? . Mr. Kiyosaki is not someone whom I would consider betting against. In my opinion, his predictions could not only come true, but could also carry over well into 2012. His next Yahoo article was entitled, "Doing the Dead Cat Bounce," also a must read.

I hate to even bring this up, because anyone who reads this will probably think I'm nuts, but I don't believe anyone really reads this anyway so here goes: December 21, 2012. Whether the Mayans actually predicted the world would end on this day, or they simply couldn't read their calendar after this date, I have no idea. Leave that up to the scholars to debate. All I know is that "Y2K" caused many people to panic, so why shouldn't people fear the Mayan prediction as well? Especially if we experience economic and political turmoil in the year 2012, leading up to December 21.

World stock markets are going to suffer over the next few years. Gold will likely see new highs. Why not just wait it out? Keep your hard earned money, your nest egg, your retirement account in cash or gold. Buy some Japanese Yen, perhaps. Just don't own any stocks. On December 22, 2012, buy back in. Do some buying on the Hong Kong exchange, open a brokerage account with Peter Schiff's company, buy some ETFs. You'll be happy you avoided another stock market erosion from 2010-2012 if you do this. Buy, hold, and diversify will truly be dead come 2012.