Potential Market Crash

on 11 16, 2010

For those of you who follow the news then you know how bad the underlying fundamentals have been.  Just recently though we have seen some significant news comes out of Europe that could act as a drag on the res of the world.  Ireland, Portugal and Greece are back in the news.

Ireland has seen the cost of financing their bonds skyrocket for fear of complete collapse.  The EU body is recommending a bailout, but Ireland does not want to be held hostage by the EU.  Mean while Portugal and Spain are facing similar problems.  It is only a matter of time before the debt hawks collapse one of these nations.  The socialists have lived beyond their means for too long.  They will eventually have to pay for their debts.

This hits home here in the US, because as some say we are becoming the socialistic society that much of Europe claims to be.  Depending on what measure you look at we are worse off than these three countries.  Our national debt does not take into consideration our unfunded liabilities of social security, medicare, medicaid.  If we did count these massive unfunded liabilities the USA would be in worse shape.  As the European debt fears increases it will only bring to light the massive $600Billion that the Fed just rolled out as Quantitative Easing.  We told you it was coming back in August of this year.

So where is the crash you ask?  Well, these markets have been built upon a cloud of air.  Volume so thin that it could be punctured with the slightest pressure like the flash crash back in April.  I have seen several references that the markets are looking very similar in wedge formation on the chart.

I have tried to keep readers apprised of precarious levels for areas when to protect your portfolio.

Let’s take a look at the charts:

Here is the DJIA on 11/16 with a 5 year view:

We can see on the bigger picture that we have rallied quite nicely from the lows in March of 2009 and ran until April of 2010.  Retest of the 10,000 line occurred over the next few months.  They were finally able to break it out of consolidation to retest the highs of April.

There has been no major improvement in any underlying fundamental economic indicator that matters.  Some companies have had better earnings and provided better forecasts, but we know that we should not rely on those forecasts.

We can only rely on the truths that we do know:

Housing prices are still falling

Foreclosures are still increasing

Bank mortgage fraud could cause major problems

Uunemployment rates are still very high and a lot of unemployed people are falling off the ranks because they have been on for 99 weeks

Our debt is literally out of control

Fed enacted another round of quantitative easing even as they said under oath that they would not

Our Dollar is getting destroyed

Let’s take a look at the short term chart.

We can see from the short term, that the trend line is just starting to be tested.  When we see violations of the trend then we should start to be concerned with reversals.  We have to gauge where the reversals can potentially fall to and if we want to protect our portfolios.  The market has complete air under it.  What do I mean by air?  Just like every bubble that has popped in the last 10 years, this market has been built off of slight of hand and manipulation.

Slight of hand is how the government adjusts the reporting requirements for banks to stop the bleeding.  The manipulation is the bailouts that those banks, autos and insurance companies received to make the perception that they were a safe investment.  Further manipulation is the Fed doling out money to banks and brokerage firms in exchange for their worthless mortgage assets.  Even further is the Fed propping up the market with POMO:Permanent Open Market Operations.  This is the primary dealers license to steal. The fed doles it outand the primary dealers push the high beta stocks.  Everything else gets pulled higher.

So where is the crash?

Well, that is the tough part, the market is reacting negatively to the European debt news, but we have the Fed and primary dealers who POMO money doesn’t seem to hold as much force these days.  If you follow the trends and things continue to stay ugly, then we could have some sideways movement for some time.  If lousy news continues to drip out of Europe, then we could face a rally in the Dollar which would crush our stock market.  This is where I want to have some PROTECTION.

Not guns and ammo but portfolio protection.  Buy a put or buy an inverse ETF.  Beta weight your portfolio so you know what your risk is to the downside.  If the market falls to 10,000 on the Dow, what does your portfolio lose?  Are you comfortable with that?

If you are not comfortable hedging then ask your financial advisor what you should do?  Just kidding – he will tell you to invest for the long term…go ahead ask him.  Or to rephrase it, I am not allowed to hedge your portfolio or I don’t know how! Sorry folks you will have to do this one on your own.

There are multiple methods to assess your risk.  The obvious one is: whatever the market goes down, then your stocks will go down roughly the same.  What is your loss down 10%? Another way is to beta weight your portfolio.

Each person’s portfolio is different.  Risk is different to each person as well.

I have written about this several times, but mainly to tell everyone to protect themselves.

I do not believe in the fundamentals that is shoved down our throats from the national news or newspapers.  We are not out of recession.  Unemployment and foreclosures are not going away any time soon.

The upward trend is being broken and you need to protect yourself.

If you are not comfortable with protecting your portfolio then I encourage you to go to someone who can help.  I created a step by step course to help you with beta weighting your portfolio and showing your how to use options and  inverse ETFs to protect your current investments.


Please learn how before we see another flash crash like we did in April of down $1500 points.

If you need help or have questions, I will do my best to help answer your questions!


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