Dow is off 7% – what’s the problem?

I have seen it all before. Stocks climb for years on massive complacency, and when virtually no-one expects a decent decline, the market ‘suddenly’ plunge in the space of only a few days. Then, after they have composed themselves, the bulls are out in force explaining why they remain in the market and there really is nothing to worry about – this is just a normal and long-overdue ‘correction’. Actually, they are compelled to do this because they cannot admit to their investors they missed the sell signals at the top.

I am a student of human nature and I know a rationalisation when I see it. And boy, are the bulls rationalisisng this week. Today’s article on Bloomberg spells it out. One money manager says “This is a real bull market,” Shaoul, whose assets under management have risen to $21 billion from $400 million in 2008, said in a phone interview. “What happens in real bull markets is they do fine, and then they are occasionally interrupted by an exogenous shock.” Translation: I am not selling and expect markets to make new highs.

Another says: “This episode will have a distinct beginning, middle and end,” said Shaoul, chairman and chief executive officer of New York-based Marketfield, whose MainStay Marketfield Fund has beaten 99 percent of its peers the last three years, data compiled by Bloomberg show. “The end of it will be a significant buying opportunity in the U.S.” Translation: I am lining up to buy more shares and expect the market to make new highs.

You get the drift. None of these guys expect this 1,200 pip Dow decline to be the start of a massive bear market taking the Dow below 6,500. They all believe this is just a blip on the way to new highs. Well, I don’t.

That is not to say the decline will all be one way – far from it. We will see the buy-the-dippers jump in, probably on the back of ‘good’ news and drive the market higher. But this will be a relief rally only and not a resumption of the bull market.

And here is another quote from another money manager I couldn’t resist: ” We didn’t expect the US would be this weak. We do not see sufficient reason to change our fundamental earnings outlook and stock prices have fallen, the market still looks attractive to us”.

Here is another fearless prediction: Many of these will be out of a job over the next two years.

GOLD

As forecast, gold is showing more signs it wants to move higher after a couple of testing dips: