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Stock Markets Panic Crash Continuing, Is the Stealth Bull Market Over?

Stock-Markets / Stock Markets 2011 Aug 07, 2011 - 09:39 PM GMT

By: Nadeem_Walayat


Diamond Rated - Best Financial Markets Analysis ArticleInvestors and Traders are reeling after a week of plunging stock prices and high market volatility as the worlds major stock indices fought to and then failed to hold support sending the Dow down to an extreme intra-day low Friday of 11,139, before recovering to close up marginally on the day at 11,444, as of writing asia is sharply lower with Dow futures trading over 270 points lower at 11,170 suggesting a continuation of a downtrend early week to below Dow 11,200.

The BlogosFear is claiming victory though many of whom conveniently forget that if they had followed their own advice they would have already gone broke several thousand Dow points ago on the way up, meanwhile the mainstream press yo-yo's with every market gyration to explain what is beyond their capability to interpret, each bounce is followed by good news explanations such as agreement on the debt ceiling, each plunge is followed by a bad news explanations such as Italy and Spain teetering on the edge of default bailouts.

The relatively mild summer correction has clearly morphed into a market panic event. However unlike many investors, I don't tend to panic, instead see opportunity in every crisis. Therefore my focus this weekend has been to update my buy list that will aim to capitalise on the ongoing panic as the Dow futures suggests.

U.S. Credit Downgrade, Bankrupting Eurozone, Double Dipping Economies

S&P puts another nail into the U.S. economies coffin with its credit rating downgrade, the eurozone continues to trend towards default of PIIGS and sharply higher interest rates on issuance of eurobonds (as euro-zone interest rates get averaged between bankrupting PIIGS and core Eurozone), with economic data increasing the odds of a double dip recession manifesting.

So all of the bad news is true, but ultimately all that they will do is to ACCELERATE the INFLATION MEGA-TREND, which is the primary driver of prices be they consumer, commodity or assets.

So if you really want to know how to preserve and grow your capital you need to know to keep on the right side of the Inflation mega-trend as covered at length over 18 months ago in the Inflation Mega-trend Ebook (FREE DOWNLOAD), following which little has actually changed in respect of the key drivers of the inflation mega-trend.

Investing For Capital Protection and Profit in the Inflation Mega-trend

Investing is HIGH risk even if one picks low risk large cap dividing paying and growing stocks, there still is a significant risk involved which is why investments have to be accumulated into target stocks with a view to long-term holdings that span many years if not decades, for that is how you actually beat real inflation, not from jumping in and out of holdings on the latest scare or market panic that takes all stocks lower regardless of each stocks differing fundamentals. Whilst short-term term speculators focus on the gyration of stock price charts, what they may be forgetting is the long-term impact of growing dividends that is the real key to profiting from stock market investments, therefore in my view dividends are more important than what the stock price does, as long as dividends are growing then the investment is safe because whilst companies can and do lie as to the actual state of their balance sheets, but the dividend does not lie, remember that!

The strategy is simple in that the Inflation Mega-trend driven by the sovereign debt mega-trend as countries seek to default on their debts by means of high real inflation results in corporations raising prices which raises revenues which raises profits in nominal terms and thus raises dividends and hence constant dividend paying and raising stocks are a hedge against in inflation which should over the long-run be reflected in the stock prices as stocks are compared to one another in terms of price divided by earnings (P/E) and dividend divided by price (yield). So my long-run stock market investing strategy is simple which relies on the fact that democracies will always stealth default on their debts by means of high inflation as the primary driver of economies, for in democracies politicians seek to buy votes to get elected with money the country does not have, which is why you are not going to get price deflation as deflation runs counter to politicians objective to get elected by buying votes. Even in austerity Britain, the coalition government is STILL buying votes with money the country does not have to the tune of about £120 billion a year or about 9% of GDP.

This is the real price of democracy in that wealth is systematically stolen from the haves and distributed to the have not's where only the super rich (top 0.5%) can escape the democratic wealth destroying cycle.

