THE BEAR IS BACK AND THIS TIME IT WILL BE MUCH WORSE

Don’t let the the perma bulls fool you, this is not a normal correction, and it has nothing to do with Greece or Spain. This is the beginnings of the next leg down in the secular bear market and the start of the next economic recession/depression. And this time it’s going to be much much worse than it was in `08.

For months now I’ve been warning investors to get out of the general stock market. I was confident that once the dollar put in its three year cycle low the next deflationary period would begin and stocks would enter the third leg down in the secular bear market.

Well the dollar did put in the major three year cycle bottom in May and stocks almost immediately started to head down.This won’t end until stocks drop down into the four year cycle low due sometime in mid to late 2012.

Let me explain to you what is unfolding so you don’t listen to Wall Street or CNBC and get sucked down into the next bear market. 

In a healthy bull market intermediate degree corrections hold well above the prior cycle troughs. Higher highs and higher lows. When that pattern of higher highs and higher lows on an intermediate time frame gets violated it is almost always a sign that the market is topping. We are at that stage now as the market is moving down to test the March intermediate cycle low.

Oil has already violated it’s intermediate bottom. Energy stocks are a big part of the S&P and they are going to be a big drag on the index going forward.


In a healthy bull market we shouldn’t even come close to testing the March low. Actually this market hasn’t been healthy since last summer. That was the point at which I recognized the large megaphone topping pattern that was being driven by a double dose of QE.

Last year the market was able to push higher for almost a month on momentum after QE1 ended. This market has already rolled over even though QE2 isn’t scheduled to stop until the end of June. The conclusion is that the market is much weaker now than it was when QE1 ended. We all know what happened last year when the the money pumps were shut off. It led to the flash crash and a severe stock market correction. It would have led to a new bear market except Bernanke quickly started QE2.

Actually QE is the reason the market is in trouble. Just like I said over two years ago, all QE did was give us a brief reprieve and temporarily reflated asset markets. I knew all along it wouldn’t create jobs and it didn’t. (Well I guess a few bankers got to keep their jobs and pay themselves some big bonuses, but the general population was never going to prosper from QE.)

As a matter of fact just like I said it would, QE ultimately spiked commodity inflation, and just like I knew it would commodity inflation has now poisoned the global economy, crushed discretionary spending, squeezed profit margins, and is sending the world down into the next recession.

Unfortunately we are entering this recession in a much weaker state than we went into the last one. Real unemployment is somewhere around 12-15%. It is going to get much, much worse. I often wonder how in the world we could appoint such fools to run our monetary policy. I mean seriously, how many times must they make the same mistake before they figure out they are the cause of our problems?

Ok enough of the Fed rantings, back to the market.

Not only do we have a market that is testing the prior intermediate cycle low when it shouldn’t be, but we also have a clear topping pattern in place. Just like in `07 the market managed a marginal breakout to new highs in May that failed to follow through. You can see the same thing occurred in October of `07. This is quite often how markets top…or bottom for that matter. A technical level is breached, technicians either buy the breakout or sell the breakdown. Smart money fades the move and the market reverses. This is exactly how the `07 top was formed. It’s also how the market bottomed in `02. And now the cyclical bull has topped with that exact same reversal pattern in 2011.
 

This isn’t the only warning sign unfortunately. The banks and housing have been diverging from the rest of the market for some time. These two sectors are still impaired and will remain so no matter how much money the Fed throws at them. They led the market down into the last bear and they are leading it into the next bear.

Here is what I expect to happen over the next two months. We should soon test the 1249 intermediate cycle low. Actually I think we will probably marginally break below that level. As most of you probably know by now breakdowns and breakouts almost always fail to follow through. So I expect we will see a violent counter trend rally once the March low is penetrated. That should wipe out all the technicians who sell into the breakdown.

However the rally, although I’m sure it will be convincing, will almost certainly be a counter trend affair that will quickly fail. The problem is that the current daily cycle is only on day 12. That cycle on average runs 35-45 days trough to trough. So once the counter trend rally has run it’s course we should have another leg down. And that leg down will almost certainly cause tremendous damage to the global stock markets.

