Dead Cat

Dow 5,000 in 2010? [[Im holding my breath for it!]]

In my last column I predicted a “dead cat bounce” in the stock market and a possible Dow plunge to 5,000 this year. Obviously, many readers mocked my prediction.

But understanding the dead cat bounce is vital, especially in today's market.

Simply put, a dead cat bounce looks like Diagram 1 below:

The market crashes, rebounds, and runs out of steam, then crashes again…unfortunately, and possibly, to a lower low.

[[NOT a higher low. Through countless hours and days of watching stock charts, I've learned one thing, the "big investors" show their hands in profit taking, they tip their hands and show the highs and lows they are willing to get in and out at. No reason to get back in above the recent low, why not drive it down to lower-than-low? A friend recently got a memorable a** kicking after making 20K on a certain stock, then putting it all back in before the insiders had ridden it back down. He got back in high, they deflated it right back down to where they had taken it last time, and he lost big time.]]

When professional investors observe a dead cat forming, many will begin to sell. If their selling leads to a panic, the stock market goes even lower.

[[I did. I sold already except for a modest amount in share certs that Im holding for true long term on LVLT. They and ATT are Internet II. Im gonna be there when it happens, especially since I got the shares for FREE...]] 

Putting today’s numbers to the dead cat diagram gives this topic more meaning.

In 2002, the Dow hit a low of 7,286.

In 2007, the Dow hit a high of 14,164 

In 2009 the Dow fell and stopped at 6,547. 

Dow 6,547 is where the market stopped falling and the dead cat bounce began.  At 6,547 the market was oversold and buyers came rushing back in, looking for bargains. The Dow headed back up, and a bear market rally began.

[[But only a SMALL NUMBER of buyers. It is a HOLLOW recovery. Modulate the charts with the number of shares traded and youll get a surprise. There is no recovery, because while the numbers are up (the Dow is at 10,000) that only tells part of the story, how many SHARES are bought up to 10,000? Darn few. So, while the price level is up, the amount of money put back in is small, and itll not take a large withdrawal to crash it.]] 

On February 5, 2010 the Dow closed at 10,012.

On February 12, 2010 the Dow closed at 10,099.

What Does This Mean?

So the question is, “What do these numbers mean to me?” The answer to that question depends upon you. If you are a bullish person, you will be optimistic, reassured by these numbers, and looking forward to the Dow breaking 14,000 soon.
If you are bearish, you will be waiting for the dead cat to finally die and for a double dip recession to begin.

One of the theorists (and writers) I follow is Richard Russell, a wise sage who is in tune with markets and the madness of crowds. He has been in the business for about 50 years, so he has the wisdom and perspective of time. Lately, he has been writing about the ‘50% Rule’ of Dow Theory. I thought I would pass it on to you because it may assist you in seeing the future of the economy, even if --like me -- you do not trade in stocks.

The following is my interpretation of the ‘50% Rule’ using real numbers.

In 2002 the low of the Dow was 7,286.

In 2007 the Dow hit a high of 14,164.

The ‘50% Rule ‘number is 10,725…the halfway point between 7,286 and 14,164.

In 2007, when the market headed down and broke 10,725, professional traders who follow the Dow Theory ‘50% Rule’ knew what was going to happen next. On March 9, 2009, the crash stopped at Dow 6,547.

[[Hold a million shares of XYZ in 2002, it DOUBLES in price in '07. Doubles in 5 years. Per- annum return is? Wouldn't you sell compared to the pitiful "10% per year in the stock market" that most individual investors are advised to be satisfied with? All it takes is enough suckers to put their shillings in for the taking.]] 

On that day, what I believe is a ‘dead cat bounce’ began as the market moved up.

On January 19, 2010, the Dow stalled at 10,725 and headed down again. This is spooky. The 50% rule came true.

The next interesting point is 7,286, the low of 2002, when the rally began.  According to Russell, if the Dow holds at 7,286 and begins a rally, this might be a good time to buy. But if it fails to hold at 7,286 and slides past 6,547, then look out for dead cats dropping from the sky. Russell predicts that Dow 1,000, the number at which the Dow began its rally in the 1970s, may not be out of the question. If that happens, there will be millions of baby boomers joining the dead cats falling from the sky as their 401(k)s and IRAs implode.

[[People, if this doesnt bring you next to tears, I fear for you. I've predicted Dow 800. It's not worth arguing the extra 200 points. What people don't stop and think about re. gold (for example) in citing that "its gone up from $750 to 1100 and may go to 2500" is that it can just as easily go to its historical low, which is....  do you know? I do, which is why I LAUGHED (laughtd out loud at them on the phone) at Monex the last time they called - "you think Im stupid enough to fall for 30 % on the upside, when the down-side is $300 w-a-a-a-a-y back in 2001. Wait a minute, that's not "way back" - that's YESTERDAY" They took me seriously when I called the recent low in silver - to the week and nickel then didn't understand why I wouldn't buy.

http://monex.com/prods/gold_chart.html

Lest you be fooled by Monex' 10-year chart, go where I do for historical commodities data - USGS - they have no axe to grind:

http://minerals.usgs.gov/minerals/pubs/commodity/gold/

http://minerals.usgs.gov/minerals/pubs/commodity/gold/300798.pdf

There's much more to it than just price per ounce.]] 

