Market Twain

"History doesn't repeat, but it does rhythm" This could be said to be especially true of the stock market because the two dynamics that move the market are.... supply and demand? Sort of, but really it is perceptions via Fear and Greed and the market has shown over and over that Fear is the stronger of the 2 emotions as it took nearly 5 years to build the last bull market starting in late 2002 and about 18 months (most of the decline was in 8 months) to tear it all down and then some.

The Japanese figured this out centuries ago in rice trading, thus we have Japanese candlestick charts which are nothing more then a daily visual of human emotions, that's why they have worked so well for centuries.

You could certainly say the market now has a lot of similarities to the market in 2007-2009 (mostly in 2008 though). We have liquidity freezes in the traditional and shadow banking system, we have a toxic asset (sovereign bonds) that have tentacles running through the entire global financial system, we have seen some failures that are similar to the failures of Lehman and others, like MF-Global, the difference is this time it's not the US where the majority of the problems are that effected other nations, but the EU with the same effect.

The scary part is between the 2008 hurricane and now, we haven't done anything but kick the can down the road. The fraudclosure crisis is still lingering, unemployment is still persistently high despite over a trillion dollars of stimulus and other programs, we have more TBTF financial entities instead of less. Remember when AIG nearly collapsed, that's somewhere along the lines of Bank of America that has its tentacles in 1 of 2 households. Instead of making the situation less dangerous and breaking up these huge financial institutions, the F_E_D and treasury actually merged them and made them bigger. Worst of all, we are not just talking about a bunch of banks failing (although that is on the plate), we are talking about an entire continent failing and taking everything within the borders down with it. We aren't starting from a position of strength, GDP is not getting better, the F_E_D's balance sheet as well as the ECB's is stretched, especially the ECB's at 30x leverage. China is not the growth dynamo that it was and instead is facing its own 2008-like crisis. Emerging Markets were supposed to save the day, they didn't.

I could go on about the similarities, but I wanted to show you this chart of now and 2008, I used this exact chart and same time period to help predict the October rally and the end of the October rally and I've shown it many times to help members anchor expectations and see the bigger picture.

Here it is...

The two tops are very similar, so is the counter trend rally, I put a red arrow to denote where we are now and where it correlates to 2008. Of course it would be silly to say things will play out exactly the same, but it's scary how similar they are, the white arrow is the first low off the late July 2011 drop in the market which we had said would halt and bounce higher about a week before it did, when everyone else expected the market to keep falling. There was a second low both in 2008 and 2011 at the end of the white arrow, this helped (along with 3C) to predict the strong October rally and the same price pattern in 2008, with the same trendlines and moving averages (which were nearly identical), helped to establish the top of the October rally. Remember in the last post I said it took about 18 months from the 2007 top to erase the entire previous bull market, but about 8 months did the maximum damage, that 8 months started right about where we are now, at the red arrow in 2008.