Sell-off Will Continue into Mid-December

The last intermediate and minor cycles peaked on Monday, Nov. 7 and from this point forward all major indices will experience an overall decline into mid-December, dragged lower by the influence of the cyclical time cluster now taking place. A number of cycles—which have the number 12 as their reference—are converging downward from now until the week of December 15. Long commitments to the equities market should be avoided right now. A net short position, whether in the form of OEX puts, short positions in select U.S. equities, or positions taken in bear market mutual funds such as Rydex Ursa, Arktos, and Tempest (with a beta of 2.0—twice that of the Ursa), or Prudent Bear, should be maintained.

The last of the major indices to top out, including the NYSE Composite and the Dow Jones Industrials, topped out on Monday, Nov. 7—the day before the elections. Expect major weakness across the board now through month's end, with downside momentum heating as the month progresses.

The last Indian standing, so to speak, is the NYSE Composite index—the most complete and all-encompassing financial barometer of the entire U.S. stock market. This index was, until recently, hovering near its all-time high made a couple of months ago. However, this index has been unable to overcome critical overhead resistance at 666-670, despite numerous efforts made in the past couple of weeks. This consecutive failure to overcome supply can only mean that time is running out for the buyers and that sellers will soon have their way. Indeed, at this writing (Nov. 13) the NYSE Composite was down to 639.05. The long-term chart of the NYSE Comp is that of a five-year dome formation, which implies that a bear market is developing. Indeed, the mid-point of this dome pattern (which is a manifestation of the time cycles which govern the market) was passed a couple of months ago, which means that as time progresses, greater selling pressure should develop across the broad market. Based on this indication alone, we have already officially entered a bear market. (This revolutionary concept of parabolic support and resistance is discussed at length in our book New Concepts in Support & Resistance, available from Amazon.com, the findings of which were presented last week at the Futures Industry Association annual convention in Chicago).

A similar pattern of failure to overcome a critical resistance is apparent in the Dow Transports, with the level in question at 2800. This level, which might call the "Berlin Wall," has not been overcome since earlier this summer—an obvious sign of weakness in this sector, which leads the industrial sector. A failure to decisively penetrate 2800 casts a bearish pallor over the entire market. The Transports have failed successively to overcome this level, most recently in last week's 100-point sell-off.

The Dow Utilities, which have historically been the final pillar of strength in any bull market, appear to finally be giving way to the overhead pressure of exorbitant supply. The Utilities have traced out a quadruple top in recent weeks, failing to overcome the benchmark 400 resistance level. In fact, last week alone this level was approached several times on an intraday basis only to fail to overcome and close below it by the end of the trading day. This remains yet another subtle clue that the bulls' time is fast running out. Note the chart we have provided of the Utilities. Note especially the parabolic up-curve which was penetrated first in October (the primary curve), then again later that month (the secondary curve). Note also the elliptical dome formation (representing the 8-week cycle), which is forecasting downward pressure into next week. From a larger-term perspective, the fact that the up-curve was violated proves that the Utilities no longer have any major underlying support. The overall trend is now down for this financially-sensitive sector.

We expect the Dow Industrials to carry to as low as the 8,000 by the end of this current downward cycle (until mid-December). This target can either be achieved on a closing or an intra-day basis. We have no immediate-term projections for the Dow as the present market environment is much too volatile and emotionally-fraught for this type of projection. This is the type of market where day trading proves hazardous to one's health. The best way to profit from this type of market is simply to buy index puts and wait for the cycle to bottom, remaining calm and unconcerned with the wild counter-trend rallies that are sure to develop along the way. The important thing to remember is the main trend, which is down.

The waves of selling, punctuated by sharp, steep rallies, that have characterized this market environment demonstrate conclusively that we have entered an emotionally fraught, extremely volatile period of transition into a major bear market. This type of market behavior is typical of early sell-offs. The huge one-day key-reversal that developed two weeks ago along most major indices on extremely high volume would have been sufficient to reverse the downward trend and resume the bull market a couple of years ago. But now that the major parabolic supports have all been broken in the averages, the trend is down, and when the trend is down attempts at rescuing the market are doomed to failure. Any attempts at buying the market in order to arrest panic selling—while temporarily successful—always backfire on those attempting to support the market, since the net results of their actions is that they are liquefying the downtrend. When there is no longer major support underneath the market, no attempt at rescuing the market (a la' 1987 and 1998) can be successful. Accordingly, ignore all intraday V-reversals in this market until the week of December 15 as the overall trend will continue downward until then.

