An astute older businessman told me one time "If you do not heed history you are doomed to repeat it". The Federal Reserve has done a masterful job of being a political spin doctor. They have fooled the majority of Congress into believing their path is correct. Two wrongs do not make a right and the second wrong is about to be unleashed. The Fed has a corner on the market of making gigantic wrongs. The philosophy of throwing money at problems instead of morality is a recipe for disaster. The first of March saw Vice-Chairman Donald Kohn resign. Sure there is a spin on that story to allay concerns once again. The fact that perhaps an experienced seasoned Fed official may be the third rat off the sinking ship, should be a major alert for us. That makes 3 vacancies on the Fed, I am alarmed.
Shortly, the Fed will pull the plug on all the liquidity in the system. They have been preparing their prevarications for the financial press using transparency as a 'good word' while operating in the dark like a thief stealing the family heirlooms.
Lets get to specifics of the stock market!
I discovered an overbought-oversold indicator called the Cook Cumulative Tick 25 years ago. The indicator is helpful in extreme situations where the market is just plain overdone in one direction. The extremes are compared using percentiles of severity. The greatest extreme ever was the 'imposed overbought' manufactured by Greenspan in the 4th quarter of 1999. The first quarter of 2000 was the beginning of one of the greatest crashes in market history. It took months for the carnage to complete its havoc. The facts: 80% drop in NASDAQ, 50% drop in S&P, ALL because liquidity was zapped from a market perched on a mountain peak. Have we learned anything in 10 years?
Obviously, the Federal Reserve has not. Once again they have placed our economy in a situation of too much liquidity. This liquidity will be pulled and the same result will be experienced. The news media are all saying ' we are beyond the crisis now'! This demonstrates the complacency that has been orchestrated by our government stating 'the worst is behind us'. Are we a deaf man on a railroad track with our backs turned to the approaching locomotive?
I have done many participatory studies of the Cook Cumulative Tick alerts and the numerical probabilities. The recent 2008 bear market eroded prices to the satanic 666 number on the S&P. The interesting component missing on that 666 bottom was a pure capitulation. This is necessary to establish long lasting bottoms. I believe the Fed and Treasury intervened to buy stock and give the illusion of better times ahead.
I expect the market will neutralize the overbought situation which according to my studies will erode the S&P a minimum of 300 points. Any adverse news item will accelerate the downward velocity as the liquidity is lessened.
The Fed has used all their bullets in their gun. They stand with an empty gun as the thief laughs at them as he steals the family heirloom.
Traders will survive, buy-hold will be crushed!!!