Financial Apocalypse by Bert Dohmen Dohmen Capital

RETURN TO REALITY

By Bert Dohmen
Saturday, July 9th, 2011

In our SMARTE TRADER service we had just closed out all short positions on June 15, which was the exact day of the low of the 6 week decline. There was a surprising announcement from the White House on June 23. We repeat what we wrote in Smarte Trader that day as it is still applicable today:

The big shocker today was that the White House will order the release of 60 million bbl of oil from the Strategic Petroleum Reserve (SPR). Brent crude oil plunged over $7 and the West Texas (WTI) dropped over $6 initially. One has to ask why are they releasing the oil. Was there a shortage? No! In fact, the Saudis have said that a glut was developing.

I believe it was a concerted effort, together with the Saudis who were totally disgusted with the behavior of Iran, Venezuela, and other radicals at the latest OPEC meeting. This is retribution to demonstrate who is in charge.

It’s only the third time that oil has been released from the SPR. Therefore, we have to think what is the plan? Is it only to show the radical OPEC members who is in charge, or is there more?

So, why break into our “piggy bank,” the SPR, when there is so much energy to be had by just letting energy companies do their job? Why suddenly take steps to reduce oil prices? Could it be a frantic effort to stop the deterioration of the economy ahead of next year’s election?

At the low today, the DJI was down about 235 points. The markets looked dismal. Many traders were running for the exits. However, the decline didn’t look like a serious down move that would go lower. In fact, in my own mind I traced out a chart of how the indices would look at the end of the day. There would be a rally and the major indices would form a bullish pattern. Therefore, it was time to pick up the bargains near the lows. And that’s exactly what happened.

We now have a bullish candlestick chart on some of the indices, called a “hanging man.” Furthermore, it was a retest of last week’s lows, which was successful. The prior low was on June 15.

Technically, there was another important item:  several of the major indices, such as the DJI and the S&P 500 hit their important 200 day m.a.’s. That’s usually considered the dividing line between a bull and a bear market. Obviously, the big trading outfits, and the HFT’s, use this to reverse the recent trends. This is the easiest way to squeeze the shorts who didn’t have our signal to close out shorts on June 15, the exact day of the bottom.

My conclusion is that this is a decent bottom of the six week correction. Now comes the next move, upward. How high? Well, we are better at catching turns than in telling the market what to do. However, it is possible that at least one of the major indices, such as the DJI, could even make a new high for the year. We have mentioned before that even in 2007, there was a fake-out rally in the market in October, although most stocks had already made their peaks in July.

Our subscribers are now in a great position: cash to deploy. And that’s what we will do.

The next several weeks: The story from Wall Street is that lower oil prices will be like a “tax cut” and thus stimulate the economy. We don’t agree with that, but it will cause short covering in consumer stocks, like retail, restaurants, etc. But that is once again a phony story.

The bond market will take a beating during July based on the story that “risk aversion” is no longer necessary.

WHAT’S AHEAD?

Until there is evidence to the contrary, we consider this a trading rally, designed in Washington, engineered to give the impression that everything is wonderful. After all, there is a big election next year. The release of oil from the SPR is purely political.

We will see countertrend moves to the declines since end of April. This includes rallies in commodities, energy, emerging markets, stocks, and a decline in the dollar and bonds.

Wall Street will put out their own “talking points” which includes that the economy will rebound in the second half of the year. A rebound in residential real estate in May will be presented as evidence.

There were lots of shorts because of the ending of QE2. It was our position that the ending would produce a brief market rally, as the market usually likes to surprise the majority. That would suggest that the rally is temporary, just for a few weeks. There still is no big investment buying. This may be similar to the rally in October 2007, which brought the major indices briefly to new bull market highs before the plunge into the abyss. At the time, we wrote about the glaring divergences, confirming that it was a “bull trap.” We called the top in mid-October 2007.

So, we will watch our technical indicators closely now for an end of the rally.

COMMENT TODAY, July 10, 2011

The dismal employment number on July 8 was a shocker for Wall Street economists who had been so bullish on the economy. But it wasn’t a shock for our readers. In the May 9th issue of our award-winning WELLINGTON LETTER, we had the front page headline:  “RETURN OF THE DOUBLE-DIP.”

Reality will now return. There are many huge storm clouds forming on the horizon. Don’t listen to the Pied Pipers and their advice that stocks are cheap. The fact is that they are very expensive now and are priced for strong economic growth. A sharp economic slowdown is not priced into them yet.

 

 

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