Dorn: Markets Are Off Their Lithium
The bipolar/manic-depressive markets are off their lithium and about to crash into major depression. This looks like the revulsion stage that we have been writing about over the past few weeks.
The world is in crisis and so many people are suffering. Our hearts go out to those who are losing their jobs, seeing their retirement accounts dwindle away day by day, and are suffering physical and mental illness from the stresses of having to decide between buying food or much-needed prescription medication. It’s a tragedy being played out around the world today and there is likely no end to it in the foreseeable future. We have come to this point in "The Big Rollover."
Tragically, it is still in its infancy as the next shoes are about to drop. Iceland already dropped, and it looks like Hungary is teetering on the brink.
We are now on the brink of complete revulsion. For those still holding and hoping, it is the area of capitulation, despondency and depression. Fasten your seat belts because it looks like it could get very bumpy.
Trade deficits in the trillions and forced deleveraging is behind the rise in the $US. The story that the U.S. is safe haven because we are doing less poorly than the rest of the world is also a contributing factor. How long this can continue is unclear as the dollar is now at previous resistance levels and now needs to be watched to see if it can blast through or if will pause before making up its mind what to do.
Movements in the currency markets early yesterday were among the most rapid and violent I have ever seen.
Looking at correlations, silver seems to be forging out a bottom, being up some 4% yesterday in the face of a strong dollar and weak gold. This is of interest and we will be watching closely over the next few days. It is only a matter of time before the currency markets come to what is left of their senses and the dollar resumes its downtrend. Currency traders who have been trying to short the dollar are being stopped out repeatedly. Wait and do not anticipate.
We are at a critical juncture in the major indices at this time. My message to you entitled "What To Do Now” indicated that I did not think we had seen the bottom of these markets. I hold to that opinion, although I stand ready to be proven wrong. The simple answer is that no one really knows. Half of the people think that the bottom was in on October 10, and half are looking for another leg down. I have heard projections that it could be another 1000 point drop in the Dow before a bottom is found and we can attempt to slog our way up through the election before the next down phase. The 1987 pattern seems to be tracking closely, and history may not repeat—but it often rhymes.
One thing is for certain. This is not the time to be a hero and try to catch falling knives. Could you get lucky and catch one by the handle? Yes, of course. Then you will have the gambler’s curse and think it’s safe to keep trying. Sooner or later, your hand will be chopped off. That is not good at all. No fun.
So what do we do? Wait and don’t anticipate. When the rally comes (and I assure you that it will), there will be time to get in if you are nimble and quick. Otherwise, stay out and let this play out. Patience is a virtue in life and in the markets. For those who heeded the call of The Big Rollover to get rid of any and all underperforming assets beginning in October 2007, you have cash to deploy.
For those in the hope and hold mode, what more can I tell you? It doesn’t matter anymore about the “Why? or the Who?” Tragically, the money has been lost. There will be lawsuits, arrests and convictions. I have heard more horror stories in the past two weeks about life savings being cut in half and “trusted” advisors abandoning people or not responding to them that it makes me want to throw up. Also, I am pretty much up to here with the incessant drone of the media always asking “What are you buying here?” Good Lord! Unless one is some kind of a stock-picking savant, the answer is: I am buying nothing. I am in a small core position that is throwing off some dividends and I have cash to deploy when the market shows itself and the time is right. Good answer! The other good answer (that you will rarely hear from the mainstream media) is “I am shorting every bounce with futures or have been going long the SDS or QID." Very good answer, indeed. This will work until it doesn’t. Until then, we keep our powder dry, we are not losing money and-if we are nimble—we are daytrading or scalping.
Don’t be shocked or surprised by anything you see over the next few days. Historically, turns happen on or about October 26. We are patient, we wait and we are prepared for anything to happen between now and then. As true behavioral traders we now appear to be entering the total revulsion stage of the sentiment cycle. Stay focused, remain calm and centered. This too shall pass.
Janice Dorn, M.D., Ph.D., is a financial psychiatrist and chief global risk strategist for Ingenieux Wealth Management in Sydney, Australia. She also offer trading consulting and coaching services via her Web site, TheTradingDoctor.com.