You hear a lot of talk about the lost decade for stock market investors, what these commentators fail to consider is the performance of stocks with consistently rising dividends that one could easily during a panic event collect yields on as as high as 6% which then COMPOUNDS as the dividend is raised, resulting in a 10 year return of as much as 100% on the initial investment BEFORE stock price capital appreciation is even considered.

As the PIIGS crisis illustrates that risks posed by many stocks can turn out to be lower than that of government bonds. Those holding PIIGS debt are sitting on capital loses of between 30% and 50% on so called low risk investments!

So in my opinion panics ALWAYS breed opportunities to accumulate into high yield stocks and country and commodity ETFS as covered at length in the Inflation Mega-Trend Ebook.

So whilst you read the rest of this article in terms of shorter term trend expectations, do remember that in terms of the long-run the current panic action is just noise, that is giving me and many other investors discounts on stocks of between 10% to 15% compared to where they we were trading just a few weeks ago.

U.S. Addicted to Debt Gets Downgrade

Growing sovereign Debt is a mega-trend that afflicts ALL democracies that manifests itself in INFLATION as countries are forced to default ont heir debt my beans of high inflation.

The Inflation Megatrend Focus

Regardless of the what the debt deleveraging deflationistas have been continuously stating for many years now, stay focused on the inflation mega-trend as the primary driver for asset prices as a consequence of the megatrend's of sovereign debt default through high inflation, population growth impact on commodity price inflation, demographic changes in emerging markets on consumer and asset prices, and the inflation inducing climate change mega-trend.

The academic economists may be blind for obvious vested interest reasons to the inflation mega-trend but it is real and powerful and will continue for the whole of this decade by which time rear view mirror looking economists that populate the mainstream press will say how did we miss the great inflation of 2010 to 2020?

My investing focus as iterated at length in the Jan 2010 Inflation Mega-trend ebook remains the same to accumulate into this decade long mega-trend in which respect panics present opportunities.

My focus is to invest in commodity, internationals and emerging markets for emerging markets growth will far out perform the west for the whole of this decade. Look it is not because emerging market people are smarter or cleverer than those in the west for they on an average basis are not, because of several; factors such as lack of freedom of thought in China, or lack of educational opportunities or poor infrastructure in places such as India. What is driving the emerging markets mega-trend as illustrated in the Inflation Megatrend ebook is the convergence of GDP's as the below graph illustrates (Jan 2010).

Therefore the GDP of countries such as China and India can double but STILL lag far behind the west which illustrates how far they have yet to grow with all of the implications for commodity and asset prices given the billion plus populations of each of these countries.

Stay focused on the Inflation mega-trend and you will preserve your capital and grow your wealth. Fall for the deflation propaganda and you will lose at least 50% of the value of your capital over the next 10 years for this is what so called deflation looks like for the UK in terms of prices -

Inflation Mega-trend Investing

The Inflation Mega-trend ebook broke down where one could be investing to protect ones wealth which I can summarise as in stocks , commodities and the corporate bonds of low risk stocks. Now some 18 months on my analysis is also converging towards holding housing (UK), therefore if I were to break an ideal portfolio down today it would comprise 30% stocks and commodities, 10% cash, 40% housing, and 20% index linked / corporate bonds. My own portfolio currently stands at 28% stocks & commodities, 52% cash, and 20% index linked / corporate bonds so clearly the focus of my analysis is more on protecting cash from bankrupting banks and the UK housing over other markets.

Stock Market Quick Technical Outlook

Volatility is high, markets are yo-yoing all over the place every few hours as illustrated by Fridays price action, asia is sharply lower and so are the futures, nevertheless here is my quick take.

Technical State of the Bull Market - The Dow's last bull market high of 12,876 against the last close of 11,460 represents a 11% drop, so still well within that for a normal correction of between 5% and 15%.