Once the market penetrates the coming low it shouldn’t be long before traders recognize that something is terribly wrong. At that point everyone is going to head for the exits at the same time which should lead to some kind of waterfall decline bottoming around the middle of August. This is when I expect Bernanke to freak out and initiate QE3. I have no doubt the market will rally violently on the news as traders have become conditioned to expect QE to drive stocks higher. I expect we will see the market test and maybe even penetrate the 200 day moving average during the fall rally. 

However this too will only be a counter trend affair. QE is the cause of our problems and more of it isn’t going to make things better, it will only make them worse as it will start to spike commodity prices again into a rapidly weakening economy. Remember spiking commodity inflation is what caused this in the first place. Doing it again as the economy rolls over into recession is only going to guarantee that this turns into a depression instead of just a severe recession.

Traders and investors need to start preparing for what’s ahead. If you ignored me previously and are still invested in the general stock market, exit, either now, or into the rally that should come off the March lows in the next week or two. Don’t get fooled by the analysts who will be telling you the correction is over, it won’t be. This won’t be over until late July or early August.

Get back into dollar denominate assets as the dollar will continue to rally and gain purchasing power in a deflationary environment.

Once it’s appropriate we will transfer assets back into gold and precious metals, but it’s still too early for that. Gold needs to move down into an intermediate cycle low before we want to buy. My best guess is gold will dip down to somewhere around $1400 over the next 4-5 weeks. I am monitoring not only the stock market but also the gold cycle in the premium newsletter and will let subscribers know when I think it’s time to get back into precious for the next ride up.

For the next week I will re-open the 15 month subscription special. Click here to go to the premium website. Then click on the subscribe link on the right hand side of the home page to go to the subscription options page. 

If you are on a monthly subscription and wish to upgrade you can do so by following the directions on the website home page to cancel your monthly subscription. Then purchase a 15 month subscription. It will automatically start once your monthly subscription expires. You must cancel your monthly subscription by following the cancellation process detailed on the website for this to work.

120 thoughts on “THE BEAR IS BACK AND THIS TIME IT WILL BE MUCH WORSE”

  7. sophia

    I would be careful of a meaningful rebound tomorrow before the w.e as Europeans are meeting on Sunday to discuss Greece rather than Monday as initially planned…
    I am afraid that the markets turned too bearish too fast…Will cover today

  8. ALEX

    That is an absolutely great and thorough report /post Gary.

    I feel Like I just got the weekend report, the monthly report , and the year -to- date report all in one 🙂

  9. Gary

    Keep in mind my charts are showing trajectories not actual targets. It’s very tough to spot counter trend tops in real time. You will almost always end up having to hold through draw downs when selling into counter trend rallies.

  10. 86d4life

    Yeah, ran across these a couple days ago and thought they were pretty neat. That`s a 1 liter bottle. He`s a big boy. I`ve run across a lot bigger, but still. Bears are one of the top critters. Just amazing.

  12. Gary

    Since I will be at a weightlifting meet this weekend this will act as most of the weekend report with maybe just a small blurb on gold. Although there probably isn’t going to be much to say about gold for the next month or so.

  13. ALEX

    no need for me to run ahead here, 1 step at a time ( but I do anyways 🙂

    – so I was just going to say that your SPX chart–If the rally went from the 200sma to the 50 sma, that would suck everyone back in into August with screams of summer rally,
    and you’d have a perfect head and shoulders top!

  15. pimaCanyon

    Great post, Gary.

    However, there is this fly in the ointment: The July 2010 low. That low was an IT low AND it broke below the prior IT low. After that low, the market rallied. And continued to rally for another 10 months.

    What will make this time different?

  16. daniele

    great great great report gary.
    Anyway we are waiting for selling signal on dow theory to have a confirmation, aren’t we?
    thanks

  17. Silverhound

    Alex

    Trust me, my working charts are no different to yours 😉 I think the term “dogs breakfast” was invented when somebody first saw one of my working charts heh heh.

    Yes I like your first scenario on a dollar breakout. I always prefer to see a back test for confirmation like you do.

    Cheers

  18. Gary

    PC,
    I’ve noted in the past that we can get a violation of an intermediate cycle low early in a bull market and still recover. The market did it in 04.

    But once the bull matures a violation of an intermediate cycle low is almost always the death knell for the bull.

