Scenario for Next 12-24 Months

The S&P500 fell apart last week, precise for the reason outlined last week:

 “….there is no good reason why this bounce must come to an end anytime soon.

Except for one thing—the Fed and its meeting announcement this upcoming week.

Because risk markets have risen in reaction to central bank actions and promises, they have already priced in a continuation of liquidity support by the Fed.  This means that for the bounce to hold—never mind continue higher—the Fed must come through with a strong dose of medicine at its announcement.

If so, the bounce will hold and even continue higher…..to say 1,300.

If not, then the bounce will most likely reverse itself……quickly…..to say 1,150 or lower.”

The failed to “come through” and did NOT pleasantly surprise the market with more quantitative easing (ie. an expansion of its balance sheet by creating more money).

And as predicted, the S&P  fell to “1,150 or lower”……specifically: 1,136. This was a painful 6.5% drop on rising volume, which added more validity to the fall.  Volatility spiked 33%, and the breadth of the decline was very wide, meaning that most stocks in the indices fell along with the market.

There were only a few macro news releases, mostly bad.  Housing starts were lower than expected. Existing home sales beat expectations, BUT the median price fell another 5.1% yoy. Initial jobless claims were higher than forecast, and leading indicators were slightly better (but this had more to do with lower interest rates which are obviously manipulated down by the Fed).

Technically, the down trend has re-asserted itself on the daily charts. Once the S&P drops below 1,100 it will have fallen by 20% from the early May high.  This will then become an official cyclical bear market. On the weekly charts, the down trend that began in the spring had never ended—last week’s bounce did nothing to challenge it.

So what can we expect going forward in the US equity markets?

While is always impossible to forecast with any great certainty, it is useful to think about possible scenarios.

And here is one that could play out over the next 12-24 months:

We’re currently in a secular bear market that began after the 2000 tech crash.  Within this secular bear, we’ve had two cyclical bull markets: 2003-07 and 2009-11.
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It looks like we’ll break through the August 2011 lows, to somewhere around the July 2010 lows near 1,000 (where there should be a LOT of support, technically, and because Europe could come up with one last BandAid bailout program).  Then, with everyone caught on one side of the boat (short), the S&P rallies to 1250-1300, which would not break the downtrend that began after the May 2011 high.
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Then, if Greece blows up (or if we see any similar Euroland heart attack), we go back down…..through the July 2010 lows, sometime in 2012.  With the S&P in the low 900’s and with little technical support preventing more damage, the central banks money printing (think QE3 that didn’t happen last week) will kick in.
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THIS should be the Fed’s last stand.  And unless the fundamental issues (excessive and bad credit…..at banks and sovereigns around the world) are fixed—and let’s face it, they CAN’T be fixed without huge PAIN in the social/economic system, so therefore political short-termism means it WON’T be properly fixed—we go down toward the true secular lows…..sometime in 2013 or 2014.

Sure this is only speculation, but it’s very plausible and it’s tied into the major global macro theme that’s been driving the markets since the beginning of the secular bear after 2000

What’s NOT speculation is this—the secular bear market is far from over. Exactly what path it takes over the next 12-24 months is open for debate. But there’s very little doubt that there’s much more pain ahead in equity markets….in the US and around the world.

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