Credit Crisis Lehman's Event - The last bear market was intensified by the unexpected Lehman's bankruptcy, whilst the unexpected is well unexpected, the banking sector is far less likely to produce a Lehman's event now than in late 2008. Off course the focus is on the European PIIGS producing a Lehman event. However the Euro-zone has repeatedly shown that it WILL step in to prevent such an event by bailing out and buying government bonds, which means even the too big to save such as Italy, will at the final moment be saved though the process could be painful in terms of market volatility however the ultimate bailouts would result in a stocks rally.

Price Patterns - The head and shoulders pattern is back - My take is that it is always visible just before it gets busted! The H&S pattern is less reliable than a coin toss !

Technical Analysis - A measuring move of the decline to A, from the break of support point suggests that a low is imminent around Dow 11k. However the severity of the current downswing suggests that an imminent low will be revisited / tested after a bounce.

The lower high at B suggest the stock market is now in a down sloping channel, which further suggests an imminent low is likely to be tested and probably broken before the Dow targets a break of the down sloping resistance line.

MACD - Very oversold and has hit the support channel line which suggests further downside is very limited and a bounce is imminent that targets the higher down sloping channel line.

Elliott Wave Theory - May 2nd is clearly a major 5th wave peak which initially suggested an ABC correction which given the severity of recent price action suggests a further wave lower is likely.

Volatility - VIX has spiked sharply higher virtually touching 40 from an early July low of 15. Similar VIX spikes usually coincide with major lows though need several days of price action to be confirmed, as 40 could spike further to 50.


Clearly the stock markets remain immersed in panic mode so not in any state to make a new bull market high any time soon, I see the likes of Dr Doom Marc Faber, AFTER the event claiming that stocks are in a bear market as of 2nd of May 2011 and won't make a new high. WRONG. The only question mark is how long will the current volatility extend before the bull market in stocks RESUMES. That is not clear, the stock market is oversold and set to bounce, but after the bounce it could make another lower low. It is not clear, which is fine because the market is not always predictable. My best guess is for an imminent bounce to resolve in a retest of the lows, stocks historically tend to make major lows in September and October.

The Bottom Line - The stocks bull market is not over, the current correction extends to about 11%. Therefore I have an on going opportunity to accumulate target stocks and will likely get another bite at the cherry after a bounce and plunge into Sept/Oct, after which the future prospects for stocks for the balance of the year will become much clearer.

Your analyst disappointed that his target stocks are not dropping as much as the indices!

Source and Comments:

By Nadeem Walayat

Copyright © 2005-2011 (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of three ebook's - The Inflation Mega-Trend; The Interest Rate Mega-Trend and The Stocks Stealth Bull Market Update 2011 that can be downloaded for Free.

Stocks Stealth Bull Market Ebook DownloadThe Interest Rate Mega-Trend Ebook DownloadThe Inflation Mega-Trend Ebook Download

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 600 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2016 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


08 Aug 11, 12:53

Hi Nadeem -

Assuming that inflation is a given, what is the importance of actual economic growth on stock prices?

1) inflation w/expansion - Dow reaches 14,500++ in 2012-2013

2) stagflation - this seems to be the actual scenario ... couldn't it be argued that the Dow simply hovers between 10,000-13,000 rather than reaching new all time highs? meanwhile commodity prices continue to rise ... higher % of earnings allocated to commodity prices rather than to economic productivity

3) inflation w/recession - isn't there a risk that the Dow make lower highs over the coming years even while commodity prices skyrocket? or is higher commodity prices / higher stock prices a foregone conclusion?



08 Aug 11, 18:45
A question regarding currency exchange rates in regards to overseas investors

Hi Nadeem,

I have followed you for quite some time and quite enjoy your articles. I do have a question for you that I put to Jim Rogers on CNBC once that I felt he was unable to answer which was disappointing, however he may not have completely understood with the time restraints of being on CNBC etc.

