By Bert Dohmen, Founder
Dohmen Capital Research
(contains excerpts of our most recent Wellington Letter)
In our September 5thWellington Letter Special Bulletin we forecasted, “the dam is ready to break in the financial markets. Our time target of early September is here and the cycles are working.”
On Tuesday, September 13th, the dam broke and the trap for the bulls slammed shut. The markets suffered their worst plunge since the dark days of COVID in June 2020.
Wall Street did a good job luring inexperienced investors into the market to take unwanted inventory off of the hands of their firms. Now those people are in the typical psychological trap: whether or not to sell now. Novice investors never want to sell at a loss, but that’s a big mistake!
We’ve always gone by the wisdom, “never let a small loss turn into a big one.” When in doubt, sell and watch from the sidelines until the fog clears.
In our Smarter Stock Trader issue from Friday, September 9th, we also forecasted,
“we could see a final bounce on Monday before a reversal lower on Tuesday.”
That prediction was right on target. One clue for that forecast was the preceding four-day rally on declining volume.
Another clue was the fact that the broader indices (VALUG Index and NYSE Comp, which we consider far more important), failed to close above their prior week’s highs on Friday. We said that was “meaningful” as it showed buyers couldn’t overpower the selling from the recent decline.
Lastly, the signals on the charts throughout last week’s rally indicated it was more technical in nature from oversold levels.
Thus, we concluded Monday, September 12th would be the final gasp before the markets started their selloff on Tuesday, September 13th. While the narrative behind Tuesday’s market plunge was all due to a so-called “hotter-than-expected” inflation reading, we have been saying “For us, the worst is still ahead for the general market.”
The major selling was in the mega-cap tech stocks (i.e. “FAANG” stocks). The NYFANG Index, which includes these stocks, is typically pushed up on false rallies and outperforms the rest of the indices. The manipulation ended on Tuesday, causing the NYFANG to fall 6.6%. That plunge completely wiped out its 4-day rally. That leaves a pretty bearish chart.
Tuesday’s plunge gives us further conviction in what we wrote in Friday’s Smarter Stock Trader; “We see nothing that would say that a bottom in the bear market has been made.”
The big down gaps at the opening locked bargain hunters in with losses. This is often how serious declines start. Amazingly, we heard a number of analysts suggesting bargain hunting late that day. For new readers of our research, let us remind you that our prediction for this bear market is that at least one index will decline 80% from the peak.
The daily chart below of the ETF for the NASDAQ-100, QQQ, shows Tuesday’s big down-gap opening. Note that on Monday it reached our “green” resistance level. That acted like a brick wall.
The June lows (lower red horizontal line) will be the next target, before progressing to the March 2020 low (not shown), which has been our target for a number of months. See the chart below:
Late last year we predicted that the entire up-move from the 2020 low would be erased as it was fueled by pure money creation by the central banks, unconfirmed by fundamentals. That prediction is still in effect.
CPI DATA: The much-awaited CPI came out on Tuesday and showed a higher-than-expected rise. The Consumer Price Index (CPI) in August reflected an 8.3% increase over last year.
However, Washington says that inflation increased only by 0.1%. That of course is from the prior month (July), which is typically not cited.
Core-inflation, which the Fed looks most closely, jumped 0.6%, which is double the prior 0.3% rise. Most components accelerated over the past year. That is what counts, not the change over the prior month.
Yet, the small rise in the inflation gain over last month was blamed for Tuesday’s market selloff.
Believe it or not, Tuesday’s shocking plunge had nothing to do with the CPI. Last Friday (September 9th), when we predicted Tuesday would be a “reversal” day, we didn’t know about what the CPI data would show. This plunge was well-coordinated and planned.
Had the CPI shown a decline, the reason for the stock market plunge would have been “fears of deflation.” To think that a 0.1% rise in the CPI in one month, or 1.3% annualized, would cause this selling binge is ridiculous. There always has to be an alleged reason for such manipulation in order NOT to draw attention to the real cause.
CONCLUSION: In spite of all the efforts by Washington to plunge energy prices, as that is a big part of inflation, overall price levels are still climbing, as confirmed again by the PPI (Producer Price Index). That is to be expected. Inflation doesn’t magically disappear by itself.
Well known Professor Jeremy Siegel pointed out, just as we have, that the CPI far understates inflation. Housing prices are up 40%, but the “shelter” component of the CPI, according to Siegel, is up around 6%-7%.
That confirms what we have been writing, namely that all the talk of perhaps 90% of analysts, who were saying inflation has peaked and is magically disappearing, is complete “baloney.”
September is usually the poorest month for stocks. We believe this is the start of a very strong down leg in the bear market, something we have warned about for weeks. If you have losses, taking a small loss is better than letting them grow into larges losses.
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Wishing you successful investing,
Bert Dohmen, Founder
Dohmen Strategies, LLC