    It is commodity inflation that is killing the market it won’t be possible to reflate because QE3 will drive commodities back up.

    Last year commodity prices were still manageable and that’s why QE2 was briefly able to prop everything up. That’s not the case anymore.

  20. ALEX

    Gary, your post really says it all. I hope that you dont mind me posting a couple of my charts too , As A Trader ( they are in harmony with yours).

    Last night reviewing my ‘Shorts’ and charts I came up with 2 scenarios…

    chart 1) the waterfall sell off that I posted yesterday

    http://www.screencast.com/t/MnYgm4hbvP

    The other shows what I ,as a trader ,would expect to produce a trade-able bounce (UNLESS WE START WATERFALL SELL-OFF!).

    chart 2 (click to enlarge)

    http://www.screencast.com/t/DDNMv6qUT4

    close up of chart 2

    http://www.screencast.com/t/0cbIATxpqX7

    IF THIS PATTERN PLAYS OUT…IT could be $100DOWN, $30-$40 BOUNCE UP, ANOTHER $100 DOWN …GREAT TRADE!

  24. ALEX

    Silverehound

    I see that…crazy how this stuff works.

    futures are up

    AARRGGHH…Its never easy. I wanted to close short positions at the March lows, and I dont want a bounce to come here and now. Hopefully we gap up open, then the sell off resumes.

    Then traders may flip & go long at the March lows.

  25. Edwin

    1250 is the key for the S&P

    from my analysis the stock decline won’t be over until October.

    not sure if there will be a waterfall decline though..

    at least this is a heads-up to those who are so ultra bullish.

  26. Dan

    As we are probably not too far from a bounce in the general markets, is anyone else concerned how the PMs will react once the counter rally gets underway?

  27. Ken

    Gary is 99.9% correct except the small fact that the new bear market won’t let trapped longs or sideline bears get an opportunity to sell into this perceived rally in 1-2 weeks. Once gold and oil start moing down we’ll be 100+ S&P points lower and everyone still waiting for that pop. Don’t try top time the market just get in (shorts) or get out (longs) and play it old turkey like we all did with golds bull.

  29. Wav_ridah

    DG,
    Thanks for the EUO heads up a while back. Kept it on my watch list and decided to pull the trigger last week. I was able to get in at 16.54. I appreciate all your input on the blog.

  32. ALEX

    Ken

    Looking at the Mega phone pattern that Gary pointed out, yes…it feels like we are at the top of a roller-coaster.

    Old turkey short (maybe some now, and more after a bounce) could add to funds for the Metals low coming up later on 🙂

  33. hamvestor

    Gary, thanks for an impressive analysis of where we’ve been and where we’re going. You continue to amaze.

    And good luck this weekend. We’re going up to Vancouver for a long weekend (I won’t wear my Bruins jersey).

  35. torero91

    As a bull (not a perma anything) sitting on the sidelines, I absolutely love the bearish sentiment and extreme indicators I am seeing. Gary, you’re right, a nice rally is coming. After the whole silver debacle of waiting for the market to hit a nice round number, I am surprised you did not recommend covering just a few points above the target you set forth last night. Why try to get every last point on the short side when you feel a strong counter trend rally is approaching? Risk management as they say.

  36. Ken

    Everyone and their brother expects the bounce at, near, or just below the 200 dma which is why it won’t happen. If Gary’s call that this bear will be even more brutal than the bursting of the Tech Bubble: ’00-’02 and the bursting of the Housing Bubble: ’07-’09 then the busting of the Government Debt Bubble” ’11-’13 will catch everyone off guard because everyone is expecting what happened in previous topping or bottoming patterns.

    This is why I’m not trading the bear and going w/ non-leveraged inverse ETF’s DOG, SH, PSQ, RWM, EUM, etc and going ‘Old Turkey’ with them waiting for Gold’s D-Wave to complete. When Gary gives the A-Wave is here and it is time to buy gold I’ll drop the shorts and grab me some gold, but not until then.

    Good luck to all which ever way you play it and thank you Gary for sharing the market knowledge with those who wish to protect themselves and others for 30+ years of lies and manipulation. Fracturing paradigms won’t be pretty and will effect investors for generations.