Essentially, I am an Australian living in Australia and I have not had a reason to doubt the inflation story, so last year at one point I decided to but a commodity tracking ETF, I think it was DBC, but anyway it was an ETF that was tracking a basket of commodities. I held it for say two months maybe, but it appreciated by 10 or 20% over that time and because it hit my target I closed it. But once the accounting had gone through I actually lost because the exchange rates of the AUD/USD had appreciated enough during that time that I eventually lost 10%.

So I asked Jim Rogers in a roundabout way, "you live outside the US, so how do you factor in the changes in your home currency to that of the US in relation to your expected appreciation of commodities....if in fact it would be same to assume the USD will depreciate as well?" I even explained to Jim Rogers my trade and how it lost because of the appreciation of the AUD during that time, and he laughed and said well you should have bought into my commodity tracking fund, but I felt he completely missed my point.

So my question, seeing as you are based in the UK, if you are investing in commodities how are you factoring in the appreciation of the GBP to the USD? I ask this because I want to invest in commodities over the long term but what is the point if the USD will fall relative to the appreciation of commodities and the AUD?



09 Aug 11, 08:06
Inflation mega-trend

Hi Eric

The inflation mega-trend results in an exponential growth spiral for stock market indices.



09 Aug 11, 08:12
Inflation Mega-trend and fiat currencies


I invest in appreciating currency economies or international stocks exposed to appreciating currencies, so I would invest in Austrailia, China, Canada and emerging markets.

Also remember stocks of internationals get inflated by falling currencies, so if the USD falls, international stocks would rise in price.

If your an Aussie, then you have the advantage that your currency is appreciating, which means your earnings and value of you assets and savings has increasing purchasing power over others for instance Brits, Europeans and Americans.

So basically you made a mistake by buying USD asset because your appreciating currency already affords you inflation protection to some extent.

Also I prefer to invest in stocks rather then the underlying commodity for instance oil companies rather than oil, so I get rising dividends each year which is the real secret to long-term investing return.



09 Aug 11, 21:21

Thanks Nadeem,

That makes perfect sense...I am wondering why Jim Rogers couldn't simply say that!! LOL



10 Aug 11, 21:00

Hi Nadeem,

Going on from my previous question regarding the Australian stock market and the AUD rate vs the RBA rates, I wanted to ask you about the CNY/AUD rate.

After reading your latest ebook, I decided to check out the CNY/AUD chart, and noticed that the AUD has appreciated quite considerably over the last two years against the USD, although it's only slightly lower than say 5 and 10 years ago.

I was wondering how China would view this? Obviously they like the CNY appreciating against the USD as you say in your book as it enables them to export their inflation to the US, but what about the high AUD..does this concern them seeing as they buy a lot from us?


11 Aug 11, 05:54
40% Housing

Nadeem i thought you were a housing bear, why the change of heart?



11 Aug 11, 10:43
Housing Bear

Yes, Ive been a housing bear (UK) since May 2007, and yes I am starting to change my view (still no exposure to UK housing), future articles will elaborate,



11 Aug 11, 11:17

Thanks Nadeem,


Looking forward to it,

12 Aug 11, 09:57
Deflation vs. inflation

Nadeem, seems to me we are back in deflation currently similar to 2009. Mish makes some strong arguments for that, what's your take on his thoughts? Would love to see you debate it with him.

Yes Virginia, U.S. Back in Deflation; Inflation Scare Ends; Hyperinflationists Wrong Twice Over

Hyperinflationits have now blown it twice. First, they insisted hyperinflation would happen before deflation. They were wrong. Then, during the QE2 inspired equities and commodities ramp, they said the same thing. They were wrong again.

12 Aug 11, 10:32
Mike Shedlock Deflation

Deflation back ? Really ?

I don't have the time to shred his commentary to pieces, the focus of my analysis is towards making money not pointing out why deflationists such as Shedlock are wrong.

Where stocks are concerned, from what I have read Mike Shedlock has MISSED the WHOLE bull market, which speaks volumes.

There is no debt deleveraging deflation as I warned of now approaching 2 YEARS ago !

