A major mystery for me this summer has been the strange levitation of the stock market, despite an endless list of reasons for it to get crushed. Not only does the market have to contend with a shrinking money supply, a failing financial system, crumbling European bailouts and an inept Federal Reserve, but it also seems that the entire galaxy is aligned against it. For more on the Hindenburg Omen, click here: http://markostake.blogspot.com/2010/08/hindenburg-omen-all-over-financial.html.
By now, the market should have begun its catatrophic descent. Why hasn't it? My guess is that all the hot air coming out of politician's yaps, coupled with the aggressive market support employed by the Federal Reserve and Helicopter Ben, has temporarily put a delay on what I still contend is inevitable. The best efforts of the Fed will not work. Here's why: http://markostake.blogspot.com/2010/08/unusual-uncertainty-meets-qe2.html.
Today's trading witnessed a very Hindenburg-like day. According to Yahoo Finance, there were 136 new highs and 164 new lows among nearly 4,000 issues traded. That would provide the initial trigger for the Hindenburg. As noted in prior pieces, there are a myriad of filters, but honestly, one needs no filter other than a gas mask to see that the "House Of Cards", known as the U.S. Financial System is on the verge of collapse.
But that's not all. Nearly every asset market has gotten incredibly and feverishly over-extended, including precious metals and mining stocks. We have discussed other technical indicators which are also very ominous, and those are discussed here: http://markostake.blogspot.com/2010/09/lets-get-technical.html, and http://markostake.blogspot.com/2010/09/lets-get-technical-part-2.html.
Add to that the rising inflation pressure showing up in prices at WalMart and other retail stores, plus in today's report on the Producer Price Index. Creeping inflation will put a cap on the Fed's ability to perform it's levitation tricks or a full blown hyper-inflation episode will ensue even sooner. It, too, is inevitable, once monetary velocity picks up.
So, what's an investor to do? Go To Cash! The only investments likely to survive this assault will be the very oversold U.S. Dollar and very short-term Treasuries. Yeah, the returns suck, but even 0% is better than losing 20% or more in a fairly short period of time.
Unlike the meltdown of 2008, which, too, was forsaged by a series of Hindenburg Omens, this one will not be an exact repeat. This time, Gold, Silver, Commodities and precious metals mining stocks ought to hold up much better. A correction to their 200 Day Moving Averages would be the most likely scenario, as discussed in this recent "Marko's Take": http://markostake.blogspot.com/2010/10/correct-me-if-im-wrong.html.
Better to wait for another entry point, well below current levels, than to sweat it out in a volatility spike down that may just give you a heart attack. And, the bargains that will become available will be well worth waiting for.
So, how long may stocks go? Obviously, no one knows, but a Dow Jones Industrial Average of between 6,000 and 8,000 would seem to be a logical target occuring early in 2011.
It's going to be a very, very cold winter for most investors. Store lots of blankets!