In Greek mythology, Sisyphus is the tricky king that was sentenced to pushing a rock uphill every day just to see it roll back down again. He earned this task by constantly annoying Zeus and company.
Right now, the U.S. markets appear to be the rock; Ben Bernanke is Sisyphus. And the top of the hill is close. So close, in fact, it feels like we’re about to roll down it… again.
There is no question Ben and company have been able to “carry” the market far up the hill, but once it begins to roll back down, it’s a long way to the bottom.
But how do we know we’re nearing the top?
Because there is currently a tempest of bad news gaining momentum…
The euro zone seems to have hit a wall. Several of the countries are in recession and Germany, by far the largest and most important economy, is teetering on the brink of recession.
The Chinese have reported lower growth numbers and have implemented several rounds of stimulus to no avail.
India has slowed.
Countries like Australia that provide a lot of supplies to China have also slowed.
The U.S. is reporting anemic growth numbers – less than 2% for the first quarter of 2012 – and earnings season kicked off two days ago. With much of the earnings of companies in the S&P 500 coming from overseas and close to half of the foreign earnings coming from Western Europe, this could be an ugly summer.
So with all the bad news whipping around the globe, why are markets doggedly holding on to 2012 gains and multi-year highs? Surely there must be a bright spot or two supporting this behavior… like housing enjoying a bit of a positive turn and the fact that, so far, the world financial system has not imploded.
But no. That’s just not enough to keep markets up. There must be something more.
Here comes Ben, carrying the rock.
Investors Are Trapped Between a Rock and a Hard Place
In his beneficent efforts to get that rock to the top of the hill and keep it there, Ben has trapped investors. There is no broad market support. There is no benefit to diversification.
If he, the one benefactor, enters the market, then everyone who is long will win. If he stays away, then long investors will lose.
Given what has happened the last few times Ben shocked the market, no one wants to be caught on the sidelines. But then again, everyone seems to agree the situation can’t continue. Ongoing central bank intervention cannot build a healthy market. Eventually, that rock rolls back down the hill. And no one wants to get crushed when that happens.
So how far is it to the bottom?
Think low… and then think lower.
We think the U.S. financial system has extreme problems and Ben and company are quickly running out of options. This fundamental assessment, coupled with the technical analysis that shows how bubbles tend to fall back to where they started, leads us to believe the Dow will drop to as low as 3,300 even though Dow today is around 12,600.
And yes, we recognize that Dow today is 12,600 a very long way from where our prediction.
Does the market have to fall that far? Of course not. For starters, the Dow Jones Company often reconstitutes the Dow Jones Industrials Average to take out laggards, like the recently defunct General Motors (GM). It could be that we simply test the lows from 2009, which would take us to just shy of 6,500.
The point is that it’s been over three years since the Federal Reserve began “saving” the U.S. markets. Now every other central bank has taken up the cause with many similar programs.
For all the heavy lifting these entities have done, the economies of the world are no closer to solving the underlying issues that got us here. For that to happen there will have to be significant losses… worldwide. That rock will have to roll back down the hill.
Be careful. Make sure it doesn’t roll over you.
P.S. As markets roll down the hill, there are several steps you can take to survive and prosper. One is to build as many streams of income as possible. Another is to keep your cash in dollars. It will do well in the coming years. But the first thing you should do is this.
Ahead of the Curve with Adam O’Dell
How I Know the Dow is Completely Overvalued
The Dow Jones Industrial Average is overvalued any way you look at it.