Continue to maintain a LONG/HOLD position.
Weekly Summary:
Even thou the market had a number of significant down days during the week, the Dow Jones ended up down only -180 points or (-1.14%). Both the Nasdaq and the S&P fared much better. Loosing only -24 points (-0.59%) and -7.7 points (-0.43%) respectively.
If this week can teach us anything, its that volatility is back. Every trading session was opened up with a fairly large gap. With Fridays gap being close to 200 points on the DOW. What does that mean?
It means the cyclical composition of the market has shifted from a general uptrend exhibited in 2013 and for the large part since the start of this bull market leg in March of 2009 to a bear market leg identified here last week.
Again, my mathematical timing work had confirmed that the DOW Jones topped out on December 31st, 2013 at precisely 16,576, ushering in the new bear market leg that will take us into the 2017 cyclical bear market bottom.
Now, most market participants believe that the decline since the start of the year is nothing more than a simple correction that is long overdue. While I disagree we still have to wait for a technical confirmation before taking our short position to profit from the bear market leg. Such confirmation must come from a short term bottom here, subsequent bounce and resumption of the bear move thereafter.
Our model portfolio established at the beginning of the year has been in cash this entire time @10 Year Note, helping us avoid the decline. For our previous investments, we continue to maintain our LONG/HOLD position without adding anything new. Once the bear market confirmation arrives we will get out immediately and go short.
If you recall, I have mentioned that the market opened up large gaps on the way down from 16,400. At this stage it is highly probable that the market will bounce back to those levels before resuming the bear market let once the bottom of this correction is set. When will that happen. Please see our Mathematical & Timing analysis below.
Fundamental Analysis:
As you know, my fundamental case remains fairly straight forward and clear cut. All stocks and most other markets (credit and real estate) are substantially overvalued due to massive infusion of credit by the FED over the last few years and pure speculation. I am acutely aware and as most market commentators point out, based on the P/E ratio of 18.5 and some other metrics that the market is not overpriced and is within its historic range. At lest suggesting that there is no need to worry about any sort of a decline.
However, everyone is missing the elephant in the room. The earnings for most corporations have been “juiced up” to the tenth degree by the same credit infusion. If you take the credit and those earnings out, the P/E ratio is likely to be in the 50-100 range. Making this market not only overpriced, but putting it in the “are you fucking kidding me overpriced” category.
Please note, that is exactly what happened when the P/E ratio shot up to over 124 in May of 2009 even though the market had lost over 50% since October of 2007. When earning disappear (as they will), today’s valuations will look astronomical.
Macroeconomic Analysis:
It doesn’t matter where you look, we have the same cancer spreading across the globe. Massive credit expansion juiced up the FED. This week the Fed announced a further cut in QE from $75 Billion to $65 Billion due to perceived “Economic Strength”. I have argued for a long time that the FED will be unable to withdraw this support without a massive blow up one way or another. We already starting to see strain show up in emerging markets.
With our mathematical work confirming the bear market over the next 3 years, this plays very well into our scenario. The bottom line is, our economy is driven by credit and will deflate on a large scale as soon as the credit intervention goes away (as it is now) and/or the velocity of credit slows down (as it is now).
Technical Analysis:
Technical picture remains murky.
Long-Term: The trend is still up. Market action in January could be viewed as a simple correction in an ongoing bull market.
Short-Term: The trend is down as the market structure turned bearish. Please see my timing analysis for further instructions.
Overall, we must wait for a confirmation before taking a short position.
Mathematical & Timing Analysis:
There is a number of important mathematical turning points arriving over the weekend and next week. Will these points signal the end of the bear move and a reversal into an anticipated rebound? I believe so. As soon as the rebound completes we should see the market roll over the resume a bear market leg in March of this year.
Time Targets: Coming Next Week.
Price Targets: Coming Next Week
CONCLUSION:
If you are out of the market as we have been, stay out. If you are still fully invested consider liquidating your positions as we go through a rebound over the next few weeks. Once the rebound plays itself out and the market confirms the next bear leg down, I would recommend going short at that time.
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