As we had mentioned in an earlier post, an inverse head and shoulders pattern appears to be playing out. While initially we thought the peak would end at 1220 on the S&P as mentioned in a post here, it appears that the peak is targeting 1250 to 1255.
What is particularly disappointing to us is the poor performance of the stock market in view of the incredibly accommodative interest rate policies and massive amounts of liquidity dumped into the system through quantitative easing by the Federal Reserve. We recall the S&P at 1500 only 3 years ago, and now that 1250 seems to be within reach the bulls are rejoicing.
In our view, we should be at 1700 or higher given the tremendous intervention in the economy by the central bank. However, markets do not behave as we want them to, despite human wishes, the behave as they need must. We strongly believe markets will go down to correct the misallocation of resources that the Fed and a corrupt banking, political, and philosophical system has spawned.
The bond market will only tolerate this nonsense for so long, and that time is rapidly drawing to a close as the chart below demonstrates.
QE2 was supposed to suppress yields to keep mortgage rates down, and so far it has accomplished the opposite.
So the question is - where to next?
It remains our view that we are looking at a full scale collapse in both the stock market and the bond market within months as the contagion spreads from Europe.
We expect that the stock market will be severely impacted first, with March 2011 the key period. Bonds will be impacted severely some time later, in our view.
This is reminiscent of the 1930s as the chart below demonstrates.