Thursday, August 16, 2012

A fast-collapse model for U.S. equities in 2012

A question that has always dogged me is, What if the crash, when it comes, is far more swift and severe than even the perennial permabears can imagine?  What if it impacts so hard and fast that most miss it altogether?  Or they cover some index puts at a sensible time and price and watch the rest in horror.

Here's how it could play out, an epic disaster scenario, with the bulk of the damage in 2012.

The first move would be a completion of the Three Peaks and a Domed House pattern I have in progress now, returning us to the 1260 level surprisingly quickly.  This builds into a larger impulse that takes us as low as 980 by the end of October. 

1 of C down by end of October
These waves are ideal-types, with similar wave pairs 1 & 5, 2 & 4, and an extended wave 3.  The central wave 3 of 1 of C is triggered by the September FOMC, when the Fed fails to announce a new QE program.  Or it could be Europe.  Or Europe, and then the Fed takes a pass on fixing things.  

The cause of the larger decline could be Europe or an Israel-Iran hot war in the M.E., take your pick.  Or both in tandem, you get the idea.

There are plenty of reasons to explain the decline if and when it comes.

A decline like this into EOM October cements Obama as a one-term POTUS, and he is soon discarded in the November election.  Once this outcome is obvious, and, coincident with the October full moon, we bottom and begin a sharp rally. 

From the SPX 980 - 1000 area, we retrace nearly 50%, until we rollover again at SPX 1200.  

The rally will be portrayed by the Press as market confidence in the coming Romney administration, good management, animal spirits, Club for Growth op-eds, the works.  In reality, the lame-duck President, plus an embittered, chaotic Congress, sets us up for a crash in the fiscal cliff. 

There will be no 11th-hour fix for the issues behind the fiscal cliff, no compromises, no statesmanship, no Solons to be found.  Incredibly, the rally continues until the December FOMC, but with all eyes now on the Federal Reserve to save the day.

The Fed will pass.  

December collapse

From December 12 through EOY, equities go no-bid and we experience an historic meltdown.  Everyone wants out, all at once.  The question will be whether the critical 2002-2009 low trendline holds, or if it only provides a brief bounce in the crash.

When the smoke clears in Spring 2013, we wake up to shocking new lows.

C down
The good news is, the market rises after C-down is complete.

The bad news is, it rises because we will have moved on to a currency crisis and subsequent collapse.  

I'll follow up on this scenario, if it happens at all, at this or at a more relaxed and gentle pace.  

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