Dow Jones Industrial Average, S&P 500: Expect A Market Collapse

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December 26, 2013 12:09pm NYSE:DDM NYSE:DIA

dollar money bubbleToby Connor: Well the Fed in it’s infinite wisdom has gone and done it again. They’ve created another bubble. Arguably the 6th in the last 13 years (tech, real estate, credit, bond, oil, and now stocks again, and an echo bubble in housing).


If one steps back far enough they can see what’s really happening. The Fed has now manufactured a parabolic move in the stock market. Much more aggressive (and thus even more unsustainable) than either the 2000 or 2007 tops.

Here’s the problem; Parabola’s always collapse. There are never any exceptions. And when this one goes it’s going to take the global economy with it.

At some point profit taking starts as nervous professionals fearing a regression to the mean event start to lock in profits. As the big institutional money starts to come out of the market the selling begins to accelerate and the losses quickly mount. The steeper the parabola the quicker the losses once the parabola breaks. It’s not unusual to see 3-6 months of gains evaporate in the space of days when one of these collapses. I have a pretty good idea where this one is going to initially once the break begins (more on that in a minute).

This all started in 2011. If the Fed had just allowed the market to correct naturally and drop down into it’s 4 year cycle low in 2012 we would probably now be on a sustainable path into another secular bull market.

Unfortunately the Fed made a catastrophic mistake. Instead of allowing the market to function naturally they began operation Twist, then LTRO, then QE3 and QE4. The result as you can see in the first chart is they’ve created a huge unsustainable parabolic move in the stock market. Try as they might to prevent corrections the longer they allow this to continue the more devastating the crash is going to be when the market breaks.

Based on the extremely stretched nature of the current intermediate cycle (week 27) I’m looking for a top and the start of the collapse early next year. Possibly as we begin earnings season. If one is in the market trying to catch the last few percent understand we aren’t in an investor environment this late in the bull market. This is short term trading only, and at the first sign the crash has begun get out and stay out.

Margin debt and money market funds are at levels indicating retail investors are now all in like they always are at market tops.

Source: sentimentrader.com

I expect we are going to see the market fall precipitously to test the previous bull market tops and erase most of last years gains in a matter of days or weeks. At that point Yellen will panic and all thoughts of tapering will vanish. As a matter of fact I expect the Fed will increase QE, maybe drastically, to try and reflate the parabola.

At that point though the damage will already be done. All they will accomplish is a violent echo rally common to all collapsing parabolas. From there the bear market will have begun and the more QE they throw at the market, the more and faster the liquidity will leak into the commodity markets until inflation completely destroys the economy and the next recession gets underway.

The Fed thinks they are creating a “wealth effect”. All they’ve really done is sow the seeds of the next crash.

Related: Dow Jones Industrial Average (INDEXDJX:.DJI), S&P 500 (INDEXSP:.INX).

This article is brought to you courtesy of Toby Connor from Gold Scents.


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