Financial Apocalypse by Bert Dohmen Dohmen Capital

Signs of a Market Top

By Bert Dohmen
Thursday, May 26th, 2011

SIGNS OF A MARKET TOP

Our work strongly suggests that the disguised “distribution” of stocks since mid-February is now becoming more visible. This is so reminiscent of the top in 2007 when the big, smart money was exiting while the public was being lured into the markets with false stories of eternal prosperity.

Last week we saw sharp “momentum” declines in some of the hottest market areas. The biggest loser was silver which plunged about 31%. Gold was down 7%, oil is down about 17%. Basic materials and agricultural commodities also plunged, along with many of the popular stocks. The only question, is just another “warning shot”, or the real thing?

Our last issue (April 18) we headlined: “WARNING FLAGS ARE FLYING”

We continued in that issue:

The latest money manager survey shows that there is a huge change on their outlook for the emerging markets. In December, 71% were bullish; now on 51% are bullish on the emerging markets. The survey was made in the first two weeks of March. That was before the Japan catastrophe.

However, domestically there is a virtual capitulation of the bears. They have given up on the market ever going down again. Ever! That’s typical of market tops. Investors Intelligence, which monitors the sentiment of investment advisors, shows in their latest survey that the percent of bulls has increased to 57.3% from 51%. That’s a huge jump and now is at levels seen at important market tops. And the bears have plunged to 15.7% compared to 23.1%. That gives you a difference of 41.6 between bulls and bears, which is well above 40, which is considered the “danger” zone.

It’s reminiscent of January 1977 when we started the WELLINGTON LETTER. At the time, Investors Intelligence showed only 3.8% bears, a record low. My indicators showed that an important top had formed. I wanted to put my prediction of a bear market in writing and started this publication. Because there were virtually no bears to be found, the Wall Street Journal couldn’t be choosy and put an item about my forecast in the “Heard on the Street” column. Thank you, Gene Marcial. And that’s what launched my business as the DJI started a 15 month bear market. It was painful for the bulls.

Another historic event occurred since our last issue: the first ever press conference held by a Fed chairman since the Fed was founded in 1913. He made history.

It’s great that the Fed, after 97 years, wants to create the appearance of more openness. They want to convince us that are our friends and do what they do to assist the economy, even if it means destroying the value of the U.S. dollar.

Referring to sharply rising food and energy prices, Bernanke said that the “committee” believes these price rises are “transitory.” For the next six months he will probably be right. Question: is he the dog, or the tail that wags the dog?

At the last FOMC meeting, the Fed left interest rates unchanged as expected. The statement said that they would continue to pursue an accommodative policy because of weak economic conditions. That was a green light for all the precious metals to move higher. In the hours after the meeting, there was a spirited rally. Silver gained $2.70 per ounce, and gold made a new all-time high, gaining more than $25.

This is a paradox. The knee-jerk reaction would be to think that a weak economy would reduce inflation pressures, thus bearish for the precious metals. The second reaction however is that this would produce even higher budget deficits and therefore a continuing need for the Fed to print money to finance the unsustainable Federal deficits.

The rest of the stock market also responded bullishly. A 0.25% yield in money market funds is not competitive with speculation in stocks. However, our work suggests that this is probably the last gasp of the bulls. They are fully invested, have no more cash but an abundance of optimism, and the only way for them to react to any unexpected problems is to sell. That’s what makes market tops.

One market signal is giving us great concern: the yield on 6-month T-bills continues to decline and is now at a record low, just above 0%, even below the December 2008 crisis low. Why would anyone lend their money at no yield to the government if there is no apparent crisis? In 2008, Treasuries became the only island of safety. Are these low yields saying that money is now going to safety again? One could say that banks can’t find credit-worthy borrowers and therefore stuff the massive liquidity provided by the Fed into safe, short-term T-bills. That by itself tells you that deflation, not inflation, is the bigger problem. But is that the only explanation or is there a serious problem brewing? We don’t know at this time.

For lessons on who to predict the next financial crisis, get my new book, FINANCIAL APOCALYPSE, which shows how the charts and proper interpretation of the credit market can enable you to do what all the economists at the Federal Reserve couldn’t in 2008, and what most of the “Masters of the Universe” failed to do.

Bert Dohmen

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