I’m going to start off with a few breadth charts.

The NYSE new highs – new lows chart is now on a sell signal as both the slow and fast average have rolled over and are accelerating downward.
Everything continues to point to an impending correction. The change in character the last two days is also suggestive that something is different. Instead of opening lower and rising through the day, the market has been gapping up but closing lower. This is a complete about face from what has been happening over the last two months.
I will be monitoring sentiment as the market moves down into the correction. If investors get scared and panic quickly then this should be a short correction. If we were to get a sharp selloff this is what I would expect to happen. I’m talking 50+ S&P 500 points in 3 or 4 days.
If, however, investors have gotten locked into a buy the dip mentality it could slow the rate of decline and we might be looking at something lasting closer to 10 or more days.
I will say that what usually happens after one of these extreme momentum moves is that everyone heads for the door at the same time. The correction tends to be scary but over quickly as everyone panics all at once.
That’s what happened in February 2007 during the mini crash following the runaway move. The market gave back four months of gains in 8 days.

Now I don’t think we are going to give back 4 months of gains (this is only a daily cycle low not an intermediate cycle low), but I do think we could quickly fill the March 5th gap, which would be a 60 point loss. If that happened in 5 or 6 days it should be enough to swing the bullish sentiment all the way back to the extreme negative side of the boat. The market desperately needs to reset sentiment by going through another mini profit taking period and the sharper the correction, the better.

I’ve warned many times that the intermediate correction separating the second and third leg of the bull was only going to be a profit taking correction that would soon be recovered.

However, and as expected, while we were going through the last correction I had multiple traders inform me that this was the onset of another deflationary collapse.

Heck, I’m still seeing articles on the internet predicting another deflationary collapse any day now.

Often these predictions of disaster are associated with some imaginary trend line dating back to the 1970’s or 1980’s. I’ve even seen one site that based their predictions of an impending bear market on a trend line originating in the 30’s.

I have to ask, how many people from the 1930’s are still trading stocks and are there enough of them to really effect the markets? I have no earthly idea why a trend line starting back in the depression should have any significance at all to today’s market. Geez, some of the crazy stuff one sees in this business. It’s enough to make you wonder if common sense is dead.

I must say after watching both the tech and real estate bubbles expand and listening to the irrational reasons analysts gave at the time for why they weren’t bubbles, I have to think common sense is becoming a rare commodity in this day and age.

I’m going to let you in on a secret. Bull markets don’t end because of lines on a chart or Fibonacci retracements or anything technical related for that matter. Bull markets end when a fundamental shift occurs. They end when something breaks. In a secular bear market like we have been in since 2000 that fundamental shift almost invariably leads to a severe bear leg down in stocks and the onset of a recession…or worse.

We saw the first leg of the secular bear begin in 2000 as the world realized tech stocks were ridiculously overpriced, along with Greenspan’s monetary policies spiking the price of oil. The end result was a severe bear market and a recession.

We saw this again more recently as the credit and real estate bubbles burst. This was then exacerbated by Bernanke’s insane monetary response which, of course, did nothing to stop either one of those bubbles from bursting.

All Bernanke’s monetary response did was spike the price of oil to $150 and made sure we would have a very severe recession.

This is still a cyclical bull though and until we have a catalyst in place to kill it there is one game plan that should be followed. That game plan is one that everyone who has the slightest experience in the market should already know. In bull markets you BUY DIPs. And you continue buying dips until you see a fundamental change occur that is going to send us down into the next recession.

So once we enter the correction (it may have started with last Thursday’s key reversal) we want to be buyers of that dip. (I’m going to outline a game plan in a minute).

First off, let me state again that I seriously doubt the next leg down in the secular bear is going to come from a deflationary front.

We’ve already gone down that road. Bernanke proved he can defeat deflation with his printing press. Heck, he proved he could abort a left translated four year cycle with the power of the printing press.

I’m constantly getting into debates with traders pushing the deflation scenario. The fact remains that we had the worst deflationary period in 80 years and Bernanke halted it in 9 months.

Bernanke halted deflation the same way Roosevelt halted deflation in the 30’s by debasing the currency. I can assure you that if the slightest hint of deflation reappears, Ben will crank up the presses again. So I just don’t see deflation as the catalyst for the end of this cyclical bull.

The catalyst for the death of any bull market almost always comes from the area that is experiencing excesses.

