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June 20, 2008

Market Catastrophe and Apple Short Update
by M.A. Nystrom

It's been a while since I've done a market update, and today was a pretty big day, so let's get started:

The Dow Tests 34 Year Trendline!

While it may not be the best representation of the overall market, everyone watches the Dow. It is a handful of the bluest of the blue chips, so whatever happens to the Dow will likely happen to the broader market as well. The Dow is in the midst of a 200 point Friday afternoon decline, in the larger context of one-month slide, falling once again below 12,000. It looks like we're headed for a retest of the January and March lows. The watchword is: CAUTION!

According to our friends at Elliott Wave International, should the Dow break its March lows, it will also break the long term trend line dating back to 1974!

(You can read the most recent three months of Elliott Wave's US Market Analysis this week only - free signup required, no obligation.)

Ladies and gentlemen, this is a big deal. The US stock market, measured by the nominal Dow, has been in an uptrend for the last 34 years. Of course, the Dow measured in gold began its crash long ago, resulting in the decimation of over 75% of the Dow's real value. Should the Dow break its 1974 uptrend line, it will send an ominous signal that inflation alone is not sufficient to keep up appearances on the Dow. This will likely signal that a long term decline is directly ahead.

In the past, I would make market pronouncements with absolute certainty, but I have since learned my lesson. I don't know what will happen, but I do know that all good things come to an end. Nearly everyone who doesn't work for the government believes the economy is in recession. The second quarter ends this month and companies will start releasing earnings reports in early July. What will they say? How was business? The market already seems to be getting the jitters.

Common sense dictates slow to no growth for a long time coming:

High gas prices with no sign of abating
Higher food prices, especially in light of Midwest floods
No end in sight to housing bust
Continued tight credit
Rising unemployment
Consumers maxed out, little savings and starting to save what they can
The possibility of war before the election

It is that last item that could result in catastrophe. A war with Iran, as is being discussed, would send oil prices skyrocketing overnight. Americans may be able to get by - barely - on $4 gas, but what if that doubles? What would happen to the economy at $8 gas? How would people get to work? What would happen to the price of food, and to heating our homes come winter? Printing more money for the war would send the dollar's value down further. Inflation would go into overdrive.

Considering the cavalier attitude this administration has shown towards war, it simply cannot be ruled out. The drums of war are getting louder. The stock market is clearly getting nervous about something heading into summer.

The only thing on the horizon that appears it could possibly save us all is if that Japanese car that they say runs on water along turns out to be true. I hope it is.

If not, the decline could go on for years as all the false gains of the last few decades are taken back by the market. Prechter projects a market low around 2016. Depending on how old you are, you may have never seen a decline of that length, so you might not believe it. But we all saw it happen recently in Japan (13 straight years of declines since 1990). Most of the people who remember the Great Depression in this country have died off, so the timing seems right to introduce the concept to a new generation.

Read Prechter's long term forecast (the June 9 Theorist) here for free for the next week only. You may not agree, but I guarantee it will make you think!

Apple Short Update

A couple weeks ago I suggested -- for entertainment purposes only -- a gambler's play to short Apple. From time to time, gamblers win and that was the case this time. So far, so good. Here is an updated chart of what's going on:

The stock dropped hard after the Apple show as rumors swirled about Steve Jobs' health, but then recovered just as sharply. In a bull market, that would be the perfect time to buy - weak sellers get spooked and unload the stock, and stronger hands move in for the long haul. That still may be the case, but I don't think so. In a bear market, the reasoning is exactly opposite: Strong hands sell out, and weak hands step in to be left holding the bag. Volume was weak. Even the new, cheap, 3G iPhone wasn't enough to excite the stock back to a new high.

If the above big picture scenario is correct - i.e. a slowing economy and protracted bear market - Apple will go down with the rest of the market. Their nifty gadgets will become luxuries to cash strapped and hungry Americans. I'm sticking with the short, and remaining cautious.

Emerging Markets

The thesis here is that if the Dow breaks down, as it looks like it will, it will bring the rest of the stock market down with it, including the emerging markets. Look at today's gap down from the flag consolidation in today's action. Not good, and poised to fall much further, methinks.

How to profit from it? Check out the proshares double inverse emerging markets fund, symbol EEV. It yields double the inverse of EEM's moves. But again, be careful. This is a volatile instrument - up 5+% just today!

Conclusion

Watchword of the coming days and weeks: Caution. Keep an eye on the Dow. War is a possibility that is spooking the markets, and if it becomes a reality, could be a catastrophe for the US economy. Corporate earnings season is dead ahead. For some food for thought and copious weekend reading, sign up for the U.S. Markets Free Week at EWI. Finally, if you found this letter of value, sign up for future updates via my low volume, no spam email announce list.

Michael Nystrom
Editor
www.depression2.tv
www.bullnotbull.com

M.A. Nystrom is a private investor and consultant currently living near Boston. He earned his MBA from the University of Washington with a specialty in International Marketing. Following his retirement from the US securities industry, he picked up the hobby of web design, a trade he now plies at his big-picture investment oriented website www.depression2.tv.