THE DOT - if this turns orange or red be alert

Wednesday, August 27, 2008

insane markets part 2 ( technical update )

Rydex down to .645 which is an alert level for a trough. But we need a few days more downside and to test the 1250 (1235) SPX and in the NDX could even drop to 1850 before again an upmove will start in the first week of Sep. and could last through the rest of the month. The insane part is that VIX is around 20 while Rydex got so low. Hinting to another sucker rally which will be followed by a severe correction. The Bond market is not any close so complacent as the volatility (VIX) shows since most spreads are at or close to record levels hinting to a high risk perception.

As we forecasted months ago the 3rd quarter would be driven by falling commoditity prices and therefore rising stocks and McCain has gained momentum since - mission accompished? When you look at the market from a distance ignoring daily noise of the talking heads and their so called 'breaking news' its absolutely obvious that markets are substantially overvalued. Real inflation close to 10% in the USA asks for an discount to current PE evaluation by at least 25%, the new geopolitical situation of a second cold war with Russia will be discounted going forward by 15-25% and finally if Depression enters valuation which I believe it will is good for another 25% but that is due to be discounted by end of 2009. An 8 times estimated earnings S&P would be at 650 right now assuming that kind of earnings are stable and we just discount the risks around them. How can markets be comlacent with all this looming risk. Very interesting peace of research in the beneath link about the Russian strength and the corrosponding weakness of stocks.

Oil will retest the 121 level soon and might struggle going higher to our estimate of around 130 before dropping to 100 - which will obviously drive stocks higher. The cold war trend though has another implication to reverse the glabalisation trend into a nationalism or hostile block trend which nevertheless will make commodities unavailable or create rigid market conditions which will drive prices higher. The world as we got used to know is about to change in a substantial way and markets will have to adjust.

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