In 2000 the catalyst emerged when the tech sector cracked. Everyone had become convinced these companies were eventually going to make unimaginable amounts of money, while amazingly enough overlooking the fact that most of them were making no money and never really had any reasonable shot at ever making any money. They were just burning through capital and at an incredible rate. Once the world woke up and realized the emperor had no clothes, down we went.

This collapse was exacerbated by Greenspan’s printing efforts to ward of the imagined 2000 contagion and had the unintended consequence of spiking the price of oil.

The latest catalyst as I mentioned above came when the overheated real estate and credit markets imploded.

So we have to ask ourselves, where is the excess this time? It certainly isn’t tech. The companies that are left are making money. It’s not the real estate markets. That bubble has already popped. And I don’t believe it is going to pop again. I doubt it’s going to come from the credit markets again, as people and banks are deleveraging now, and for years to come. Besides central banks have already figured out they can fix those problems by changing the accounting laws and by pumping liquidity.

So where is the dam going to spring a leak from this time? What is the area that is experiencing massive excesses that will eventually come back to haunt us?

I would say there are two. One of them is government debt. But I’m not sure that will cause problems though because governments control the printing presses. No matter how much debt they rack up they can always print enough additional money to pay it.

That leads us to the heart of where I think the next catalyst is going to emerge. The one area of incredible excess is the currency markets.

Let’s face it, every country in the world has been running the presses on overdrive since early 2008. This has created an ocean of liquidity covering the globe like no other time in history. It halted the deflationary spiral we were in last year. And it is certainly giving the illusion that good times are returning (heavy emphasis on illusion). But just like the credit bubble felt real nice while it was growing, there are going to be consequences for this excessive liquidity. The piper will eventually have to be paid.

I expect it will start when a small or maybe even a medium sized country’s currency gets into trouble. Then, just as subprime infected the rest of the mortgage market, it will spread into other currencies. I strongly suspect the bull market will end when something breaks in the currency markets.

So until we see that happen investors should continue to buy dips and ignore all the Chicken Little’s predicting the sky is falling because we are approaching a trend line from 1932 or because this is the third of a third wave or whatever hokey nonsense they imagine will start the next bear phase.

As I have said, bear markets begin when the fundamentals break down, not when the technicals do.

More in the weekend report…

48 thoughts on “DEATH OF A BULL

  1. Beanieville

    Well said, Gary.

    However, it’s rarely easy to discern the end of the bubble is near, or the beginnings of a bigger bubble.

    Some folks thought that that housing was a bubble 3-5 years before it actually popped. Same with the internets. By 1996-1997, people werre already calling bubble. And the shorts got decimated all the way to 2000.

  2. Beanieville

    Btw anon, I’ve never made a penny with Zerohedgers. They tend to be looking at their rear view mirrors. And their front view mirrors are almost usually clouded.

  3. ph11

    While reading I was thinking… “Yes! He’s back…”

    Great article Gary. From 30,000 feet above, you provide both short term and long term perspectives on where we are. Clear, fundamentally sound advice… I’m personally appreciative.

  4. Gary

    Actually it’s p[retty easy to spot a bubble. When everyone starts doing it you have about a year to a year and a half to go.

    With gold you just watch the Dow:gold ratio. Anything under 2:1 and it’s time to start dancing close to the exit.

  5. Dana

    Nice post. Question: couldn’t we argue that since the indexes are holding up well despite the drop in the new highs and the deterioration of the Mclellan osc that we are correcting through time not price and that therefore we may not see a significant price correction? Also, re: currency problems. Might we not already be seeing that in Greece, and more likely than not, Spain?

  6. Dana

    And, just to follow up on my previous post, recently you had called for a spike in energy prices to end this cyclical bull as excess money moved into energy and commodities. Do you still see that as part of the end game?

  7. Gary

    It would be pretty rare that this kind of momentum move would correct by just going sideways. Usually these things are followed by a wicked retreat as everyone heads for the door at the same time.

    I also don’t think a sideways move would reset sentiment. It’s way too bullish right now. In order to continue rallying we need to see sentiment swing back to the bearish side of the boat. That’s not going to happen if we just go sideways.

    The breadth indicators are indicating that fewer and fewer stocks are participating in the rally. That’s not a bullish scenario for further gains.

    Regarding Greece that is a debt problem. If Greece wasn’t part of the EU then I would expect them to massively debase their currency in a vain attempt to print their way out of their problems. In that scenario it would be possible to see currency problems spring up in Greece. However Greece doesn’t control the printing press so that option isn’t available to them.