  39. 77

    the dow will try and bounce off the jan 2000 high at 11723 which will be in conjunction with the 200 DMA

    http://www.the-privateer.com/chart/dow-long.html

    this is the 3rd year of the 4 year presidential cycle, since 1950 this pre-election year is 18-0 for an ave gain on SPX of +18% each year…the big boyz know the stats, they’ll be buying whenever they perceive it’s the summer low, as they did at last summer low…next year also up for stock market as president tries to get reelected

    nice to see TOS mentioned by Gary in prev. thread, as you all should put $2k into a tdameritrade acct( can be an ira) and then you download the think or swim platform and use your ameritrade login…

    also the ameritrade acct gives you access to minyanville buzz and banter, which is full of chart masters

    for example, minyan chartists were calling the silver top right around easter, and the best guy on gann ‘coop’ called a sell on SPX when it lost the ‘gann 2 times low at 1333’ last time

  41. ALEX

    I have sold nothing this morning

    I own SDS EDZ DRV and EUO

    I have been trading using 3 day 5 minute charts. As of now (10 a.m.) I see no reason to let go , despite a weak market rally

    (YET)

  44. William

    Gary,

    The new post was like the best advertisement I have ever seen in my life, if that dont get others to jump on the 15 month deal they are nuts.

  53. Gary

    Wes,
    I can’t add to old subscriptions because they aren’t actually in the new system yet.

    If you remind me I will open the offer for you when your subscription expires.

    Send me an email I can look up when your subscription expires.

  54. Gary

    Market,
    $200 for 15 months instead of the usual 12.

    The same thing applies to 6 month subscriptions. If you want to add 15 months you first need to cancel the reoccurring feature by following the directions on the website before you purchase a 15 month.

  55. flaunt

    Gary,

    Don’t you think there’s quite a bit of short-term danger going short (or long expecting a counter-trend rally) into this weekend with the Greece situation?

    If they come to an agreement the markets will go ballistic, but if things go poorly the bottom will fall out.

    Why not sit on the sidelines and see if a counter trend rally materializes and re-establish short positions into it?

  58. Hack

    Great charts Gary. I agree with your summer’s analysis, we are in for a rough ride without a doubt. However when I look at the election year cycle we should see a new bull run starting in September that should peak in the forth quarter of 2012. But if we don’t get a labor day rally upward then everything is back on the table.

  59. jhnewman

    The dollar has been in a HUGE 5-waves down pattern for a year now — since June of 2009. (Best seen on a weekly chart.)

    What many are calling the 3-year-cycle low in late April/early May was, IMO, the end of the huge Wave 3 — which started in August of last year.

    The bounce up into May was the big Wave 4 up of this huge pattern, and was done in the classic counter-trend 3 waves (A-B-C) — the most natural way to count that bounce.

    At the top of the bounce, we started the big final Wave 5 down of this huge dollar pattern.

    So far, within that big final Wave 5 down, we’ve had a Wave 1 down (into last week’s daily cycle low for the dollar). And this morning we probably finished the Wave 2 up (also in classic 3 wave A-B-C counter-trend fashion — showing that the primary trend of the dollar is still down).

    So my bet is that, within this big final Wave 5 down for the dollar, we just started the big Wave 3 down this morning, which is going to last for a number of weeks, breaking through 73, then 72, then 70, and going into the high 60s. And this morning’s high in the dollar put in a right shoulder of a large head-and-shoulders top pattern — best seen on an 8-hour chart.

    So I’m betting that this morning’s high (76.015) was the high for the dollar’s new daily cycle, and that this daily cycle for the dollar will be extreme left translated and end in about 6-7 weeks with the 3-year-cycle low for the dollar — and the C-Wave top for gold.

    **********

    On the Euro-Dollar situation: a more important meeting than the EU finance ministers meeting on Sunday, is happening tomorrow (Friday). Sarkosy is going to Berlin to meet with Merkel. As it stands right now, it’s Sarkosy & the European Central Bank v. Merkel on how to structure this 2nd Greek bailout. I would think the resolution to this is going to happen at the head-of-state level tomorrow, and not at the less important EU finance ministers meeting on Sunday. I can’t see them allowing this “Greece problem” to blow-up the Euro now. Maybe next year, when they have some of their new “European-wide rescue structures” in place. So the probabilities are very high, IMO, that they’re going to kick the can down the road and salvage this 2nd Greek bailout — and that won’t be good for the
    dollar.

