On September 7, the powers-that-be pulled the trigger on their “bailout bazooka” via the $200 billion rescue of Fannie Mae and Freddie Mac.
Then, on October 3, they dropped the ultimate bailout A-bomb: Congress’s passage of the $700 billion “Emergency Economic Stabilization Act.”
And YET -- the big, bad grizzly goes unscathed, taking the financial world by storm like some indestructible Bearzilla, squashing every major monument to wealth in its wake. The latest casualty: On Monday, October 6, the Dow Jones Industrial Average plummeted below the 10,000 level for the first time in FOUR years – at one spot, the index plunged 800 points to set a new daily-down record.
Forget faith. Forget unheard of dollar amounts. Forget the Fed’s promise not to let the leading pillars of the U.S. economy fail. The truth is: In forty years of U.S. history, there has been ONE single requirement for a financial bailout to pull off a meaningful recovery: A bull market in social mood, as reflected by a rising stock market.
But don’t take my word for it. The undeniable proof is in the September 2008 Elliott Wave Financial Forecast’s close-up of major government bailouts versus the “Real” Dow (i.e. measured in terms of gold ounces) since 1966. (Reprinted below)
One look at this spellbinding picture and the there’s no going back: During the sustained bear market of 1966-1982, bailouts that coincided with apparent stock market lows were always ultimately followed by lower lows.
Conversely, each government-backed rescue beginning in 1982 to the 1999 peak overlapped with higher stock market highs, reflecting the raging bull market. (For a more comprehensive study into this myth-busting phenomenon, check out my colleague Gary Grimes' article, “Historic Bailout Vote”)
(U.S. Stock Market: Bailouts, BEAR In: At the start of the year, Elliott Wave International’s team of analysts warned: the giants of finance were NOT “too big to fail.” Now, Our October 2008 Financial Forecast Service publications stay one step ahead of the sea changes in store. Act Now.)
Bottom line: If the larger trend in social mood (and stocks) is down, no amount of rescue money or rate cuts or rebates in the world will stop its continued, across-the-board decline. It is this very fact that has enabled EWI's team of analysts to stay one step ahead of the “wreckage” now underway.
Case in point: In the days leading up to the DJIA's October 11, 2007 all-time high, the October 2007 Elliott Wave Financial Forecast went on high alert to the market’s downside potential and wrote: “The clearly corrective advance from August 16 reveals the likelihood of further damage” to the financial sector. “ The bearish [Dow Theory] non-confirmation will signal an inevitable reversal for the stock market as a whole.”
Soon after, the October 10, 2007 Short Term Update stepped up the urgency of its analysis with this message: “Odds have increased that a market high is in place. We’ll allow for a final upward push but the pattern indicates that this move should be sharp and brief prior to a downward reversal.”
Now, flash ahead to the market’s most immediate FREEFALL. On the same exact day that the $700 billion bailout was signed into law, the October 3, 2008 Short Term Update warned: equities would keep their bearish promise. In STU’s own words:
“All the ‘uncertainty’ over the government’s rescue plan has been removed with today’s passage. Now all we have is the ‘certainty’ of the stock market’s cycle. The ‘bill’ that just passed is thought to somehow address the market’s problems. It won’t, nor can it.” The Dow will “decisively break down from current levels.”
What came next was the 800-point drop in the Dow on October 6. What's next for the market? Find out by reading the latest Short Term Update – now, online, risk-free.