Last week Paulson admitted that his plan to save the markets were not working and he offered some other crazy ideas. Obviously the problems we face are not as straight-forward to fix as many thought.
In about two months, the United States will have a new president and it is more than likely that the problems will still be here. All this leads to three reasons why the stock market will continue to head lower:
- The trend in most all stocks is down. This trend is likely to persist and last longer than most people imagine.
- There is no plan. The government is floundering and does not have a plan that is going to work anytime soon.
- We have a lame-duck president, and nothing is going to happen of any consequence until President-elect Obama is sworn in.
If we take the first problem into account, then we can realize that most people trading the market today have had no experience in a prolonged bear market like the one we had in the ’70s. I was not even born. At the current trend of the market, it looks like we will make another new low and take out the recent lows that were put in place in early October. Unlike a bull market that constantly needs positive news to drive it higher, a bear market just falls under its own weight.
The second problem we have is that there is no concrete plan in place to rescue the economy. In fact, the domestic and global economic issues are so great that they are overwhelming in scope. The Paulson plan, which is being changed and will continue to change, is a major concern and creates significant uncertainty in the marketplace. Only when we see the new regime take office this coming January will we see any meaningful changes. Even if the new regime does any better, it will take some time before their actions take effect.
The last major problem we have is a lame-duck president. This is a major problem for the markets as President-elect Obama can not make any sweeping changes until he is sworn into office. Yes, he may hit the ground running, but the reality is, it’s not for over two months from now and a lot can happen to the market in two months. The key levels that everyone is going to be watching for are the recent lows we saw in early October. If these lows are taken out, and I expect they will be, it’s going to push this market and everything else down to new lows. It will exacerbate the housing situation, the unemployment situation and most of all, the morale of the country.
Investors of all different levels and ages are making predictions. I received an email the other day from a TWI reader, who was predicting the DOW to reach 2500. While it may seem farfetched, it is hard to disprove his estimate.
Having researched the bear market of the ’70s, I can relate how difficult the journey we face is going to be. Now this may seem like a very pessimistic outlook and in some ways it is, however there are always opportunities to make money in the marketplace. These opportunities may not be in stocks, it may be in forex or the commodity markets. Lets stay diverse and keep on keeping on.
For further commentary, check out this great video analysis of the market outlook.