A Second Big Leg Down Is Coming In Stocks

Take a good look at the long-term chart shown and let it liberate your imagination. It’s not difficult to see the force of gravity at work here, pulling the S&Ps toward a trendline that lies 250 points below. Notice how, when the futures swooned last autumn, the recovery was much steeper and swifter than the decline. Not this time. Three weeks into a bounce that has been punctuated by manic, fleeting short squeezes, stocks have yet to recoup even half of the losses suffered during the last two weeks of August.

It would seem that the “story” needed to drive a strong rally simply isn’t there. The Fed can’t loosen because rates are already near zero. China’s economy is weakening rather than strengthening, and Europe is now a full-blown basket case. Adding to this disquieting picture, America’s enemies have grown increasingly bold and seem now to be daring Obama, the weakest and most inept U.S. president in history, to do something about it.  Not exactly a comforting picture. Under the circumstances, it seems safe to predict that the S&Ps will fall at least to the trendline shown, currently around 1700. If so, the Dow, now trading for 16433, would fall to 14000 — down 24% from May’s all time high of 18351.
And then what?  Elliott Wavesters might say the chart leaves room for a Wave Five surge to new record highs. That would be hard to imagine, considering that the coming recession, or perhaps depression, will leave the U.S. and global economies in a state of smoldering ruin. Whatever happens, we should keep an open mind. First, though, we’ll look for the broad averages to complete the bearish cycle begun in August with a drop to the trendline. The implication is that any rally in the days or possibly weeks ahead is a gift to those looking to get short.