It is pretty much confirmed that the top on April 26th will be significant as we move forward.
I see two scenarios going forward. I first like to point out that we are in very volatile times and individuals who are in long only equity investments and do not have the ability to add additional funds over the next few years should consider changing their allocation to 80% short duration fixed income instruments and 20% dividend paying equities . Cash will be king over the the next 3 to 6 years however there will be an incredible opportunity to invest in undervalued companies with dividend yields of 6 to 10%. Complacency is not an option in this environment and this is why I am writing this blog to help people understand where the potential lies ahead.
The problems are fierce amongst this liquidity driven growth over the last 15 months which has been primarily driven be government spending. The only way we will get longterm growth is if the private sector has the confidence to hire again. The great reflation experiment by governments around the world are only buying time for the inevitable. There will be the day where we will all have too pay the piper but this experiment could possibly hold together longer than many believe. The statistics are overwhelming and I believe the issue going forward will be a sovereign debt funding crisis. The questions is when will we get to this point of recognition. I think we are starting to see some recognition over the last month but the ulitmate recognition could be a couple of years away for the USA. Since the USA debt is so large there will be a time where the usual buyers of the debt (China and Japan) decide they have enough and need no more. Since all countries are running a fiscal deficit we are going see a great competition to sell debt. If you really think about all we have done is use more debt to fix our problems but it was too much debt that that got us in this mess. It does not take a rocket scienctitst to see where this is all going to end up.
As per my analysis the the April 26th high should hold this year and may only be surpassed early next year but it will only be a short lived sucker rally.
If we hold the 1000 level over the next couple of months and trade in wide range between 1160 and 1000 for the next 6 months we may see one last attempt for the April 26th high before the potentially very difficult years that will begin in late 2011 and continue for 2 to 4 years.
If this is the start of Primary wave 3 which all likely hood it is we may have already completed the 1st and 2nd wave of primary 3. Therefore if the May 25th low is taken out we can potentially be in the midst of a 3rd of a 3rd wave much sooner than most people believed. If this is a the 3rd of the 3rd my first target area zone is 882 the second is 818.
If this scenario plays out it will exhibit crash type characteristics. If we see a close below 997 for 3 days there is the potential for a 20 to 30% drop in very short period of time.
In either case the risk reward to be invested in the stock market over the next few years is not attractive for any long term investors. Especially anyone with a 5 to 10 year time duration. For the younger individual this is an amazing time to periodically invest through this difficult period and average in as price declines knowing when we do get out of this difficulty the market will rebound significantly from the ultimate lows. Complacency is not an option for anyone in retirement or approaching retirement within the next 5 years. There is a great risk of capital loss just before retirement and there just won't be enough time to make back any significant losses back.
"Remember this is just One Man's Opinion"