Therefore those who followed Mikes advice these past 2 years will likely be BROKE!

The perma bears are at their most vocal just as the stock market correction ends and the bull market resumes - Watch and learn ;)



13 Aug 11, 09:29
52% Cash?

If you are so confident in your forecast for major longterm inflation, why on earth would you be holding such a large portion of your portfolio in cash? You are scared and worried that you may be proven wrong and your cash allocation proves that deflation rules the roost. You like preserving capital in scary market downturns when you should be leveraging up to the max to scoop up as many stocks as possible.

13 Aug 11, 13:19


It would help if you actually read (paid attention) to the article.

What is the target allocation ?

30% stocks and commodities, 10% cash, 40% housing, and 20% index linked / corporate bonds.

What is my holding of housing ?


What does this imply that I am next targeting ?

Hint - Housing.

6 months from now I will probably not be at 0% housing.



16 Aug 11, 18:20
Bull Market


I'm an avid follower of your work. Suffice to say, I believe the equity market continues to operate a bear market. Despite Bernanke's QEII announcement last August, the S&P, DOW, and RUT have each virtually retraced the entire the past 10 months of gains in a matter of weeks. To add, without record deficits, the U.S. GDP, would continue to be negative (6% range).

Until the Govt/elitists ever agree to expunge/restructure the debt, change their wreckless spending programs, overhaul campaign contributions, and simplify our complicated tax system, we will continue to operate within a breath of another equity market crash.

To that end, I remain a commodity bull. Since 2004, I've been riding the gold/silver train (and watching in amazement the complete destruction of our dollar). I'm certainly expecting more of the same money-printing announcements later this month in Jackson Hole.

All the best,


prechter rules
17 Aug 11, 11:12
prechter rules

yes the bull market is over

Be Real
18 Aug 11, 02:39
what rules, again???

What rules again???? Calling for a doomsday bear market week after week, month after month, year after year, decade after decade......? of course he will get it right one day. Just like what this other guy said when he used the analogy of a broken clock eventually telling the correct time, and twice a day for good measure.

That is no way to make a forecast, much less trading. A trader would have lost his pants by now. Nah, those so-called EW forecasts are all humbug. They are only good for entertainment reading that's all!

Chris Smith
18 Aug 11, 08:45
This is why....

This is why the market is SOOOOO prone to the downside in the SHORT TERM right now. You have TOO MANY BULLS (2 to 1 based on Investors Intelligence the way....this is the ONLY sentiment indicator that actually WORKS, because it is based on what larger investors are actually doing).

So know the big investors have to "pare back" because they have to follow the "risk off" trade. Any of them that have a risk department, will HAVE to pare back....and that will take the market lower....and it becomes a feeding frenzy.

This market will NOT bottom until the bull-to-bear ratio is 1.0ish or below (during "hell" in fall of 2008 till March of 2009 it was .4 to 1.0).

HAVE TO GET RID OF THE BULLS for the market to move higher.

Economically....I think the economy will SLOWLY repair itself in coming months. But the stock market is NOT the economy. Look at 1987, 1998, etc. You can have LARGE selloffs in a good economy. I would suggest that you can have LARGER selloffs in a weak economy.


Chris Smith
18 Aug 11, 08:54
WTIC follows China...

One other thing....look for oil to mimic the China trade. Oil set a high of $146 several years ago, then dropped to about $36....then rose to $135ish...and now we're heading to what may be $60 - $70.

This is the very same LARGE TRIANGLE that is being mapped out my the Shanghai index. Which is why AFTER we get through this correction, I will look to move BULLISH on China AND some alternative energy stocks. Right now, the algorithms that are used by the high frequency traders, "connect" oil/gas with alternative energy as long as oil and gas are heading south, so will they.

There will be some very nice LONG TERM INVESTMENTS coming up AFTER we get to a HARD BOTTOM this fall.

