Guest Post: If The Market Rolls Over Here....

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

If The Market Rolls Over Here....

If this rally runs out of steam, history suggests the next move down could plumb depths not seen in years.

If the market rolls over here, the next bottom might be a lot lower than most players think possible. After all, the "news" is all positive: Europe's debt crisis is now resolved; employment in the U.S. is trending up, GDP is growing nicely, etc. etc. etc.

As food for thought, here are two charts, courtesy of frequent contributor B.C., that suggest the good news might not only be priced in, but it might abruptly cease flowing.

The first chart is of the S&P 500 from 1973 to the present. The current rally has stalled right at a multi-year line of resistance, and a potential A-B-C pattern in a long-term channel suggests a return visit to the March '08 lows around 666, or perhaps even lower.


Here are B.C.'s observations:


If a C wave is imminent, a typical pattern is 2 (or 2.382-2.764) x A or a target of the '02-'03 and fall '08 lows, or even as low as the 500s-600s eventually. C = A would imply an idealized target in the 460s and nominal SPX 600s (US$ constant at the current level).

Such a decline in a period of "growth" seems impossible, but we should keep in mind the possibility that four conditions could cause growth to roll over and corporate profits to compress:

1. Rising energy input costs

2. Rising U.S. dollar decimates overseas earnings of U.S. corporations

3. Tapped-out consumers run out of gas (literally)

4. Federal government stops borrowing and blowing 10% of GDP every year

Next up, an analog chart of the Nikkei and the S&P 500 (SPX). To align apples to apples, this chart tracks the dollar-adjusted Nikkei from its top in 1989 and the dollar-adjusted SPX from its top in 2000. (For reference, the yen-adjusted Nikkei is also plotted.)

Interestingly, the SPX has tracked the Nikkei rather closely--at least until the extraordinary monetary interventions by the Federal Reserve known as QE2 and Operation Twist put booster rockets on the market (with some recent aid from the ECB's LTRO injection of about $1.5 trillion into the banking sector since December).

If the SPX were to continue tracking the Nikkei, the next bottom won't occur until late 2013 or early 2014--two years hence.



Here are B.C.'s notes on this chart:

Note how relatively closely the SPX was tracking the currency-adj. corollary with the Nikkei until QE2 and "Operation Twist". Coincidence . . .? I suspect not. Had the SPX tracked the corollary as in '01 and '08, the SPX would be in the 800s-900s by now.


Can the Fed and shadow banksters prevent for the next 18-24 months the historical tendency for the SPX to follow the self-similar cyclical and secular patterns? I suspect we are going to witness their ongoing desperate attempts to do so.

The problem for the Fed is that interest rates are already zero, and playing around with bonds and buying more mortgages (the Fed already owns $1 trillion) is ultimately pushing on a string: the Fed can't force all the free money into productive investments, nor can it force banks to lend or consumers to spend.

The cliche is "don't fight the Fed;" there is no need to "fight the Fed" because they're busy self-destructing, and all we have to do is watch.

Maybe the market will follow Apple in a trajectory to the moon here. If it doesn't, a variety of other models suggests the wheels may fall off the "growth and rising profits forever" story and the market will decline to test recent lows or even hit new lows.

That's not what the Fed or the politicos want, but events on stage may be slipping beyond their off-stage control.

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catacl1sm's picture

Holy Crap! I read the headline as "If Merkel rolls over here..."

nope-1004's picture

The FED is the market.  They are controlling everything.  It is the furthest thing from a free market I've ever seen.

It won't roll over.  I think Benocide was lying yesterday.  He knows damn well that the only way out of the massive debt situation is to inflate.  The stock markets will rise in nominal terms.  The sheeple will be happy watching the S&P rise, meanwhile have no clue how or why their wealth is being depleted.


ACP's picture

Just gotta play the crashes.

Every time the printing stops, crash. But from the world-wide printing that's been going on, don't know if the printing will ever stop from here on out.

