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Bank Bailout Implodes
"In a long-term bear market, prices keep declining beneath the bailout lows."
As you probably know, last week the U.S. Treasury changed its strategy for the bailout of the banking industry. Initially, the $700 billion Treasury Secretary Henry Paulson got approval for was going to be used to buy banks' "toxic mortgage assets." That's no longer the plan; thus, the bank bailout implodes.
A casual market observer can hear that, look at the sharp declines in the stock market we've seen this week, and say, "Well, sure! The bailout money isn't going to be used as planned, and it's bad news for stocks."
You've heard this kind of reasoning before, haven't you? The assumption there is always the same: The government is in control of the financial markets, and as long as it pulls on the right levers, the market will obey. It's only when the government makes a mistake, that's when the "bad news" sends the market lower. Bank bailout implodes – the Dow crashes.
But this perfectly logical assumption (and many others like it) shatters the moment you look at a chart and compare the dates of some of the bailouts – the "good news" – with what the market did afterwards. Editors of our monthly Elliott Wave Financial Forecast did just that in the September 2008 issue:
Notice that this is not just the chart of the recent U.S. bailouts and the subsequent market action. This is the chart of international bailout efforts – going back 40 years.
Can you see that bailouts only "work" in a bull market?
"There is a simple socionomic explanation for this pattern," says the September 2008 Elliott Wave Financial Forecast. "As we have noted many times, government is the ultimate consensus organization and as such commits to trends near their exhaustion point and subsequent reversal. Bailouts come at lows because that is when the outlook is most dire. In bull markets, these lows go unbroken. In a long-term bear market, prices keep declining beneath the bailout lows."
You still think that if the U.S. Treasury hadn't changed its bailout game plan, the DJIA would be OK? If you liked the chart above, you should see the others we show our subscribers. Seriously, you should.
I would start with the current, November issues of Elliott Wave Financial Forecast and Elliott Wave Theorist. You have 30 days to explore these valuable resources risk-free. Here's how.