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Historic Oversold Conditions in Almost All Financial Markets

Stock-Markets / Investing 2009 Feb 12, 2009 - 12:32 PM GMT

By: Money_and_Markets

Stock-Markets

Diamond Rated - Best Financial Markets Analysis ArticleLarry Edelson writes: 2009 is already shaping up to be yet another year when almost all analysts and investors get the markets dead wrong. Again.

But you don't have to be a part of it. You can be on the right side of the markets.


To do so, however, you must …

Keep the Following Three Thoughts Ever Present in Your Mind …

First, do not have a biased understanding of economic history. For instance, instead of harping on how similar today's events are to the Great Depression, look at how different things are today.

Let me put this point into one of my favorite statements:

Yes, history does repeat itself. BUT IT ALMOST NEVER DUPLICATES ITSELF.

Understand the truth to that statement, and you'll automatically have one of the greatest edges over the markets, ever: An open mind.

And that will be especially true this year, in a year that I've already labeled as being “The Year of the Trap,” the details of which I spelled out in my January issue of Real Wealth Report .

Second, do not get caught up in herd-like behavior. Running with the herd almost never makes you lasting money. To the contrary, it is — and will always be — the single biggest and most common mistake investors make, and it costs you loads of money and missed opportunities.

Also recognize that herding behavior occurs both at market tops and at market bottoms!

Third, keep in mind the fact that markets always have a way of healing themselves, no matter what governments do or don't do to try and right them.

The key is to understand what that healing process is … when and why the market is choosing that path … and the underlying forces that are driving it.

Helping you understand this is a big part of my job. So today I'm going to outline some vital forces at work right now. And if you follow them carefully while keeping the aforementioned tips in mind — 2009 could easily turn into one of your most profitable years, ever!

The Three Vital Forces At Work Right Now …

Force #1 — Historic Oversold Conditions In Almost All Markets:

Please don't misunderstand me as I don't want to sound like I'm underestimating the train wreck the economy is in. To be sure, it's the worst financial crisis and stock market environment since the Great Depression. And by many measures, it's even worse …

  • We have the most oversold conditions ever in almost all major stock indexes.
  • We have the most historic oversold conditions on record in almost all natural resources.
  • We have precipitous record declines in nearly every economic indicator ever tracked, from housing … to unemployment … to industrial production. You name it.

And nearly everyone agrees that there are more losses to come. Myself included.

But the markets are never straightforward with you. In fact, their predominant behavior mode is to separate the majority of people from the majority of their money. And they largely do that by stoking the flames of conventional wisdom and emotion.

For instance, how often do you hear the saying: “It's going to get worse before it gets better?” That statement is everywhere today. On the morning and nightly news, on virtually every TV and radio talk show, in almost every financial newsletter on the planet.

But it's the markets' job to turn that conventional wisdom inside out. So the more accurate and more profitable statement is this …

“It's going to get better before it gets any worse.”

That's how human behavior works. It's the ebb and flow of human nature. And it's why — even though this depression is going to last for years — you're about to see one of the most powerful stock market rallies ever.

The force behind it that will provide the fuel: Some of the most deeply oversold conditions markets have ever experienced. Deeply oversold conditions can lead to massive, surprising, out-of-the-blue rallies. Four historical precedents to consider …

#1: The 1974-75 recession —

A 45% collapse in the Dow, in just two years' time, led to the most oversold conditions since the Great Depression. Meanwhile, freshly and entirely cut loose from the gold standard, the Federal Reserve cranked up the printing machine like crazy.

What happened next? The Dow turned back up in early ‘75, rallying more than 75% by Sept. ‘76, even while slow economic growth lasted for another two years.

Commodities followed suit, with many hitting new record highs in the late 1970s.

#2: The 1990-92 recession —

Stocks once again got hammered, largely due to the S&L crisis. Most analysts again claimed that, at best, a recession would last years, while others proclaimed the U.S. economy was on the doorsteps of another Great Depression.

What happened next? The most oversold conditions since the 1974-75 recession led to a massive rally, with the Dow soaring 40% from 2,365 to 3,310 in just over two years — even though the underlying fundamental economic indicators did not turn back up until late 1996.

#3: The Long Term Capital Management derivatives disaster of 1998, and the 1997-98 Russian and Asian financial crises —

The apocalyptic warnings were coming out everywhere.

Once again, almost all markets traded were quickly and deeply thrown into panic oversold conditions, forcing most investors to sell precisely at the bottom.

Yet just one short year later, by 1999, stocks were at or reaching new record highs!

#4: The 1929 Stock Market Crash —

Even that 23% loss in the Dow during the crash of October 1929 was followed by a massive 48% rally between the Dow's November 1929 low and April 1930, when stocks turned lower again.

My point: Betting on the downside now is a low-odds, high-risk bet. Things just may get better before they get worse!

That's especially true today because we don't have the same monetary system we had in the 1930s. It's entirely different … It's designed to inflate away problems.

