- Another massive selloff blamed on S&P downgrade, but again Europe is a key issue as well as it stages Financial Crisis 2.
- Obama speaks again, talking more on tax hikes and class war, and, of course, blaming someone else for the problems. Oh yes, and the market sells again.
- Secular US decline talk emerges as in the late 1970′s. Will a Reagan emerge again?
- Internal, and sentiment indicators reaching extraordinary levels.
- How low can it go? SP500, SP600 at 2010 summertime base peaks, giving back 100% of the QE2 breakout and rally.
- Again, plan to use a bounce if it comes, prepare for more downside.

MARKET SUMMARY

Market sells for the usual reasons: US debt issues, European financial crisis, Obama speaking . . .

You can take your pick of reasons for the market selloff and you would likely be right. A logjam of poor fiscal choices, anti-market policy choices, monetary mismanagement, energy shocks, and uncertainty brought on by an administration bent on undermining the small business sector has broken loose and is rushing downstream, taking the stock market lower with it. Wow what a trite metaphor!

Old and trite, but true. This happens every 30 years or so, at least in ‘modern times,’ and this time we hope we have enough left in the tank to get out of it. I have chronicled the problem many times before. The 1930′s massive spending and socialized programs in the US turned a depression in the Great Depression that lasted through WWII and the boom that followed the technological gains made for the war. Thirty years later more anti-growth policies (windfall profits tax, massive environmental regulation- – that had its good points – -, poor monetary policy, and energy shocks) produced similar results with skyrocketing inflation and massive unemployment (the ‘misery index’). It took a change of policies that once again made investing in the US desirable to jumpstart American entrepreneurship and ingenuity and a new era of prosperity.

Other interesting attributes: in the 1930′s our enemies thought the US was too chaotic and disorganized to present a counter to their aggressions. In other words, our form of government was misunderstood and believed to be too soft to rise up in opposition. In the 1970′s as the US economy floundered the question was posed if the US was in decline, that the ‘experiment’ in self-government had ultimately failed. Today and over the weekend you heard stories about the ‘secular decline’ in the US.

No doubt the US has serious troubles, more so than in the 1970′s. The main issues involve the massive debt, the unfunded entitlements that mathematically cannot be met, and turn toward anti-capitalist, big government rule. As John Bogle, founder of Vanguard Investments said today, the US is on a downward path and people who do not realize this are foolish. We have the ability to recover ourselves IF we know there is a problem and can get back to what made us great. As Winston Churchill said of America: Americans always do what is right, but they try everything else first.

Hopefully now that we have tried the socialist route of Europe and seen the disastrous results we will now ‘do what is right.’ If we do not, and do not do it soon, then we will most assuredly decline into a second-rate former power. That leaves me and many others asking, where is our next Ronald Reagan, someone who is unabashedly a believer in free enterprise and the good that is the US? We need leaders that believe the US has been and is a good force in the world and that growing stronger and showing others freedom is the way is the way to defeat those with mal intent. We will see is someone emerges. The country is ripe for that kind of leader.

Definitely versus one that comes out during each market selloff and day of perceived crisis and falls back into the blame game. Monday, after a weekend of silence on S&P’s downgrade of the US debt to AA+ from AAA (and I cannot agree with Buffett that we are AAAA), the president spoke, and as he did, the market selloff hastened. Why? Because it was more of the same. The President blamed S&P for the selloff, again condemning the messenger. The US knew it would receive a downgrade if it did not do something big with the debt. It did not and thus it received a downgrade as promised.

After blaming others for his troubles (did I miss the reference to his administration ‘inheriting’ this problem?) The President then went into his old fallback position wanting more taxes, talking of taking from the billionaires while his proposals would take the most from the middle class small businesses that pay most of the taxes and create most of the jobs that, under current policies, are not being created. The President may not like it, but the US is in dire fiscal circumstances and the blame game does not work. You cannot lead blaming others for your problems.

Frankly I believe the administration is shocked that its massive spending policies are not working. The President’s Princeton economists have told him that spending a lot of money will create demand and the US will consume its way out of its troubles. History has told us that you cannot have a one-sided economy. In 2000 the business side shut down and we went into recession even with a stronger demand side. Demand could not push supply enough to pull us out. Investment capital had to have a reason to invest once again in the US.

That is precisely the problem now: there is NO venture capital at work in the US because no one knows what rules are or will be. The President has issues untold numbers of Executive Orders resulting in thousands of new regulations that have not been approved by Congress. Every day his administration is writing new rules in a dictatorial style, rules that Congress does not see or get to vote on. With the new healthcare driving insurers out of markets (Aetna announced it is leaving a few states already), with new regulations showing up every day out of the blue, and with talk of more taxes on the businesses that create jobs it is no wonder that venture capital is locked up tight, waiting for regime change and a new view regarding business to enter DC once more. If that happens, capital that is being sequestered will be unleashed into the economy once more just as happened in the 1980′s when money poured out of tax shelters into the economy, igniting a new era of innovation and a 20 year boom.

But . . . I digress.

Stocks were crushed again as fear spiked, sending the VIX and internal market readings to reversal levels. The dollar was stronger (showing issues are in the EU more than the US), bonds soared (same reason as the dollar’s rise), oil tanked, and gold few yet again. About the only positive is the market is vastly oversold and SP500 is at the highs of the summer 2010 base. Another support level is hit, the others all broken, as the rally on the QE2 Fed stimulus is totally reversed. Eight months of rally lost in 12 sessions. As I have been known to say, fear is powerful but greed is the king.

NASDAQ -174.72, -6.9%. SP500 -79.92, -6.66% (the devil in the details?). DJ30 -634.76, -5.55%. SP600 -8.48%. SOX -5.39%.

TUESDAY

Another day, another massive selloff, another skewing of indicators to even more extreme levels.

About all you can do at this point is look for the opportunity to get into some positions for a rebound. If the market continues to sell off it is building in a huge recession ahead, perhaps a depression. If it undercuts the summer 2010 lows and falls into the rally zone from March 2009 to that 2010 summer base, it threatens the entire liquidity rally and thus truly is forecasting a worst case scenario, i.e. a complete failure of the ‘recovery’ and long term weakness. Fun prognosis.

Even so, bear markets have sharp selloffs and sharp rallies. The indicators are skewed heavily negative. After this happens it may take a week but there is historically a surge to test. Sentiment (VIX, put/call) is extreme, market internals are extreme (new lows, breadth), technical index indicators are there, and leadership is at critical go/no-go levels.

The market will rally even if it is just a relief move. We just have to be ready to step in as it does to make money. We are going to look at the leaders that have been roughed up but are the ‘name brands’ at key levels, the names that investors will put money in when the market bounces. Some are at the bottom of ranges, others are at gap points or other important levels. We are also going to look at index plays for their simplicity. If SP500 and/or SP600 want to bounce off their summer 2010 bases then they are candidates ripe for some upside gains.

It won’t be a rally to break to a new high. Indeed, as noted above, a rally to the April 2010 peak (roughly coincident with the November 2010 peak), or a 100 point move on SP500, would be a jewel. It would also make us some great upside money and allow us to reload to the downside with some more downside plays. SDS, LLL, SCHN, USO, THO, RMTI, QID have all made us huge green to the downside and we want an opportunity to load up . . . when the time is right. That will also let is bail on the remaining upside we have and at the same time take gains on the new upside we plan to take. It is not nirvana, but it isn’t bad. Just have to be patient and wait for our shots.