    And yes a currency crisis generally means that the currency rapidly loses value. In that situation the price of oil would go through the roof sending the US back into another recession/depresion.

  8. Gary

    I am not Gary the blogger, but another Gary from the UK.

    Whilst I think this article is full of common sense stuff, I personally think the bubble is here already, and it’s the stock market.

    As Gary correctly points out, consumers/households are deleveraging at a rate of knots. People have realised that they can’t live beyond their means, and are trimming their budgets accordingly. It is VERY significant that debt is reducing. it reverses the effects of years of fractional banking, and we are seeing in money supply figures that despite the Feds printing, the money in the system is falling (not rising).

    So, whether you call this deflationary or not, when the US consumer spends less, and earns less (because of high unemployment) then US companies will also earn less. That is not rocket science.

    The stock market is procing in a recovery/growth, but in reality it is simply not happening.

    Stocks continue to go up because of the Fed’s liquidity (banks have to put it somewhere).

    Eventually though, reality will pop this bubble as with any other, and that time is getting very close.

    So, buy the dips at your peril, because when reality sinks in, there will not be a painful slow correction, we will see a swift crash-type coreection.

    Best wishes.

  9. Gary

    I know the bears would love to see another crash but those are very rare and very far between. It will more likely be a long grind down similar to the 2000-2002 bear and the Fed will fight it all the way with the printing press.

    That kind of bear chews up bulls and bears alike.

    Best to make as much as we can on the long side while this cyclical bull remains intact because it’s going to be very very hard to make money during the next bear leg down.

  10. Anonymous

    Gary- Do you think the “next leg down” breaks the March 09 lows? I suppose that is what the next leg down means but I wanted to make sure…. It seems many people have assumed that we will not make new lows unless it is based on some inflation adjustment. Thanks for all your work! If we have a strong correction in the next few days I am signing up for your service!

  11. Gary

    I think we probably will. If not in nominal terms we will certainly go below that level in inflation adjusted terms just like 82 dropped below 74 in inflation adjusted terms but not in nominal.

  12. Gary

    I think somebody didn’t get their information correct. The commercials actually moved from a net long position to a net short position last week.

    I think what this guy must have been looking at was the magnitude of change from the week before.

    That week was quad witching which always skews volumes trmendously which then drops off drastically the next week.

    The fact remains though that the commercials have now moved to a net short position and a rather large one compared to last weeks net long.

  13. Gary

    If the world begins to get worried everyone can head for the door all at once which leads to massive selling of a currency. Which means it rapidly loses purchasing power, it collapses.

    This leads to huge inflationary pressures in that country.

  14. Anonymous

    I don’t know much about cycles. I just trade the charts. Gold looks like a nice big base to me.


  15. Gary

    I wouldn’t make the mistake of trying to overlay the chart from a different time with different fundamentals on today and assume that we will get the same outcome. The world doesn’t work that way.

    That crash was initiated because there was about 700 billion in debt that came due and no way to roll it over. That crashed the credit markets.

    The credit markets aren’t even in the same boat right now. As a matter of fact the credit markets are looking pretty healthy…as would be expected after central banks threw several trillion dollars at them.

    One probably isn’t going to make any profits trading the past unless one has a time machine.

  16. Anonymous

    Arent we getting to a stage where the daily cycle lows should have played out by now? Sentiment-wise, everyone looking for a pullback (as evidenced by AAII poll as well).

  17. Anonymous

    After selling the precious metals bull for years and how it would out perform every asset class and be the new leader from here on our, you are now recommended buying tech over them? (Or only taking a small position in the miners and loading up with the rest in the Q’s) Gary, you have completely baffled me this year!

  18. pimaCanyon

    Hi Gary,

    You wrote: “Often these predictions of disaster are associated with some imaginary trend line dating back to the 1970’s or 1980’s. I’ve even seen one site that based their predictions of an impending bear market on a trend line originating in the 30’s.

    I have no earthly idea why a trend line starting back in the depression should have any significance at all to today’s market. Geez, some of the crazy stuff one sees in this business. It’s enough to make you wonder if common sense is dead.”

    Does this mean you know with certainty why trend lines do work?

    There are charts that have intact trendlines going back decades. How do you explain that? If part of your explanation requires that the traders at the beginning of the trendline must still be market participants today, I doubt there are traders still holding positions decades old, eh?