    My usual caveat: I could be dead-wrong about this. But I don’t think so. Yet I always try to keep an open mind about alternate scenarios — and always have my loose stops in to give the market a chance to say: “You were wrong in your analysis, buddy.” (THE most important thing is to hang on to what you’ve got.)

    As usual — gotta run. Good luck, all!

  60. Gary

    The problem with the presidential cycle thing is that we can’t do what we’ve done in the past to create the rally into the elections, namely goose money supply.

    We’ve already done that and it’s spiked inflation. the economy is rolling over because of spiking inflation. So printing more money and spiking commodity inflation further will have the opposite effect of intensifying the recession.

  62. EricH

    I can imagine the frustration with the folks holding the miners today. Gold is 2.5% from the all time highs and holding at 1520-1530 the past few days. The stock market is bouncing and YET the miners (GDX, HUI, XAU) are down 1-2% today while putting in a new low on this move down.

  65. Cool_Loser

    Gary,
    Which would be the better play at the intermediate cycle low, GDX or GDXJ? Both have been getting their brakes beat-off over the last few weeks…

  66. samppa_nyman

    just went long UUP and ZSL, I bet they’ll pull back soon though, but at least I’m out of most of my euros, I have a bad feeling about that mess.

  67. TZ(8155)

    GARY,

    Good job and THANK YOU on cleaning up the (horrible) TOS charts. How in the world they can make the default be what it was is beyond me.

    Anyway, there is one more small tweak you can probably do (which people usually don’t think of or notice directly)….the GRIDLINES.

    The gridlines on the chart are probably changable in color as well. Right now they are full black. If you change them to a LIGHT GREY, they will receed into the chart and be less obtrusive, but still visible. Stockcharts, again, does similar (as to many other programs.) Check it out and see what you think. We are almost there.

  70. mamaloshen

    I agree with Gary’s comment about the presidential cycle model. By the way, it didn’t work too well in 2007. Market dropped 20% after the October high that year. If May 2 marked the high for the S&P this year, who’s to say it couldn’t suffer that kind of decline again?

    I was 90% long stocks coming into June, now about 30% (and those pay hefty dividends). I am thinking of lightening up even more on the next bounce (assuming there will be one).

  75. Elaine

    William,

    I have been looking at DUST and the volume has been steadily rising, along with the price. I’m concerned about how little shares actually trade.

    I guess I’m waiting to see what happens tomorrow with the EURO…

  78. Daniel

    William–
    I am long Dust also :)) (I usually do not post my trades or positions here– but you sounded like you needed some company) :))

  80. Hack

    Why wouldn’t there be buyers in gold right now? Greece – Portugal possibly Italy default. Libya, Yemen, Syria are going up in flames. Where would you put your money in this situation? I personally like US government agency bonds but some folks go for the PM’s.

  81. dallascfp

    Gary,

    When/If the SPX bounces off the 1250, do you think the PMs will follow the pattern, or they will continue with their own cycles and head down.

    Thanks

  87. hamvestor

    Elaine, I’m currently in DUST, and have traded in and out of it in recent months with no difficulty whatsoever, even in 1000+ share lots. I think you’ll find it more liquid than the thin volume suggests.

  88. Dan

    As I stated earlier, gold/silver are strong here and I’m really concerned what’s going to happen once the general markets bounce. When “risk-on” trading comes back one could only assume PM would go green also.

  93. Gary

    Dan,

    It’s unlikely that gold and silver will continue to stretch their daily cycles regardless of what the stock market does.

    The extreme weakness in the mining stocks is clearly saying gold is on the verge of a major correction. The fact that gold is 20 weeks into an intermediate cycle is also warning that a major correction is impending.

    I’ve pointed out before that gold often dances to its own drummer and ignores most other sectors. I doubt this time will be any different.

  94. Gary

    Hack,

    the situation in Greece and Europe in general is extremely deflationary. That’s not the kind of environment that is conducive to a strong rally in precious metals.