David Lloyd
18 Aug 11, 14:36
Stocks Stealth Bear Market Resumes


Are you still accumulating into this latest slump? Where have you set your "stop losses"?

The bull market you speak of has gone exactly NOWHERE over the last decade!

Will be interesting to read your next words of wisdom in the Bull Shit Mega Trend.

18 Aug 11, 15:01

I am fully loaded so no more stocks for now, future purchaes out of dividends.

When you say stocks have gone nowhere, are you forgetting dividends ?

I am getting over 10% per annum on many of my original purchases, if I could turn back the clock I would have bought far more ! So I KNOW when markets PANIC it is the best time to buy HIGH YIELD stocks.

How else do you get 10% per annum PLUS capital growth?

Tell me ?

For I only know dividends or timing corporate bond purchases at the right time (though they are a short-ter term investment, perhaps 2-4 years than 5-10 years for stocks).

Buy Panics for Yield then sit back and enjoy rising dividends.

Akshay Chinchalkar
20 Aug 11, 08:12
Bull/Bear Market

Nadeem, I have been reading your work over the last couple of years, and I have to acknowledge your work is indeed very good. Over paid Economists the world over are raking the moolah with forecasts that are a great deal away from the line of best fit, but I dont blame them at all, given that academics are unwilling to admit that external events (except acts of god and other catastrophes) do not move markets. Bernanke probably does (or atleast the crowd believes so), but in 4 weeks, all of his genius work and therefore, the stock market's post QE2 gains have been completely wiped out in 1/10th (maybe even lesser) of the time. I remember how he adorned the cover page of TIME as man of the year, and I am a great believer in Robert Prechter's Magazine cover extreme. Since then it has been downhill for him and the Fed. Its not the Fed's business to support stock markets, and if it is, they should probably put it on record so people know. History is replete with examples of the market rendering "interventions" absolutely impotent. The latest is the USDJPY episode. You might help create a bounce in the larger scheme of things, only for the worse to snowball into something that no regulator can handle. In this background, let us make an effort to acknowledge different opinions rather than tearing somebody else's arguments to shreds (Read: Mish). The one thing about Robert Prechter that is particularly likeable is that he has never shied away from accepting his mistake. I follow him very closely, and whatever he did recommend, he's always had stops. Always. Here again, I hope he is wrong with his dow 1k forecast, but there is nothing that the market can't do, and am sure with your experience, you know that a lot better than I do. On a final note, am not sure if you follow David Rosenberg of Gluskin Sheff and he's not scared to be a bear. In a bear market, you just cannot be a bull. The great thing about a good technical analyst is to swap sides when the trend turns, and not just be bullish because a bull gets called to studios more often. Having said that, keep up the good work.

Marcin Strojny
20 Aug 11, 13:29
Mish & Prechter

It is funny to read now about Mike Shedlock and Robert Pretcher. Does every market slump need to bring those infamous names up to the surface? If anybody followed their forcast, predictions and fundamental views over the past 2 years, has had huge losses or went broke! Mr Shedlock in December 2009 forcast that 2010 will be a year of 'big retracement' of 2009 stock gains. He is a puppet writer and probably never traded on his own. Mr Prechter, if I am correct, after arguably predicting the low of March 2009, bacame bearish in December this very year, advising to short the market rally which was faster and almost as big as the 2003-2007 rally. No respect whatsoever, those guys don't have any adge, expertise, only popularity and audience. Nadeem Walayat is an ex-trader (I presume) who became an investor for long term, so those frustrated traders who don't see any sens in inflation mega trend please read what you read carefully! In a few years time the secular bull will be born, the long term entry point : any time or pullback from now on!

21 Aug 11, 10:18

Good points. I have read a lot of Prechter and Mish. If you followed their advice , you would have lost a lot. Im mo expert but trying to learn as much as I can here and elsewhere. IMHO, Prechter and Mish dont get what the Fed is doing. In a free market Prechter would be correct, but the Fed is not allowing free market forces to act.

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Catching a Falling Financial Knife