Our Chartist Friend from Pittsburgh recently posted two charts that should give those tempted to “buy the dip” pause.
The first is a long-term chart of the Dow Jones Industrial Average (DJIA). The recent price history has traced out a pattern that looks remarkably similar to the one that presaged the crash of 2008, with one difference: massive quantitative easing and Eurozone bailouts pushed the B leg into an overextension. If this pattern is valid, the C leg down could be a real doozy:
Photo: Of Two Minds
How can we tell the market is ready to roll over on fundamentals? Study the ISM PMI composite readings, which just dropped below 50 into recession territory:
Photo: Of Two Minds
Notice that the S&P 500 stock market index is highly correlated to the Composite.Those who expect stocks to rise despite the PMI Composite cratering will have to explain why “this time it’s different.”The “buy the dip” crowd is counting on the Federal Reserve to launch a new round of QE (quantitative easing) that will goose the market higher even as the real economy follows the rest of the global economy into recession.
Perhaps, but for how long? Or even more sobering, suppose this entire “b” leg up was the market pricing in QE3 being unleashed on August 1.
The “buy the dip” crowd may well face a new choice: either sell at 12,500, or sell at 10,500.
Thank you, Chartist Friend from Pittsburgh for sharing two of your many insightful charts.
Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)
Read the Introduction (2,600 words) and Chapter One (7,600 words) for free. We are like passengers on the Titanic 10 minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution.Rather than being powerless, we hold the fundamental building blocks of power. We need neither permission nor political change to liberate ourselves. A powerless individual becomes powerful when he renounces the lies and complicity that enable the doomed Status Quo’s dominance.
Read more posts on Of Two Minds »