Stocks broke down in a big way this week, falling below the trendline that has supported them since late August. Indeed, it looks as though we not only broke below this line but have since rallied to retest it: a classic pattern during corrections.
The question now is if this is just a minor correction or the start of something more. The S&P 500 appears to have formed a rising bearish wedge pattern (see above), which usually is a termination pattern that results in the underlying security falling to retest its base (in this case 1050 or so on the S&P 500).
However, with Government intervention in the markets being what it is, we could also simply see a minor correction here followed by yet another ramp job. Indeed, this is exactly what happened in 2009 when stocks broke a near perfect rising bearish pattern only to bounce back and begin yet another ramp job:
Thus, the BIG question for US stocks is whether the market has already digested all the QE hype to the point that threats of additional liquidity does nothing, OR if the Bernanke “Put” is still in play.
While this might not seem like a big deal, I can assure it is THE most significant issue the financial markets face right now. The reason for this is that IF the Bernanke “Put” is no longer relevant, that is additional liquidity and bailouts, doesn’t actually induce a rally anymore… then the entire financial system will collapse in one form or another.
Remember, the only thing that pulled us from the brink in 2008 was Bernanke printing like a lunatic. It’s the ONLY thing that has held the market together. And while it may have kicked off a major rally in stocks… it FAILED to address the underlying issues that caused the Crisis in the first place: namely excessive debt and leverage.
In fact, Bernanke has made the financial system even MORE leveraged than it was in 2008. So if the Fed’s moves no longer have an effect on the markets, then it’s time for the REAL Crisis… the Crisis to which 2008 was a warm up.
Because when the stuff hits the fan this time around, the Fed will be powerless to do anything. Bernanke’s already shot every bullet he’s got. So when he loses control this time around, not only will the market crater, but the belief that has kept the financial system afloat through every Crisis of the last 30 years (namely that the Fed can always save the day) will shatter.
And when that happens it will be the US financial system, NOT just stocks that goes down.
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