Another nasty week for the stock markets

Another nasty week for the stock markets although they did mange to eke out small gains. The S&P 500 was up a meagre 0.4 per cent. But the damage was done as the S&P 500 broke down through its up trend line from the 2004 lows, joining lows seen in 2005 and 2006. We are firmly below the prior year’s lows but not yet below the 2006 lows. The lows this week rebounded off the four-year MA that was briefly penetrated.

The busting of the 2007 lows and the uptrend line that has been in place since 2004 is significant and long-term investors should heed these technical warnings. It tells us that the bull market that began in October 2002 is over. This is not an ordinary correction; we believe it is a resumption of the bear market that began with the highs seen back in January to March 2000. The first part of the bear market was the internet/technology collapse; the second part is the housing and credit collapse.

Make no mistake about it: a credit collapse is the most dangerous collapse of all. Cutting interest rates by 75 bp as the Fed announced this week is a temporary measure and will not turn this mess around. It is solvency that is at issue here, and no amount of low interest rates or stimulus packages are going to cure bankruptcy across the system.

But that said, we may be at a temporary low. We can’t confirm that yet because we have not
taken out any prior week’s high to tell us officially that a near-term correction is under way. We
examined the 2000-02 bear collapse as to drops and corrections in the market. The results are [ read more... ]