In a GOLD-EAGLE editorial earlier this year, we predicted that the U.S. presidential election would not be held this year, that the stock market collapse would eclipse any political considerations this fall as all eyes turn toward the imploding financial sector. Obviously, we were a bit off in our timing; howbeit, the overall import of our prediction still stands. The fact that one week after the elections no new president has been selected—a development unprecedented in the history of the presidency—is a strong indication that the insiders have no intention of appointing a new president anytime soon. If there is one thing we can know about politics on the presidential level it is that national leaders are appointed, not elected. The fact that neither Bush nor Gore emerged a decisive winner on the ballots shows that neither is considered presidential material by those behind the scenes who make all the important decisions. Clinton is the only one who (at least in the eyes of the populace) has the clout to "carry" the nation through its next major financial crisis since the Great Depression, a scenario that is unfolding even as we write this. Simply put, the American people will be too anxious and concerned to worry about whether Bush or Gore is "elected" once their portfolios begin to sink in severe fashion. One can with little trouble envision a scenario where Clinton is re-installed at the executive level as a "temporary expedient" to "pull the country through a time of crisis."

It always amazes us the desperate lengths the financial establishment will go to keep the investing public from pulling their money out of the stock market, even in times of great danger (such as now). One example of this is found on the front page of the business section of the Sunday, Nov. 12 edition of The Washington Post. In an investment article headlined, "Averages Makes Best of Bad Times," the writer attempts to rationalize (rational-lies) the investment strategy of "dollar cost averaging" when times are tough. That is, he advocates averaging a stock market loss, which is one of the first cardinal sins a beginning trader or investor learns to avoid. He qualifies this absurd advice by the use of the term "hope," as in "your hope—repeat, hope—is that the average cost per share will turn out to be way lower than the market price at the time you're ready to sell." Thus, he adds yet another sin to his catalog of investing no-no's by teaching investors to "hope" in the face of a weak market, which is the second thing a beginning trader or investor learns to avoid (i.e., there is no place for hope in the market). Unfortunately for millions of investors, this is the type of pabulum they are spoon-fed day after day, week after week, month after month, and year after year by the financial press, academicians and so-called "experts" while their net worth gradually evaporates. The bottom line is that the financial establishment will stop at nothing to keep you from pulling your money out of its hands, even if it means your financial destruction.

The financial sector has been deteriorating since last January in the case of the "old economy" stocks, and since April in the case of the "new economy" stocks. The old rule of thumb is that an equities bear market precedes a recession in the physical economy by six months to a year. That would put the first signs of an economic slump at sometime between now and first quarter 2001. This is when the average American becomes aware of the fact that something is amiss and begins to curtail spending. This will feed upon itself and create an even greater economic contraction in the months that follow. We can all expect recession conditions to develop in 2001, even as the stock market enjoys its first big corrective bounce.

In researching for our latest book, Gann Simplified (to be available from Traders Library early next year), we have happened across many insightful ideas put forth by the great market technician W.D. Gann. The words and wisdom of Gann have proved especially comforting in times like these, as Gann was thoroughly acquainted with panics and depressions, having lived through (and accurately predicted) the Great Crash and Depression of the 1930s. In his master work, Truth of the Stock Tape, he wrote the following bit of information, just as applicable to our present time as it was to his:

"The public has never been good leaders and never will be, because their hopes and fears are easily excited. If stocks were all in the hands of a few strong men, then investors and the country would be safe, but when they are in the hands of millions of people who are unorganized and without leadership, then the situation is dangerous. A wise man will sell before it is too late. The public will hold on and hope; then all will become scared at the same time and sell when nobody wants to buy, thus precipitating a panic. This was what caused the 1929 panic. The speculators and gamblers all got scared and sold at the same time.

"Greed and love of money will cause the next panic and the love of money will cause the next war. "War is hell!" You might ask what that has to do with stocks. War has always caused panics. War is coming and a panic is coming in stocks, and this time the panic in stocks may be the cause of war. People often get a misconception of an idea or quote things wrong. We often hear people say "Money is the root of all evil." They think they are quoting the Bible, but they are not. The Bible says, "The love of money is the root of all evil." In fact, the love of money and the quest for power has been the cause of all wars, as history proves. Love of money has been the cause of all financial troubles and depressions in the past, and the coming panic will be the greatest the world has ever known, because there is more money in the United States than ever before, therefore more to fight for. Men fight harder for money than anything else, once they see it slipping away."

The love of money is what drove the markets to such excessive heights in the first place, and it is now the driving impetus of the downside. Presciently, it is even predicting another series of wars on the magnitude of those in Gann's day, as all great bear markets eventually culminate in war, just as Gann foretold. Suffice it to say that things on the domestic as well as international scene will become very interesting from this time forward.

All cycle-based indicators are telling us to stay clear of the markets right now. Maintain short positions, carefully setting and adjusting protective stop loss orders.