Three days ago Richard Russell wrote: "First, we saw the recent April highs in the Averages. Then we saw a plunge in both Averages to their May 7 lows -- Industrials to 10380.43, Transports to 4298.12, next a short rally. If ahead, the two Averages turn down and violate their May 7 lows, that would be the clincher. Such action would signal the certain resumption of the primary bear market."
The bullish confirmations of Dow Theory (the last and strongest one was on March 17) have now reversed themselves. Today the Dow closed at 10,068 (down 376 points, 3.6%) and the Transports at 4,161 (down 214 points, a dismal 4.9%) - well below the May 7 lows. The selloff was global.
According to Dow Theory, this now means we will most likely retest previous lows set in February. The internal structure of the markets has been deteriorating rapidly for several weeks. Last week's so-called "flash-crash" was not a glitch so much as a zealous indicator of where we are headed.
This does not bode well for the Obama Administration - as the president will, of course, be tagged with the blame for what is likely to become a continuation of the Great Recession. (He will learn that his brave social agenda resonates with no one other than his most liberal supporters. His stimulus package and the health care reform bill will seem like bad jokes - which is what they are.)
For the record, the government stimulus did nothing but increase our national debt. It did not get us out of the original recession. It merely delayed the recession from fully expressing itself. As Ned Beatty says in the great movie Network: "You have meddled with the primal forces of nature and you shall atone!"
So, my guess is the severely oversold markets will have some sort of short-term bounce before something resembling a crash occurs. Advisor Jeff Cooper seems to think the new bottom will be somewhere around 8,000 for the Dow. Russell seems to think it will be lower.
This debt situation is far worse than anyone has acknowledged. In the coming months, unemployment will likely rise, the number of foreclosures will likely increase again, the trouble in Europe will likely spread, and the Fed will be in an all-out battle against deflation. All this, while the Fed reading of the situation borders on delusional. (The markets are the definitive source on what we can expect from the economic "recovery".)
It was announced today that the so-called Leading Economic Indicators were down for the first time in a year even though Moody's says the recovery is now nationwide.
Deflation will hurt gold in the short-term (and, consequently set-up a great buy-in opportunity for additional accumulation). But, the Fed will fight deflation tooth and nail. The reason why is our national debt. To reiterate something I have harped on before, in a deflationary environment the price of everything goes down but the debt remains the same so it is experienced as greater, heavier, in relation to everything else. The Fed will ramp up the money supply again, more worthless fiat Federal Reserve Notes will flood the capital markets and gold will shoot up again. The third phase of the gold bull market should show us unprecedented, historic prices.
No one knows for sure, of course. But, that's where I'm betting my money. And that bet is largely based, as it has been since 2003, on Dow Theory.