Other Markets

This ‘50% Rule’ may apply to other markets such as gold, the hot commodity of this era. 

In 1971 gold was $35 an ounce. I began buying gold in 1972 when I was a pilot in Vietnam, watching the Vietnamese panic when they knew the U.S. was not going to win the war.

Gold hit a peak of $850 an ounce in January of 1980.

Gold dropped to a low of $252 in July of 1999. Obviously, I bought a lot of gold in 1999.  Gold was at an all-time low because Central Banks, such as the Fed and the Bank of England, were dumping gold in an attempt to protect the value of their counterfeit currencies.

[[Notice he waited till the "all time low" instead of following the herd mentality and buying on the uptick out of fear we'll be left behind. "Left behind" is just as fictional here as it is in religion. And dont fall for the "inflation adjusted price" - the price can fall to ZERO, and zero is zero.

And IMO, we are back at the "protect their counterfeit currencies." If so, welcome to the coming gold crash.]] 

According to the ‘50% Rule’ of Dow Theory, when the price of gold was passing $600 an ounce(halfway between $850 and $252), a rally in gold was on. When gold passed $600, mainstream financial experts began warning of a crash in the price of gold… stating that gold was in a bubble.

Today gold fluctuates between $1,000 and $1,200 an ounce.

[[I played a version of this in 2007 with LVLT and DOUBLED my money in 3 MONTHS by following someone (an insider, I assume) who was playing 5M shares regularly, up and down. I'd stay in for about 50% up, then 50% of that 50, then bail out, ride it down to before where "they" got in at, and I got back in. I was not placed well enough to know when "they" are going to buy and sell so I had to get in/out a bit before top/bottom. It worked. It DOES NOT work now because there is no rationale in stock trading. Stocks are wandering around like little lost sheep.]] 

Is Gold in a Bubble? 

When you factor in inflation and devaluation of the U.S. dollar, $850 gold in 1980 is $2,500 an ounce in today’s dollars. In other words, gold might be at 50% at $1,200, which is the highest of highs. Could there be a run to $2,500?

Your personal answer to that question will depend upon how confident you are in Fed Chairman Ben Bernanke, President Obama, and Wall Street. If you have faith in our leaders of commerce, don’t buy gold. If you do not have faith in them, maybe you should buy gold or silver.

If the dead cat bounce dies and the Dow drops to 5,000 in 2010, as I predict, then the price of gold and silver may die with the dead cat of the Dow, as investors cling to cash. The next question you need to answer is, “If the Dow dies and the price of gold and silver drop, what should you invest in at the bottom…stocks, gold and silver, or cash?”

[[the answer in 1929 was cash, and Im there now, just waiting for hyper inflation....]] 

I know what I will do. I will buy more gold and silver. Why? The answer is because I trust gold and silver more than Central bankers, the Oval Office, and Wall Street. Gold and silver have been real money for thousands of years.

 [[Flawed logic many fall for, yes, gold and silver were money for thousands of years, but they aren't now - if but for their industrial uses, what are they good for? Ill keep as much as FDIC allows in cash, some in the platinum group metals, maybe some in silver but forget about gold, its not practical for trade.]]

The Lost Decade

The people I am most concerned about are the average investors who have bought their financial planner’s advice of “Invest for the long term in a well-diversified portfolio of stocks, bonds, and mutual funds.”

[[Long term is good for the planner, NOT FOR YOU. They advise what makes money for them. Yes, "long term" as long as prices are rising.]] 

Many investors are calling the past 10 years The Lost Decade. That means those who invested for the long term in stocks, bonds, mutual funds, and cash are long-term losers. Japan has been in a Lost Two Decades.

A ‘lost decade’ means:

1.  Zero job creation.
2.  Zero economic gains for the typical family. Home values are down and   many families owe more on their home than the home is worth.
3.  Zero gains in the stock market.

Over the next few months, it is important to watch both the Dow and gold. As I write, the Dow is around 10,000 and gold is at $1,000. If the Dow breaks 7,286, the 2002 low, and continues down below 6,547, the 2009 low, watch out below. If 6,547 is broken and gold passes $2,500 an ounce, you'll have even more to worry about.

[[Problem - stock prices now have NOTHING to do with company fundamentals, just as gold has no real tie to the dollar. Gold isn't worth 'diddley squat' if industry is flat-lined, at least with stocks, the paper certificate is directly related to a corporation with tangible assets, which, I believe, is related to the dislike for bonds the Chinese have right now, US bonds are based on what besides a smoking hole full of debt?

And another thing to watch, the 10 A.M. EST price rises have ceased. Go pick a dozen stocks at random and look at their trends at 10 AM, then look at them a few months ago.]]