Carl Swenlin's DecisionPoint
The S&P 500 Still Has a Long Way to Fall
Charts courtesy of DecisionPoint.com
Our current downside projection is for 350 on the S&P 500, with comparable declines for the Dow (3700) and Nasdaq (500). Why so pessimistic? Here are some reasons:
First off, I believe that we are in a secular bear market unlike any seen in the last 70 years. Even the most experienced professionals will find that much of what they thought they knew is wrong and does not apply to the current environment. So-called valuation models have been rendered useless because interest rates are so grotesquely low, not because stocks have become attractive values. Beware of the universal reference to "operating earnings". They are artificially enhanced, deceptive, and do not reflect the true financial condition of any company.
Second, Because the long-term trend is down, technical analysis rules now favor bearish resolutions of chart patterns over bullish resolutions by roughly 70%. Bullish setups are more likely to fail, and bearish setups are more likely to execute as expected. More often than not resistance will turn back rallies, and support will fail.
The chart above gives us the best long-term view of the market. The most prominent features dominating the price pattern are (1) the declining tops line drawn from the 2000 top, and (2) the head and shoulders with the neckline drawn across the October 1998 and September 2001 lows. Both these barriers must be overcome before we can say the bear market is over. Also, the PMO must turn up on a month-end basis.
I believe that this bear market should last until current extremely high valuations have been corrected, probably to an undervalued extreme of S&P 500 P/E of around 10. Historically such corrections have been accomplished by price declines, not an earnings recovery.
Extreme caution is the name of the game right now.
--Carl Swenlin |
