A “Normal” Correction in the FACE of Massive Government Interventions? No Can Do!

``Mankind is condemned to repeat history, the first time as tragedy, the second time as farce.”-Karl Marx (1818-1883), German political philosopher and economist

I find it comical to see some analysts or experts completely in DENIAL to the present circumstances. Some see the present opportunities as a buying window, where they suggest that the present correction runs a “normal” course of action to the underlying trend. This runs contrary to common sense.

We pointed out that since global monetary authorities concertedly acted to salvage the present liquidity drought induced crisis, the fact that they ACTED on a supposed problem reflects a deeper degree of that problem than what had been mostly assumed. Yet, in the face of the synchronized central bank support worldwide, the continued violent reactions in the market in itself represents strong evidence of a fallout from such existing malaise.

In technical terms, yes, the correction in the US markets is within NORMAL ranges until now. But NO, you don’t see global central banks injecting liquidity regularly in the markets, do you? The last time they lent this degree of support was during the infamous September 11, 2001, which obviously means that the present imbroglio has even had MORE impact than 9/11, since today’s rescue package had been much larger in scale and scope (worldwide)!

NOW if the FED further acts to cut interest rates, which I expect to be very soon, (in a month or even less perhaps, depending on how the markets react), then such action should be construed as the recognition of Mr. Bernanke and Company of the imminence of the risks of degenerating economic conditions in response to the self-imposed tightening brought about by the continuing recession in the US real estate industry, which has now spread to other segments of the economy. This should imply that US markets may have FURTHER room to fall!

Ok let us revert to some technical standpoint to see how “Normal” things are.

Figure 2: Chart of the Day: September is the Worst Month for US Markets

Chartoftheday.com totaled the monthly average performance of the US major benchmark the Dow Jones Industrial Averages since 1950, as shown in Figure 2 and arrived at the statistical probability that going forward September could equal its WORST performance as it had been in the past 57 years.

This means that as August (barely changed from July 31^st) progresses which seem to be acting out an inflection point, September could even deliver more sufferings to the rear view mirror looking bulls. So essentially why take the risk today unless there is a tradeable short term window (but again risks prospects are high)?

Figure 3: BBC: Market Crashes Through The Ages

Two charts I compiled from BBC as shown in Figure 3 is the 10 biggest ONE DAY FALLS (leftmost bar chart) and 10 worst BEAR markets (rightmost bar chart) in the Dow Jones Industrial Averages.

Notice on the left chart that the 10 biggest declines had occurred mostly during October (5 times) followed by August (2 instances).

So aside from seasonal weakness for the month of September, August until October has proven to be a quarter previously SENSITIVE to the biggest one day losses for the Dow Jones. This implies that if HISTORY would ever rhyme again, then the present quarter has INCREASED the odds for the Dow Jones to be equally SUSCEPTIBLE to a HUGE one day decline!

Moreover, if today’s market has turned out to be an inflection point rather than a “normal” correction then the rightmost chart tell us that the average bearmarket in the US falls by around 40%!

And since our Phisix and most of the global markets has closely traced the movements or have been POSITIVELY CORRELATED with that of the US markets then think of WHAT a bearmarket in the US might possibly do to us or to the global markets, as shown in Figure 4.

Figure 4: The Previous Bear saw the Dow Jones HURT the HANG SENG and the PHISIX

When the 2000 tech bubble imploded in the US, the Dow Jones (black candle) plunged to about 7,200 (2002) from a high of about 11,900 for a 40% loss, as shown by the green trend channel.

In a similar timeframe, coincidentally the Hong Kong’s Hang Seng Index fell by about 52% (blue line) and the Phisix (red line) an even harder 62%!

And when fundamentals and technical viewpoints match, they tend to deliver quite a meaningful impact!

Of course I can always be wrong (which I hope I am--it will be a financial drought anew for us in the industry under a bearish environment--I should perhaps look for a new job).

Maybe confidence will be regained soon (I hope), the liquidity drought reverses and recovers (I hope) and credit conditions will ease (I hope) as the housing recession in the US finds a bottom (I hope).

But as a student of risk and market cycles, I wouldn’t bet on HOPE UNTIL the market proves me WRONG by stabilizing and eventually recovering. For the moment, this OBVIOUSLY isn’t the case.

Our goal is to preserve capital first and foremost.