The U.S. President, the Fed and all the central bankers and financial whizzes in the world are trying to put our Humpty Dumpty economy and financial markets back together again. But they aren't having much luck.
While many of us pondered the words of Martin Luther King, Jr., on his memorial holiday yesterday and then headed to our local shopping malls, the rest of the world's financial markets were open for business. But business was bad. Stock market after stock market in Europe and Asia took swan dives, following last week's drop in U.S. markets. Stock futures said the U.S. market would be down horribly at the open this morning.
And they were right.
The Dow was down 464 points at the open, until it got wind of the Federal Reserve's emergency interest-rate cut of a whopping 75 basis points, from 4.50% to 3.75%. As Bloomberg reported, that was the "biggest single reduction since the Fed began using the rate as the principal tool of monetary policy around 1990," and it was supposed to be a way to calm the markets. But you've got to know that the markets might be "cracking up" when the Fed's action earned a less-than-complimentary headline on Dow Jones Market Watch: "U.S. stocks plunge at the start as Fed fuels fear."
The Fed's surprise announcement came a week before its regularly scheduled meeting. But to readers of Elliott Wave International's Short Term Update, it wasn't a surprise at all. Our chief analyst, Steve Hochberg, put out a special issue last Tuesday, January 15, in which he wrote, "I’m updating this shortly after I posted the original Update at 4:30 pm Eastern. I just saw the open of after-hours trading, which is down heavily. I think recent market action makes a “surprise” Fed rate cut highly probable before their next meeting on January 30. If so, expect a large rally in conjunction with the announcement."
Fear and worry get worked up into a frenzy when market after market starts to lose large percentages of their value, and bear market action rears its head around the globe. It doesn't help that U.S. financial markets have given back the gains they made over the past year. For instance, the last time the Dow dipped below 12,000 was last March 2007. With the Dow closing below 12,000 today, it's time to say good-bye to all those gains in the ride up to above 14,000.
We here at Elliott Wave International have been waiting for the U.S. markets to take their own swan dive into a bear market, following a long bear-market rally, as we have labeled it. In his most recent Theorist, Robert Prechter writes that "[t] hose waiting to get rich in the stock market, however, have in fact just been kidnapped, trussed up and thrown in the trunk of a car heading to Bankruptcy City." Why would he say that? Because he has three charts that show exactly why the Dow and the S&P 500 are on the brink of taking a great fall.
You can't put Humpty Dumpty back together again but you can prepare yourself for the next moves in the markets by viewing these same charts and reading Bob's analysis. Just follow the quick steps below.