The Big Ching-aso's picture



Hell.  The obvious.  If QE doesn't come 'voluntarily' Wall Street on its own will crash the market forcing Ben's hand.  One or the other.

French Frog's picture

If only  I could magically remove the word 'IF' from the headline....

economics1996's picture

Let the Fed commit suicide.  Adios asshole.

Spigot's picture

Potemkin Markets

The USSR had nothing on us, baby.

Nearing event horizon

clones2's picture

"Mo' Money... Mo' Problems..."

The FED and Central Banks will keep printing...  which means the markets should continue to inflate.  I believe at that point, bonds fall and rates rise.   The money moving out of bonds into riskier instruments like equities could really get the inflation party going.

Al Huxley's picture

Agree 100%.  The FED and the ECB can SAY whatever they want, but they can now only DO 1 thing - monetize for as long as they can get away with it.  It's that or make the banks eat their losses, and THAT will never happen.  Far more palatable for the average American or European to gradually notice they're getting less for their money that it is to wake up one morning and find out that the bank's gone broke and all their money's gone.

clones2's picture

The 2 major investment choices that most people invest with are stocks or bonds... At SOME point - people aren't going to be crazy about a 10 year bond at zero...I mean 1.95%...  Which means money of out bonds into equities and rates rise.

To make up for rising rates and higher debt payments, deficits will rise, banks will print more.

I'm pretty sure this is leads to hyperinflation. ;-)

catacl1sm's picture

Treasurey rates don't ever HAVE to rise. The Fed COULD buy up all of the new Treasuries at whatever rate it decides. That's not exactly good for the public, but it keeps the interest on the national debt down. If that goes up, the US blows up fast. The longer they keep this farce up, the worse the aftermath will be. I think they've already taken it too far and are hoping for Krugman's aliens to invade so that they have a good excuse for the aftermath. They just keep covering up a lie with a lie... eventually it will all come out and it will seem like lunacy what was done, but when you get deep enough into the lie, you CAN'T get out of it. I'm sure there's a psychological term for that.

Theta_Burn's picture


With just mths away from an election, the continuation of this farce is easy. after the golden booyyee is reinstated, rollover,QE new market lows will be daily read

On a side note, I can't really watch those fed speeches because well i just can't, but yesterday i did just long enough to notice contortions on Bernake's face that I've never seen before.....

Oh, and I think Barney Frank has a man crush on the Bernanke.

eatthebanksters's picture

he digs the bernank's trim...

BobPaulson's picture

Which is why they shanked gold.

SillySalesmanQuestion's picture

He's lying again today as we speak...he does'nt even read the data he's "quoting". What a loon.

Lost My Shorts's picture

I agree -- that market rollover is the Godot that everyone at ZH has been waiting for forever.  The market has been about to roll over for months.  Mr. Hugh Smith claims to be of two minds, but I can only see one.

The market would only roll over if:

1) I go balls to the wall long.  (For $25 you can sign up for my newsletter and I will tell you when.)

2) The powers that be want a roll-over.

Doug Kass is also calling for a modest roll-over, and he seems to know how the big players are positioned.  I would trust that much more than CHS's rambling about who can't do what.

disabledvet's picture

Doug Cass is part of the "lunatic brigade"...hence "the market rallies on his news." not saying he won't be proven right... but the Treasury market is the best economic forecaster you can have. If those yields plunge back to the 1.75 range then yes...Problem BofA returns. The fact of the matter however is if these low rates which indeed are being spread throughout the economy courtesy of Citigroup are "sustained" that combined with continued massive Federal stimulus will simply "command recovery." I agree it is far from elegant. I know I've been living the blues for some time now and see no end in site to that. "Cry me a river" as they say. Or "blow up Syria Mr President!" I know it'll make me feel better.

silver4me's picture

The FED is the market. They are controlling everything. It is the furthest thing from a free market I've ever seen.