That's not to say problems can't occur. Indeed, they can. But in the end, without a gold standard, debasing money and inflating asset prices is baked into the cake.

Force #2 — The Bursting Bond Market Bubble:

Even in a horrible economy, bubbles grow. So where is the bubble now? In the bond market, in U.S. Treasury bonds.

Investors all over the world have been flocking to U.S. Treasury bonds, running for cover from failing banks, collapsing real estate prices, and plunging stocks and commodities. They think cash — in the form of bonds — is king.

But it's just another bubble, and that bubble is bursting now.

U.S. government debt has almost doubled since November, soaring by at least $9.7 trillion in IOUs.
U.S. government debt has almost doubled since November, soaring by at least $9.7 trillion in IOUs.

Why? Because the U.S. government is flat broke … and it is soon going to go begging hat in hand to borrow trillions .

Without one shred of doubt in my mind, whatsoever, the most dangerous and riskiest market on the planet right now is the U.S. Treasury bond market. It's a bubble that is bursting … will collapse completely … and will send giant shock waves throughout the world.

But it will also signal that the re-inflation phase is taking root. How?

Because savvy investors will be pulling their money out of the bond market, and that capital has to go somewhere.

So the question then becomes: Where will the money go?

  • Real estate? Yes, some of it will go into the residential property market, helping to start stabilize prices. But I don't believe that's where most of the money will go.
  • Under the mattress? Some, yes, for alleged safety. But savvy investors — those who know currency devaluation and reflation of assets are in the cards —won't be parking their money in the mattress, even if banks fail.
  • Foreign economies? Yes, some of the money will go there, helping to set the bottom in foreign equities that I've been telling you about.
  • Government-sponsored programs, like the expanded TALF program Treasury Secretary Geithner just announced, meant to remove bad assets from troubled banks that will in turn be put up for grabs to the private sector?

    YES, that's going to be an area where large amounts of capital will flow. After all, why not buy assets where your downside risk is covered by the government, where losses are guaranteed?

  • To commodities and natural resources? Absolutely. In my opinion, in addition to stocks and government-sponsored programs, natural resources are going to be a huge beneficiary of capital flight out of bonds this year. Why? Because …

A) Natural resources have intrinsic value. They may go down in price from time to time, but over the long haul, they historically rise in price, as a result of the currency devaluation process. For instance, just consider oil — even at its current price of around $40 a barrel — it's still 300% higher than it was just nine years ago.

B) The supplies of natural resources, even oil, are finite and in long-term declines. The surges you are seeing in supplies of some commodities are merely short-term.

And, last, but certainly not least …

Force #3 — The U.S. dollar will lose its status as the world's reserve currency:

I've written about this before, and I repeat my view: The U.S. dollar is in a massive long-term decline … it is going to lose a lot more value … and ultimately, it will be replaced as the world's reserve currency.

The dollar will be supplanted by a new currency that is likely already in the works as part of the “new financial architecture” being discussed by the G-20.

For further details on my writings in this area, please be sure to see my Money and Markets column from last November entitled “ The G-20s Secret Debt Solution .”

And then factor in what's happened since I wrote that column …

  • U.S. government debt has almost doubled, soaring by at least $9.7 trillion in IOUs.
  • Another $3 trillion in debt may be issued in the next few months in additional bailout plans.
  • The U.S. banking system will effectively be nationalized.
  • Large swaths of the private residential real estate market in the U.S. will effectively be nationalized.
  • The price of gold has jumped from $737 to over $900 an ounce, a gain of more than 22%!
  • And what has the dollar done? The international value of the U.S. dollar remains a mere 16% above its recent record low.
  • In other words …
  • With all the panic liquidation you're hearing about …
  • With all the massive pay down of debt that is occurring …
  • With all the movement of money into cash and the alleged safety of the U.S. dollar that you're hearing so much about …
  • With foreign currencies like the pound and the euro plunging …
I strongly suggest you listen to the markets and what they're telling you about the dollar: Its value is headed much, much lower.
I strongly suggest you listen to the markets and what they're telling you about the dollar: Its value is headed much, much lower.

The U.S. dollar has only been able to eke out a minuscule 16% rally off its record lows!

This action in the dollar is absolutely pathetic under these circumstances. I strongly suggest you listen to the markets and what they are telling you about the dollar.

The value of the dollar is headed much, much lower. Either the markets will depreciate the dollar naturally, or the G-20 will eventually replace the dollar as the world's reserve currency.

That is what the action in the dollar is telling you. That is also what the bursting bond bubble is telling you.

And it is also why you will soon see tremendous rallies in certain assets — namely blue-chip stocks and commodities.

Best wishes,

Larry

P.S. Naturally, each month subscribers to my Real Wealth Report get all of the details on my thoughts, systems, methods, and of course my recommendations. My 2009 core recommendations, for instance, are already showing open gains of as much as 14.27% in barely one month!

Why not join them? It's a mere $99 a year. It's a bargain considering all the money I can save you, not to mention all the money I can make you! Click here now to join .

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

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