    Gold has dipped down into its intermediate cycle low like clockwork every 20 to 25 weeks for the last 40 some years. I really doubt this is going to change during a severe deflationary. As a matter of fact one would expect it would intensify the correction.

  95. Gary

    GLD is still holding below the 10 day moving average. I suspect it won’t be long before gold finally succumbs to the deflationary pressures and heads down into its intermediate cycle low.

    The extreme weakness in the mining sector is clearly saying there is a big nasty correction coming in the near future.

  96. William

    Current IT 96 days from 1/31/11 to 6/15/11

    prior IT 132 days from 7/29/10 to 1/28/11 bottom

    prior IT 119 days from 2/8/10 to 7/28/10 bottom

    prior IT 146 days from 7/9/10 to 2/5/10 bottom

    prior IT 56 days from 4/20/10 to 7/8/10 bottom

    prior IT 175 days from 10/24/09 to 4/17/10 bottom

  98. Gary

    William,

    I don’t believe that there are set rules for which will bottom first, sometimes gold bottoms and minors follow, and sometimes the mining stocks will bottom early in the gold out of the correction.

  104. Dan

    Wow PM stocks are being completely destroyed. HUI down 3.5%+ with market up and gold essentially flat? Incredible.

  106. Felix

    Wow, the miners are melting like the Wicked Witch with Gold & Silver dancing on their graves – this can’t last long, Monday after op-ex maybe

  108. Ollie

    DG, I really liked your posts on shorting and how to add on weak bounces etc…as I’m a terrible short I still am just sitting in cash though

    As I was thinking about why I wasn’t able to pull the trigger in June 2nd I realized it was due to position sizing

    Greed was telling me to go all in but fear of a drawdown on a 100% position kept me out

    May I ask what % of trading capital do you use when you initiate a position like your EUO trade?

    And what % allocation do you add at the next opportunity?

    Many thanks

  109. Felix

    Indecision candles GLD, SLV ? – lovely proportions, perfectly suspended, delicate – yet hardly yielding to the advances of either suitor…

  111. ...at ease

    traderlady,
    I think so too. I followed Gary in a litte bit more on that last MP change, however not full percentage suggested. Trying to be frugal on these shorts to make some money, not lose it. Preserve capital is first on my mind… as I want to ride that A wave with full funds intact. But that was a nice short to make a little cash. 🙂 Might even try the full percentage allocation listed on next change. 🙂

  114. Gary

    Edwin,

    Trying to catch a counter trend trade, especially one that will likely be brief, and possibly very mild, is a very low percentage trade.

    I’ve often said that if traders could resist the urge to take counter trend trades they could probably increase their lifetime average winning trades by 10 to 15%.

    Can you imagine how much 10 to 15% over a 30 year career would add up to? I suspect it would amount to hundreds of thousands if not millions of dollars.

    I also think this rally off the 200 day moving average will probably fail quickly and the market will move down to test or marginally break 1250 before we see a more substantial rally.

  116. kaarby

    After looking at the first chart SPY, you say we are testing lows of March, if you look at kast yesr at the correction we went below Feb. lows, it was not a big deal, I think that we will chopp around until the end of July then the congress will aprove raising the debt celing, we also may get QE3 if we go to to low, the goverment wont go in the another dip.

  117. Gary

    Kaarby,
    We have an intermediate cycle that topped in seven weeks. A daily cycle that is only on day 12 with another 25 to 30 days left before a final bottom.

    By the time this bottoms in late July or early August we should see a test of the 2010 lows. If you think that’s normal for a healthy bull market then by all means buy.

    A violation of an intermediate cycle low isn’t unusual at the start of a cyclical bull market. We saw it in the spring of 04. And we saw it again last summer. However last summer was obviously something more than just a consolidation of the first two legs of the bull market. Last summer was a brief deflationary period that the Fed quickly aborted with QE2.

    Unfortunately QE2 has now spiked commodity inflation to the point where it has poisoned the economy. More QE at this point will only exacerbate the problem and accelerate and intensify the recession.

    This late in a mature cyclical bull market a violation of an intermediate cycle low, especially if both the industrials and transports participate (Dow theory sell signal) will almost certainly indicate that a bear market has begun.

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