First with Financial Comment from Arabia

Markets finally correcting, put your shorts on!

with one comment

stock_market_01This website has been talking about a correction since August and was in danger of becoming a broken record until last week’s sell-down.

Actually my August prediction was not so far off. It said the Dow would hit 10,000 and the S&P 1,050 before a sell-off, given the momentum in markets (see article here).

It has been a long wait since then but the 80th anniversary of the 1929 stock market crash (alternatively on the 24th or 29th of October depending how you read it) seems to have marked the turning point.

Trend reversal

The market always rises until all the good news is discounted. On Thursday we had a better than expected reading for US Q3 GDP at 3.5 per cent.

But now the thinking is can this continue? Was it artificial and based on the ‘cash-for-clunkers’ program and bank bailouts? Is there more good news to come, or have we been ignoring the negative in this stock market rally since March? What happens as the government stimulus ends?

As this website has been pointing out for more than a year, the real economy is suffering badly in the Great Recession. There is a worldwide slump in trade bigger than in 1930, a credit squeeze on private business and private investors and a double-digit decline in industrial output almost everywhere.

It would be surprising if an illusion of a swift recovery could be maintained for long. There will be more shocks in the banking sector with CIT due to collapse. The US commercial real estate sector is due to crash. Europe is going to start to feel the pressure of the weak dollar. Emerging markets are not doing so great – ask me I live in Dubai and business is dreadful here.

Big decline

So the question then moves from not how long will the rally last but to how long and how deep will be the decline in stocks.

How would the Fed respond? Slash interest rates? No can do as it is already done. More money printing, perhaps but will the banks pass the money on to the real economy?

An artificial recovery in stocks, fueled by liquidity is liable to a swift and big downward correction. Could we see the Dow at 5,000 and the S&P at 550? I wonder what exactly would stop such a rout when it gets going.

(For an update on this article click here)


Written by Peter Cooper

October 31, 2009 at 10:33 am

One Response

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  1. This could be very tricky because they could be selling puts to squeeze all the shorts out. I made good money on Friday from my FAZ and SPXU shares. Perhaps I should have sold them but for some reason decided to hold on to them over the weekend to see what Monday brings to us.

    These last 2 days of trading have been very fishy. If you have something like an Etrade or Scottrade platform running you can pretty much feel and see that there is an invisible hand running how things move in the market. Manipulation on which way the market moves is very evident this week. I’m thinking that perhaps the big guys sent their men to the UAE or China for some lessons on manipulations lol..

    Ed Note: Yes you are most likely right – it was the end of the month! But I suppose the proof will be what happens next week – absent some very good news I think the market will keep falling.


    October 31, 2009 at 10:59 am

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