Dow 6000, S&P 650?? -- The Bottomless Bottom
The Well-Timed Strategy for Week Ending March 6, 2009
by Peter Navarro, Ph.D.
March 2, 2009

Market Pulse

My call for the Dow to continue its downward trend to as low as 6000 is still in play. To this, I add the speculation that the S&P 500 may be headed down to 650.

The biggest concern I have about both the Dow and the S&P 500 from a technical analysis point of view is that there is absolutely no discernible levels of support. From a technical point of view, we are truly in uncharted territory. We are literally staring into a bottomless bottom.

At present, my favorite technical analysis website Market Edge has both SPY and DIA as short sells. For each exchange traded fund, all of the relevant moving averages -- 10-day, 20-day, 50-day, and 200-day -- are pointing downward while both funds are under distribution. Moreover, SPY has experienced a Point & Figure double bottom breakout, reinforcing the idea of a bottomless bottom.

One of the central tenets of my approach to stock market analysis is that every technical analysis pattern can be explained by an underlying macro fundamental story. In this case, both the Down and S&P 500 continue to head downward because there is no end in sight for what is likely to be a very long and very deep recession global in scope.

Here are the major factors that may help continue to push the Dow and the S&P 500 down to historic lows.

1. Incompetent Obama Administration economic policies:

We already know that the fiscal stimulus does not provide enough short term stimulus and may be highly inflationary over the longer run.

The big remaining uncertainty is whether Obama's Treasury Secretary can stabilize the banking and credit system. Thus far, there is no evidence that Tim Geitner’s half-baked, semi-nationalization approach is working. Stay tuned on this one.

2. The Collapse of the European Union:

To be clear, we care about this possible collapse because a weak Europe translates into weak demand for US exports. Plus, to prevent this collapse, the euro will have to tumble relative to the dollar and this will further undermine US ability to sell exports.

As to why the collapse may be coming, there are two possible flashpoints. First, there is the Profligate Five -- Ireland, Greece, Spain, Portugal and Italy. The danger here is a bond default in one or more of these Eurozone countries that would require intervention by the European Central Bank, drive down the value of the euro, and possibly trigger bank runs in other European countries as default fears mount.

Second, there are the Eastern European Basket Cases -- including Latvia, Estonia, Lithuania, Hungary, the Ukraine to name a few. The problem here is that a lot of these countries borrowed in euro-dominated instruments, e.g., mortgages for homeowners, and now their own country currencies are collapsing. This is dramatically raising their debt burdens and increasing the risks of default. Banks in countries like Austria and Sweden are way on the hook.

(To understand this problem, suppose your own home mortgage was in euros and the dollar plunged. This would make it much more expensive for you to pay back your mortgage because you would need to exchange a LOT more of your dollars for euros.)

Last take on Europe: If Eastern Europe collapses, look for Russia to try and come back in and reassert its dominance. If Europe collapses, look for a new generation of demagogic Hitlers and Mussolinis to vie for power in a democratic system.

3. The Rise of Protectionism

The kneejerk reaction of countries around the world to this crisis is “beggar thy neighbor” tariff hikes, currency devaluations, and “Buy the Home Country” legislation. This is very dangerous.

For the U.S., the biggest danger may well be that the climate will not allow the U.S. to address legitimate free trade issues with China in particular on China’s well-known propensity to pound the American industrial base with a cheap, undervalued currency and massive illegal export subsidies. Unless the U.S. fixes its trade imbalance with China, there will be no recovery of America’s industrial base and therefore no long term recovery.

4. Asia Meltdown: So far, Europe appears to be the much weaker sister than Asia, but at some point push is going to have to come to shove in Japan, Taiwan, and South Korea -- all of which are being eclipsed by China. The big plus going in this sphere is the horde of foreign reserves that China sits on that will cushion it somewhat from the global downturn.

Bottom Line: Volatile is as volatile does. This is strictly a short-term trader’s market right now. BUT plot your Long Strategy now for when a bottom is finally discovered.

THE CHINA EFFECT

Please see my latest You Tube report.

© 2009 Peter Navarro

“Any trader or investor who ignores the power of macroeconomics over the world’s financial markets will, sooner or later, lose more than they should and if they are trading on margin, perhaps more than they have.”-- If It’s Raining in Brazil, Buy Starbucks

Peter Navarro is a business professor at the University of California and the author of the best-selling investment book If It's Raining in Brazil, Buy Starbucks and The Well-Timed Strategy. His latest book is The Coming China Wars: Where They Will Be Fought, How They Can Be Won.

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