Paper Money - A US Real Estate Bubble Blog

Posted: 20 Jan 2009 11:02 AM CST

Subtitle: The (Suckers) Rally Has Left the Building?

And a very weak rally it has been… amazingly weak given all the talk of the new administration and its historically gigantic government bailout of everyone and everything… even some bears thought we might have reached the bottom…

But, alas it looks as though 'tis over.

If the contagion of (well founded) fear from yesterday's RBS (NYSE:RBS) $41 billion loss didn't drive the nail in the rally's coffin, then today's nearly 50% opening drop of State Street Corp (NYSE:STT) should more than complete the job.

Banks and financial stocks as an aggregate are now well below their November 20 lows and, like a giant cement block shackled to the broad indices, will likely pull down the rest of the stock market to a dramatic re-test and failure.

Yet CNBC's Bob Pisani still opines of a market "over sold" condition.

Fat chance.

In fact, it's becoming more obvious to me that we are firmly on the path to a 70%-80% peak decline for the S&P.

That would bring the broad index to a level of roughly 300 - 500… a startling level for sure… yet would anyone really be surprised?

Make no mistake… we are in the midst of a generational decline.

A long unwind of massive debt and delusion that even the federal government cannot prevent.

2009 will be a year of somber awakening to the harsh reality that our economic troubles are more complex and intractable than is now expected.

While many pundits still believe that a significant component of the decline to date is attributable to sentiment and psychology, this year we will all agree that something truly fundamental is afoot.

As regular readers know, I have been following along the stock market decline for about a year now with this recurring "Twin Peaks" post whereby I simply charted some very basic technical analytics (somewhat ala the amazing Louise Yamada mixed with a couple of my own inventions) which compared the underlying average movement of the current S&P/500 index to its performance during the unwind of the "dot-com" collapse.

Be sure to study the charts well as they present several different ways of capturing market volatility and together compare past market performance to what we are seeing today.

I will continue to post the comparison to the "dot-com" era bear market for posterity but now that we have broken through the 2002 lows all technical similarities going forward have ceased… we are firmly in uncharted territory as the two bust eras are now one.

The "Percentage Up-Down" chart clearly shows that we have just entered a period of REAL volatility BUT also leads one to believe that we may have a long way to go in this market shakeout.

The "Up-Down Daily Closings" chart seems to indicate that although we have seen increased volatility and significant declines, we have yet to match the distribution of daily up closings and down closings (inverted red line).

Study the following image (click for very large and clear version) of the S&P 500 index from 1995 to today then read below for the technical blow by blow.

What follows below is now just maintained for old times' sake… the second peak was obviously real and this series of posts identified it roughly a year ahead of time.

Now that we have entered effectively into uncharted territory, we are at a loss for historical comparison.

THEN (1998 – 2000 Top)

A. October 1998 – S&P 500 gives early warning sign by crossing its 400 day simple moving average (SMA). Notice also that the 50 day SMA breached the 200 day SMA.
B. October 1999 – S&P 500 gives a second signal by crossing its 200 day SMA after a solid twelve month expansion. 50 day SMA touches the 200 day SMA.
C. Three prominent but decelerating peaks set up the top.
D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)

NOW (Today's Top)

A. June 2006 – S&P 500 gives early warning sign by crossing its 400 day SMA. Notice also that the 50 day SMA breached the 200 day SMA.
B. March 2007 – S&P 500 gives a second signal by falling near its 200 day SMA after a solid nine month expansion. 50 day SMA similarly depressed.
C. Three prominent but decelerating peaks set up the top.
D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)
H. Down Down we GO! (Uncharted Territory)