Member's Question

I received an email from a newer member tonight more or less wondering what I base my bearishness on. For those of you who have been here for awhile, you remember the MENA situation and the analysis of the long term problems there that are far from resolved. We have watched the EU (PIIGS) fall one after another to the point now where the core is starting to feel the effects of contagion. We've discussed the pitfalls of Quantitative Easing, what I called the "Bernanke Chinese Finger trap" as inflation via commodities shot through the roof and manufacturer's margins were and still are being squeezed. The reports on manufacturing have shown a steady decline in margins and the destruction of the base; in fact manufacturing is nearing recession There are a lot of things that go into my analysis of the market problems which I had called out as mentioned earlier, while pundits were still calling for Dow 20,000 saying, This time it's different". You've seen how thin the market is in my market breadth posts and how QE was used to prop up heavily weighted stocks in the averages while most other stocks fell and caused very thin market breadth. However, I think this chart of the SP-500 (daily) sums it up best.

Green arrows = trend confirmation, the red arrow in 2007 is the market top/negative divergence. We see two others, but what is most telling is the relative price now compared to the 2007 top and the relative position of 3C now, the divergence this time is not just a relative divergence like in 2007, but a negative downside leading divergence, it's the worst I have seen including the Dow in 1929. Don't forget the trend in insider selling which has been unprecedented. Looking at 3C since QE2, I think we have some idea of what QE2 was used for-golden parachutes. What we are looking at is a house of cards.