The Secret to Money-Doubling Trades
There are anywhere between one and 100 reasons the market could fall in October. Some of these reasons are technical; some are fundamental.But 10 is a nice round number, so I’ll give you five fundamental and five technical — all of which are worth careful consideration.
Next: #1 The Consumer is Down and Out
The Secret to Money-Doubling Trades
#1 The Consumer is Down and Out
The driver of the U.S. economy is the consumer — consumer spending accounts for 70% of the nation’s GDP — and the consumer is down and out.
Americans have lost 40% of their wealth in the past two years; more than $4 trillion in credit lines will have vanished by year-end; the real unemployment
rate (unemployed, discouraged and part-time workers wanting full-time work) is roughly 20%; and weekly work hours and wages are stagnant. In short,
most consumers have no extra income to spend.
Find out which luxury retailer could see its share price cut in half.
The Secret to Money-Doubling Trades
#2 W-Shaped Recession
Without consumer spending picking up drastically, the economy is facing a W-shaped recession/recovery — not a V-shaped one.
We are currently climbing the second leg of W due to rising expectations about the economy. But the economy is not improving — is it just not declining
as fast as it was. This realization will likely hit Wall Street next month, sending the market back down.
You should be mad as hell at the financial media for trying to make you believe the economy was recovering — learn
more.
Next: #3 The Banks Will Lead Us Down Again
The Secret to Money-Doubling Trades
#3 The Banks Will Lead Us Down Again
The banks led the market down, and then led it back up. And when they announce earnings in October, they are almost positively going to include
comments about 2010 that will help send the market back down.
The banks still have trillions of dollars in toxic assets, increasing credit losses, and are facing new accounting and regulatory rules that are
pressuring them to raise capital and dilute shareholders. And the market is not likely to react well to this news.
See 2 Bank Stocks That Could Lead the Market Down.
Next: #4 No Positive Catalysts on the Horizon
The Secret to Money-Doubling Trades
#4 No Positive Catalysts on the Horizon
The current drivers of the market — commodity speculation, green shoots euphoria and enthusiasm over China thanks to fabricated
Chinese economic data — will be played out in the next few weeks.
Absent these drivers there are no positive catalysts left to underpin a rising market.
Next: #5 Earnings Will Disappoint
The Secret to Money-Doubling Trades
#5 Earnings Will Disappoint
The market is radically overvalued based on current earnings. Historical norms say the S&P 500 (SPX)
should be at 850, not 1,065.
And the depressed economy will lead to depressed earnings next year, which means the market will be even more overvalued than it is at current levels.
This will be made clear with October earnings announcements.
Just because earnings will disappoint doesn’t mean traders can’t make money. Get 12
Keys to Trading Earnings for Profits.
Next: #6 The Market is Overbought
The Secret to Money-Doubling Trades
#6 The Market is Overbought
Now that we’ve covered a few of the fundamental reasons the market is likely headed down in October, let’s turn to some of the technical reasons.
First, the market is overbought by almost all historical norms. And the rally, which began March 9, is having more and more trouble piercing technical
ceilings. Major resistance levels are 1,045, 1,075
and 1,110 on the S&P 500 (SPX). And a major failure at one of these levels could be a tip-off that
the slide has begun.
Next: #7 An Indiscriminate Rally
The Secret to Money-Doubling Trades
#7 An Indiscriminate Rally
The market has been indiscriminate in this rally, pushing up 487 out of 500 S&P stocks. This level of irrationality is ending, and certain segments
are going to take a hit. Once this happens, the broad-based support for the S&P 500 (SPX)
will erode brick by brick.
Get 10 Tips to Getting Started With Technical Analysis.
The Secret to Money-Doubling Trades
#8 Light Volume
Market volume is so light that many technicians do not see the rise in the indices as “real.” They want to see increased buying
volume to confirm another upward leg in the rally.
While volume may increase in the short term, it will still be considered light, as many investors are very cautious (and should be) about getting
in after a 40% rise in the markets. Without heavier volume, the market is very vulnerable to a downturn.
Next: #9 Short Covering and Money Managers Looking to Bank Profits
The Secret to Money-Doubling Trades
#9 Short Covering and Money Managers Looking to Bank Profits
Two key elements of the market’s rise — short-sellers covering their positions and money
managers looking for quick profits — are waning, reducing buy-side volume. This will eventually impair the market’s ability to sustain itself as
more shorts are entering the market and more managers are preparing to bank profits before the end of their year on Nov. 1.
The Secret to Money-Doubling Trades
#10 An Eerie Similarity
The eeriest reason you should be wary of a pullback in October is the similarity between the chart of the rally that began March 9 and the 1937-1938
rally, which was followed by a sharp pullback. They are practically identical — seriously, check it out.
This could be a harbinger of a major slide beginning no later than December, but probably starting in October.
The Secret to Money-Doubling Trades
One More Reason …
I have one more reason that the market is likely headed for a fall that is not fundamental or technical; it is psychological. There are few true believers out there. No one I speak to — professionals or individual investors — believes in the market right now. And almost no one believes in anything other than a statistical recovery as opposed to a real-world recovery.
Any of these 11 reasons taken alone is a good enough one for me to prepare to go short in October — and so should you.
To get yourself ready for the market’s slide, see:
- 9 Ways to Profit From the Market’s Fall
- 10 Things You MUST Know Before Shorting a Stock
- How to Pick the Right Put Option
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