To OTC Journal Members: 
 

A Market On Crack

Well, I took my shot on Monday with the large cap stocks at a perfect 61.8% six year retracement, and was rewarded with a slap upside my head and a big paper loss so far. I guess I'm in some sort of denial that we can't have some sort of relief rally in here. 

I'm short SDS at $86, and looking at being down 4 points as I write today's edition. I didn't take my own advice and notch my losses at $90- they say doctors make the worst patients. 

Despite the worldwide interest rate cut, the market is selling off big time again today for the 6th day in a row. I believe the market is a metaphorical a crack addict. If you've ever been exposed to a drug addict, you know their actions are completely irrational. Drug addicts will do anything for their next fix. The market is now like a drug addict- irrationally stealing, lying, and cheating to get its next fix- and it's next fix is cash. The Central Banks are trying to hold an intervention to get the markets back to some rational state, but it's not working yet. They are putting their economies into rehab, and rehab programs take some time to work.

For the time being, forget value, PE ratios, cash in the bank, or earnings. It's all meaningless in today's market. One would think the DOW can't keep going down 500 points everyday, but who knows. Like a crack addict, it's irrational, and it's self destructive. 

In Monday's edition I put up this chart of the S&P 500. As I suggested in the introduction, if Monday's levels didn't hold, lower levels were in store. Well, the 1075 level did not hold, and lower levels are being found now.

Does this mean the 61.8% Fibonacci retracement doesn't work anymore? No- it doesn't. It means we have to go farther back to find the next level that could be in the cross hairs. I'm not going to show it, but there is a pretty big confluence at 959, so if we break that level, the chart is a near certainty. 

Here's where we could be headed on the S&P 500- 867- that's right, an additional 11% drop could be in the cards from current levels. This would represent a complete 61.8% retracement from the move up in the S&P 500 going back to 1995 during the boom years of the Clinton Administration.

In case you are wondering, the DOW equivalent would be 7677- sub 8,000. At five hundred points per day, it's not that far away. 

Here's a few observations which require a rational, detached mind. First of all, this is truly an amazing, once in a lifetime cataclysmic event. It feels very surreal- a lot like watching the World Trade Center Towers come down on 911. Painful, but part of our life experience. 

Secondly, the VIX is trying to hit the unheard of an nearly impossible level of 60 today. That's an absolutely mind numbing development, and suggests fear levels are akin to the raging paranoid levels only experienced by drug addicts.

Third, and just as scary is the amount of wealth being wiped out across all asset classes. Economists like to talk about the low savings rates in the US. We are not a nation of savers- we don't have savings accounts. We save in other ways- by building up equity in our homes and through 401ks, Defined Benefit Plans, and income producing investments.

Could this be the Great Depression of the 30's all over again?  I hardly think so. There some major differences. For one, in 1929 bank failures meant depositors lost the money in their accounts. That won't happen here. Furthermore, in the 30's a much higher percentage of the population was agrarian- working on farms in the Mid West. The Great Depression was exacerbated but the "Dust Bowl" in the mid west- six years of drought turned Mid Western farm land to dust. We couldn't produce enough food. The Central Banking system was born out of the Great Depression, and Central Banks are stepping up to get money moving around again.

There is a giant bulge of population known as "Baby Boomers" at or near retirement age, and they are watching their retirement accounts take severe hits. People are living longer, but this massive destruction of wealth means people will be working longer as well. Longer careers mean more productive citizens and less of a burden on entitlement programs.

If you're looking for a "glass half full" side to the current insanity- here it is. At this rate, the end of this Bear Market will come quickly. Once there is a glimmer of perception economic conditions could improve, absurdly oversold stocks will come roaring back as no one will be left with stock to sell, and there's plenty of cash on the sidelines. 

If the market could stop smoking the crack pipe temporarily and stage some sort of relief rally in here, it would be welcome. 

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