    Personally, I have no idea how trendlines work. You can see them on very old charts prior to the days when most market participants knew anything about TA, so the explanation that they are there because everyone sees them doesn’t hold water IMO. They must be based in the psychology of the traders of that market or stock, but how that psychology expresses itself as a trendline, often times lining up several lows or high exactly on the line–that is a mystery to me.

  19. Anonymous

    i cannot believe that today’s market movements are within a 5 point range… its absurd. totally

  20. Patrick

    I agree that expecting the end of QE to initiate deflation isn’t very realistic when they have full power to initiate more QE, however what about the bond market? Don’t they have to keep 10yr rates under 4%?

    I suppose we’ll have to see if bonds find support and the TLT/SPY ratio moves during the next correction.

  21. Anonymous

    After selling the precious metals bull for years and how it would out perform every asset class and be the new leader from here on our, you are now recommended buying tech over them? (Or only taking a small position in the miners and loading up with the rest in the Q’s) Gary, you have completely baffled me this year!


  22. Gary

    First off let’s not forget that miners have been the leaders ever since Nov. of 08. They held over 100% above their Nov. lows when the rest of the market was sinking into the Mar. 09 bottom. They rallied to within 3 points of all time highs while the rest of the market isn’t even close.

    You seem to be reading my article and only seeing what you want to see.

    I clearly stated that tech might be the “safest” bet not the biggest gainer.

    Let’s face the facts. If gold is in a D-wave then it’s going to underperform. The longer this goes the more likely this is a D-wave.

    No matter how badly we want gold to shoot to the moon it’s just not going to do it if it is now stuck in a D-wave decline.

    The dollar appears to be in a cyclical bull market as the 50 DMA has crossed above the 200 and the 200 is now rising. Gold has shown no ability to fight a rising dollar. It has been able to hold up but I think we have to accept the fact that until the dollar starts heading down again gold is probably going to be stuck in consolidation mode.

    So I have to ask, would you prefer I ignore reality and tell you what you want to hear, or would you rather I access the situation as it is and give you my best idea of how to make money?

  23. Jim


    Does the market’s strength today (Monday 29th) impact your expectations for a cycle low in the next week or two? It seems like we are running out of time for a downturn of sufficient magnitude to reset sentiment if you expect the cycle low this week. Thanks.

  24. Gary

    The normal timing band runs about 30-45 days. This was only day 35 so we aren’t out of the timing band by any means yet.

    The last daily cycle ran over 60 days. That’s pretty unusual but it does happen.

    Now isn’t the time to get sucked in on the long side. That’s what most retail traders are doing right now while smart money is selling to them…just like they did in Dec. & Jan.

  25. Anonymous

    As long as AAPL keeps going up, chances of major move down is remote. After quarter it will be employment report and earnings. Profit taking only on earnings announcement, just like late january.

  26. Gary

    AAPl is certainly holding tech up as it’s a big component of the NDX but the internals are deteriorating badly.

  27. Anonymous


    I think you need to lose this Toby stuff…Way too confusing and weird. Have your partner market your blog directly to those avenues you claim to be too busy or lazy to go after.

  28. Gary

    It’s just a way for us to keep track of what he brings in so I know how much commission is due.

    Anything on GS will also be in the daily updates or on the SMT so there’s no need to check both sites.

  29. Anonymous

    Bears can only hope there is ‘sell the news’ reaction to ipad launch on April 3rd.

    Gary, Dont we have huuge selling on strength today, even in GLD?

  30. Blade

    Ahh, got it.

    Gary, agree w/Anon. Confusing and wierd – well put.

    And if your focus is on commissions, that makes it look dirty.

    Journalism 101: Plagiarism is a sin. And Tony plagarized, to the unknowing public. Shame man. And for money. Have you no ideas man? So Toby is just another copy/paster – no brains at all. Has a blog even. People writing in to Toby with questions.


    Plagiarism, as defined in the 1995 Random House Compact Unabridged Dictionary, is the “use or close imitation of the language and thoughts of another author and the representation of them as one’s own original work.”

  31. Anonymous

    Wiki: Plagiarism, as defined in the 1995 Random House Compact Unabridged Dictionary, is the “use or close imitation of the language and thoughts of another author and the representation of them as one’s own original work.”

  32. Gary

    Geez how many times do I have to say this, Toby is me. Well me and my publisher.

    I don’t think it’s possible to plagerize myself.

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