You are right about this. And once everyone is finally convinced that the Fed won't let the market go down, well then you know. It's crash time.

Gomie's picture

No way cuz I just read this: "At Birinyi Associates, it’s a 1,700-point S&P 500 Index SPX +0.37% sometime later this year, according to the money management and research firm’s March 2012 Reminiscences newsletter."

So there you have it, SPX 1700 this year. I read it on the internets so it must be true. Sorry.

RobotTrader's picture

Hilarious how Uncle Ben's comments yesterday, put huge pressure on bonds.

Most bond ETF's are now at "Do or Die" levels.

ebworthen's picture

Bonds and equities are all toppy, just like sovereign governments and central banks.

The only things that aren't are precious metals and oil.

Funny how tangibles win out eventually.

fuu's picture

Did you enjoy the little time out?

Ivanovich's picture

I have heard this story for several years now.  While it would be about time and welcome, I do not wish to hold my breath any longer, nor "bet" accordingly.  Another Morgan Peace Dollar, please.

Abiotic Oil's picture

All prepped up and nowhere to go.

iamtheeggman whooooooooooooo's picture

great line:

The cliche is "don't fight the Fed;" there is no need to "fight the Fed" because they're busy self-destructing, and all we have to do is watch.

CapitalistRock's picture

Wrong. A central bank absolutely will force you to spend. It won't be terribly productive. In fact, it will create terrible misallocations of capital and ultimately lower standards of living than a sound money would.

But they will create full employment. That part is easy. Real production will elude them.

catacl1sm's picture

1920'2 part II. Same outcome.

economics1996's picture

War creates full employment also.  If we create enough inflation the economy and make real wages 50 cents a hour everyone will have a job.  Woopi!  Fun, fun, joy, joy.

Bring back Stalin.

pleseus's picture

All the central banks of the world will print more money sooner or later.  Buy gold and silver as a long term investment.  It's bound to go up over time.

catacl1sm's picture

Gold and silver PROTECT your wealth, not increase it.

Boilermaker's picture

..."Guest Post: If The Market Rolls Over Here...."

Well, golly gee, I wonder if Ben has already thought of that.

ebworthen's picture

The Bernank is telling CONgress that the recession will not affect the potential for long term growth.

So...nearly $16 Trillion in open debt and over $65 Trillion in shadow debt and unfunded liabilities will not affect the potential for long term growth?

Ben, how long have you been sitting on that mushroom with the hookah smoking caterpillar puffing and puffing while flirting with Alice?

SheepDog-One's picture

I think someone filled Bens hookah with CRACK!

Moneyswirth's picture

The iPad 3 will save this economy

oddjob's picture

Considering the economy is bleeding so badly, you might have something there.

jomama's picture

an iPad isn't really a pad, see....

catacl1sm's picture

Is this one going to be the promised 'chocolate' flavored one? All of my olds one have tasted like plastic.

JPM Hater001's picture

It is different this time.  We have no real savings.  Adjust your drop target by another 50%.

SheepDog-One's picture

So basically we're on the edge of the highest cliff in the world, hanging by a thread, and we'll just chill here for another 10 months no problem....YEA SURE!

JPM Hater001's picture

Actually, I think we are standing on a wobbly ladder on the highest cliff at this point and someone is handing us a gun, a bomb, and a lighter to juggle.

adr's picture

Yes but for the market to roll over some bag holder has to buy all the shares of Priceline at $640. Who's goin to do that? Eventually the pumpers are going to realize they have nobody to dump to.

catacl1sm's picture

Uh, no they don't. The price of PCLN shares could go to $0 if no one wants it and the pumpers would be left with an empty bag.

Genzero's picture

Good number, bad number, same bullshit. Data is and will be interpreted and spun to benefit those who have the deepest pockets.

investors? Dont make me laugh. There's no capital market left, central bankers took care of that and simultaneously dealt a death blow to moral hazard. We've all become a bunch of gamblers betting on red or black on a daily basis.