Financial markets top-out and prepare for a dramatic crash
Posted on 29 October 2011 with 6 comments from readers
You don’t need to be an expert chartist to read the lesson from the graph below. The FTSE 100 is a good proxy for the global financial markets. It shows a clear head-and-shoulders pattern marking the end of the rally that started in the dog days of March 2009.
That is the technical view of the chart. From the point of view of market fundamentals we can be equally convinced that this finally is the end of the long rally.
Basically all the good news is now in the market. We have the big deal on the eurozone. We have 2.5 per cent GDP growth in the US. We have good third quarter results. All of these goodies are priced into the market.
What more is there to come except disappointments? The eurozone deal has more holes in it than a Swiss cheese, and allowing Greece to default turns attention to Italy, Portugal and Spain. The US will struggle to maintain this momentum and companies are already warning that the profits outlook is not so great.
Last Thursday’s market surge looks likely to have been frantic short covering and the final jump in market volumes before the slump. If you look at the chart above retesting the lows of March 2009 is eminently possible.
Black swans
For that to happen we not only require an end to the good news but some really bad and unexpected news to depress the market. The rapid unravelling of the eurozone rescue plan would be one possibility or a Chinese property crash or both.
The distortions brought on the global economy by the bailouts and manipulations post 2008 are so enormous now there is always a high probability that something nasty is ‘out there’ lurking at the bottom of the global financial system.
Is gold and silver the thing to buy for protection? Well gold rallied seven per cent and silver by 13 per cent last week so they would seem as caught up in the euphoria as the stock markets and therefore by extention just as vulnerable to the downwave.
For those laughing at the pessimists about the eurozone this week, the joke could very soon be on them.
6 Comments posted by readers:
I would suggest that a “2.5% GDP growth in the US” is not good news.
It doesn’t mean that US economic activity has improved by 2.5%. Instead, the currency volume of the GDP has increased by 2.5%. If the value of the currency has fallen by 2.5%, then 2.5% more currency, more dollars are required to stand still.
I suggest that GDP is a delusive statistic which cons us into believing that an economy is improving when, in fact, it is actually a reflection of the expansion or inflation of the currency.
If this is so, then the US and other countries have been in a Depression for some years now without any actual real growth.
I read recently that the Kaiser was persuaded that he could prosecute the First World War by printing money rather than by increasing taxes. As a result, he went to war. The GDP would have looked good during the war and in the early twenties until the currency collapsed.
Nevertheless, I thorougly agree with the tone and content of what the Editor has written, and admire him for his constant courage to be a pessimist in these dreadful times.
For me the black swan represents the one opportunity of a lifetime to benefit from the massive transfer of wealth from currency based investments into the money based havens of gold and silver. I experience the black swan as being my personal symbol of financial optimism in a world of darkness.
I’m certainly not an expert chartist, but I do know what a head and shoulders pattern is. However, I can’t find it in the chart above. Can someone explain?
Ed Note: Does the last rally not look like a head-and-shoulders? – only the final down-stroke is left to complete it.
I love the simplicity of this article and chart….and, especially, the courage and bluntness to say what needs to be said. Right or wrong – it’s an honest take on things. Thank you,
An interesting, no-nonsense commentary, Ed. Personally, I believe we’ll encounter another market drop within the next 2 months; it may not be the “big one” yet, but the “big one” is definitely coming, and may occur in the spring of 2012.
They Must Think the Public Has No Long Term Memory:
I have to laugh at how hard the Obama administration has lobbied the US news media to repeatedly publish the “good news” related to GDP growth. Everywhere one looks, this “2.5% GDP” thing is being printed in large, block letters (maybe block letters are believed to a greater extent???). They should all be so proud of themselves for promulgating this “disinformation”, and sadly we, the public, must have lost our “long term memory”.
Prior Estimates vs. Downward Revisions in 2011:
Remember the GDP numbers that the Dept. of Commerce issued waay back in the first quarter of 2011, only to revise that number back down to 0.4% in July 2011?
And what about their “estimates” for the 2nd Quarter? . . . then revising those numbers back down to 1.3% a few months later.
How many times over the past 3 years have we seen this act before? I’m betting that 3rd quarter growth will eventually be revised back downward to about 1.5%. But by then, the public will shrug it off, just as they did previously; the Obama administration achieved their objective, once again, in “fooling” the public into thinking that “all is well.”
How about a triple climax top if you don,t see the HnS. Any kind of a nudge to the downside, polital or a natural disaster could put us n2 a downward spiral. Emotional fatigue could do the rest. Just a trucker opinion.
There is still room for manipulation. Look for a Q4 rally in stocks.