We're at a Major Crossroad... Here's What to Do

It's late November and the U.S. government is borrowing more money than any entity in history has ever borrowed. It is fighting a war against deflation, and it needs this money to pay for a massive stimulus plan... 

The newspapers bring news that Asian investors are reluctant to lend any more money. More news comes through that the recession will lower tax receipts at the IRS, the Treasury's main source of capital. Editorials point out how indebted the government is already... 

You'd think the prices of U.S. government bonds would have collapsed under these terrible fundamentals and scary news stories. But the opposite happened. Bond prices rose day after day, tracing a relentless path higher...
Treasuries are "acting well," I wrote at the time. "It implies there's more strength to come for the Treasury bond market." 

And that's exactly what happened. The bond market had its most dramatic rally in history as soon as I'd written those words, pushing down yields by 33% in four weeks...
When bad news can't make an investment fall, then you know there aren't any sellers left. The selling power is exhausted, and the investment can't fall any farther. It can only rise...

The converse is also true. When a highflying stock announces good news and the stock doesn't respond, you need to be careful. It's not acting well. Everyone's already bought and there's no one left to support its price. It can only fall... 

The Institute of Supply Management monitors activity in the services and manufacturing industries. On Monday, the institute's researchers released their service data for June. It was the strongest reading in nine months. This was a far better result than Wall Street expected... 

The news made no impression on the stock market. It kept falling, down over 1% after the news. Then yesterday, the S&P 500 broke down to a new 10-week low, closing below 883 for the first time since May 1. 

Last week, we saw more good news. Data showed American manufacturing was stronger than expected and the housing market is stabilizing. The S&P 500 was only able to rise a measly 0.4% the day this news came out. 

Then on Thursday, the Bureau of Labor Statistics released the monthly unemployment report. It showed a large increase in unemployment. This news shook the stock market. It fell almost 3% that day. 

The market's reaction to news is one of my favorite prediction tools. It's plain to me that right now, the S&P is shrugging off good news and responding dramatically to bad news. After a 44% rise in three months, this action tells me the bulls have exhausted their buying power and sellers have all the chips. 

Now look at a chart of the S&P 500. The market has lost 8% in the past three weeks, after a huge run up, and the trend is clearly turning down. 


The bears are holding all the chips and the trend is turning down. This could get ugly. Position yourself for further declines... 

Good investing, 

Tom