The Bear is Back
and This Time it will be Much Worse
By Toby Connor, GoldScents
let the perma bulls fool you, this is not a normal
correction, and it has nothing to do with Greece or Spain. This is the
beginnings of the next leg down in the secular bear market and the start of
the next economic recession/depression. And this time it's going to be much much worse than
it was in `08.
For months now I've been warning
investors to get out of the general stock market. I was confident that
once the dollar put in its three year cycle low the next deflationary period
would begin and stocks would enter the third leg down in the secular bear
Well, the dollar did put in the major three year cycle bottom in May and
stocks almost immediately started to head down. This won't end until stocks
drop down into the four year cycle low due sometime in mid to late 2012.
Let me explain to you what is unfolding so you don't listen to Wall Street or
CNBC and get sucked down into the next bear market.
In a healthy bull market, intermediate degree corrections hold well above the
prior cycle troughs. Higher highs and higher lows. When that pattern of
higher highs and higher lows on an intermediate time frame gets violated it
is almost always a sign that the market is topping. We are at that stage now as the market is moving down to test the March
intermediate cycle low.
Oil has already violated its intermediate bottom. Energy stocks are a big
part of the S&P and they are going to be a big drag on the index going
In a healthy bull market we shouldn't even come close to testing the March
low. Actually this market hasn't been healthy since last summer. That was the
point at which I recognized the large megaphone topping pattern that was
being driven by a double dose of QE.
Last year the market was able to push higher for almost a month on momentum
after QE1 ended. This market has already rolled over even though QE2 isn't
scheduled to stop until the end of June. The conclusion is that the market is
much weaker now than it was when QE1 ended. We all know what happened last
year when the money pumps were shut off. It led to the flash crash and a
severe stock market correction. It would have led to a new bear market except
Bernanke quickly started QE2.
Actually QE is the reason the market is in trouble. Just like I said over two
years ago, all QE did was give us a brief reprieve and temporarily reflated asset markets. I knew all along it wouldn't
create jobs and it didn't. (Well I guess a few bankers got to keep their jobs
and pay themselves some big bonuses, but the general population was never
going to prosper from QE).
As a matter of fact just as I said it would, QE ultimately spiked commodity
inflation, and just like I knew it would, commodity inflation has now
poisoned the global economy, crushed discretionary spending, squeezed profit
margins, and is sending the world down into the next recession.
Unfortunately we are entering this recession in a much weaker state than we
went into the last one. Real unemployment is somewhere around 12-15%. It is
going to get much, much worse. I often wonder how in the world we could
appoint such fools to run our monetary policy. I mean seriously, how many
times must they make the same mistake before they figure out they are the
cause of our problems?
Ok, enough of the Fed ranting, back to the market.
Not only do we have a market that is testing the prior intermediate cycle low
when it shouldn't be, we also have a clear topping pattern in place. Just
like in `07 the market managed a marginal breakout to new highs in May that
failed to follow through. You can see the same thing occurred in October of
`07. This is quite often how markets top...or bottom for that matter. A
technical level is breached; technicians either buy the breakout or sell the
breakdown. Smart money fades the move and the market reverses. This is
exactly how the `07 top was formed. It's also how the market bottomed in `02.
And now the cyclical bull has topped with that exact same reversal pattern in
This isn't the only warning sign unfortunately. The banks and housing have
been diverging from the rest of the market for some time. These two sectors
are still impaired and will remain so no matter how much money the Fed throws
at them. They led the market down into the last bear and they are leading it
into the next bear.
Here is what I expect to happen over the next two months. We should soon test
the 1249 intermediate cycle low. Actually I think we will probably marginally
break below that level. As most of you probably know by now breakdowns and
breakouts almost always fail to follow through. So I expect we will see a
violent counter trend rally once the March low is penetrated. That should
wipe out all the technicians who sell into the breakdown.
However the rally, although I'm sure it will be convincing, will almost
certainly be a counter trend affair that will quickly fail. The problem is
that the current daily cycle is only on day 12. That cycle on average runs
35-45 days trough to trough. So once the counter trend rally has run its
course we should have another leg down. And that leg down will almost
certainly cause tremendous damage to the global stock markets.
Once the market penetrates the coming low it shouldn't be long before traders
recognize that something is terribly wrong. At that point everyone is going
to head for the exits at the same time which should lead to some kind of
waterfall decline bottoming around the middle of August. This is when I
expect Bernanke to freak out and initiate QE3. I have no doubt the market
will rally violently on the news as traders have become conditioned to expect
QE to drive stocks higher. I expect we will see the market test and maybe
even penetrate the 200 day moving average during the fall rally.
However this too will only be a counter trend affair. QE is the cause of our
problems and more of it isn't going to make things better, it will only make
them worse as it will start to spike commodity prices again into a rapidly
weakening economy. Remember spiking commodity inflation is what caused this
in the first place. Doing it again as the economy rolls over into recession
is only going to guarantee that this turns into a depression instead of just
a severe recession.
Traders and investors need to start preparing for what's ahead. If you
ignored me previously and are still invested in the general stock market,
exit, either now, or into the rally that should come off the March lows in
the next week or two. Don't get fooled by the analysts who will be telling
you the correction is over, it won't be. This won't be over until late July
or early August.
Get back into dollar denominated assets as the dollar will continue to rally
and gain purchasing power in a deflationary environment.
Once it's appropriate we will transfer assets back into gold and precious
metals, but it's still too early for that. Gold needs to move down into an
intermediate cycle low before we want to buy. My best guess is gold will dip
down to somewhere around $1400 over the next 4-5 weeks. I am monitoring not
only the stock market but also the gold cycle in the premium newsletter and
will let subscribers know when I think it's time to get back into precious
for the next ride up.
For the next week I will re-open the 15 month subscription special. Click here to go to the premium
website. Then click on the subscribe link on the right hand side of the home page
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