Why Stock Markets May Be About To Fall

If you look at a chart of the NASDAQ 100 you will see how feeble the rally over the last few years has been compared to the decline that went before. But that is not the most important point. The most important point is that the decline we have seen is only the first part of the bear market and the second leg down is always the most savage. This is a key principle of both Dow theory and Elliott Wave Theory.

This is why I am launching anew free service at this time. We live in historic times! If I am right markets are going to fall savagely and the people who are ready for that are going to emerge at the end a lot wealthier than they are now. Those who are unprepared could easily be wiped out!

Any sell signal now could mark the beginning of this expected collapse. 

But do not expect it to happen all at once. The characteristic of such a move is relentlessness. Falls that simply keep on coming, numbing the bulls until they finally concede defeat - at which point the market will rally. The difference is that this time the economy will fail as well. 

My latest book is called "THE COMING FINANCIAL CATACLYSM" and there are five main reasons why markets may fall sharply.

I have written a book on this but to summarise:

1. Equity markets are extended and vulnerable

2. Property markets are extended and vulnerable

3. The twin US deficits are putting the $ under pressure

4. Personal debt is threatening continuing consumer spending which is keeping the economies of the US and the world going

5. The US is hugely in debt to the rest of the world and if any country decides it wants out that will start a slide in the $.

The dangerous part is that if any one of these five problems starts to unravel it could act as a catalyst for all five. For example vast sums have been take out of mortgage financing by consumers and this has allowed the US and UK economies to grow. There are signs that property appreciation is slowing and this might knock on to reduce such borrowings. This might reduce consumer spending and start a mild recession. Property and stock markets then start to fall and this might unnerve those investing in US dollars, which might also take down US Bond markets. The $ starts to slide and suddenly it is all happening at once. 

This is not a pleasant scenario and I think Alan Greenspan chose his departure date from the Fed fairly well!

As we got to press the S&P is starting to form a sell signal and we will cover this in the next issue when it is confirmed.

TRADING TIP Trade what you see not what you think - Joe Ross 

Wait for your signals, do not anticipate them, do not judge markets on what might happen but on what is happening. This may seem trite but many, many traders make the mistake of thinking a certain move is coming and trading what they think. It is a major mistake and it is to be avoided.

Copyright 2006 John Piper