"Ugly" economic reality will slam stocks

"Ugly" economic reality will slam stocks

Some traders are still suffering from October whiplash as November begins on Wall Street today. After a scary swoon in the middle of the month, stocks rallied strongly into the end of October, with the Dow and S&P 500 hitting new record highs on Friday.

But the midmonth slide did some major technical damage to the market, according to Thomas Kee, president & CEO of Stock Traders Daily, who has a very, very bearish long-term view.

“When the market broke just recently…the uptrend that was established at the beginning of 2013 also broke,” he says. “So we are no longer in that upward sloping channel that began at the beginning of 2013 and that opens the door for further declines.”

How much further? Back on Oct. 9, Kee told clients that a break of 1925 would put the S&P 500 on track to fall to as low as 1469 “in a very short period.” But 1469 was just a way station toward Kee’s ultimate target of a 66% drop in the S&P 500. (Yes, a 66% decline and, no, that is not a typo.)

In the accompanying video, taped Friday, Kee concedes the recovery from the market’s Oct. 15 low at 1820 “was significant and you can't be as bearish as we were below 1920 when the reversal happened.”
Still, he’s sticking with those extremely bearish long-term targets. The late-October bounce “really doesn’t change my macro economic outlook,” Kee says. “It doesn't change the demographic risks that exist in our economy.” (Faithful viewers may recall Kee made similar forecasts about the Dow here in 2012. And in early 2013 predited the Dow would hit new highs before crashing 50%-60%.)

Kee’s forecast is based on what he calls “the investment rate.” A modified version of money supply, he defines the investment rate as the “rate of change in the amount of new money available to be invested in the U.S. economy.”

Kee has back-tested his theory back to 1900 and says the third major downturn in U.S. history – the others being The Great Depression and 1969-1981 – began in Dec. 2007 and won’t end until 2023.

“It is the infusion of the trillions of dollars into the financial system and asset prices that have thus far prevented the natural economic conditions that exist from continuing to show their ugly head,” he writes.

“Without stimulus the economy will eventually revert back to its natural condition” and -- if Kee is right – the stock market will come down (a long way) to meet the economy rather than the economy ‘catching up’ to the stock market.

The shorter version: "It's all about QE," a commonly held view that has a lot of 'currency' with many investors. It may well be true that stocks are "artificially" inflated but the profits on your brokerage statement are real. Furthermore, given last week's news from Japan and the potential for the ECB to get off the sidelines, financial markets may have much further to go before 'reality' sets in.