It reminds me very much of the early '70's bear market, where analysts kept touting value all the way to the bottom.
Take a look at the 20 year chart of the Nasdaq below:
Here's what worries me about this long term chart:
1) the momentum index in not even close to be oversold, in fact, it's just now rolling back over from the oversold rally we had from March 17 2008 to the May 19/June 5 double top.
2) A break below the long term trendline (the trendline that begins all the way back in January of 1991) at roughly 2000 would suggest a return to the lows of 2002 in the Nasdaq.
Shorter term, the Nasdaq is sitting right on a critical short term trendline at approximately 2294.
The disconcerting part, to me, is that the potentially negative technical picture fits in extremely well with the de-leveraging scenario which is playing out in the credit markets. It does not paint a pretty picture.
It appears that we're in the middle of a rather long process of de-leveraging debt in the credit markets. And the economy is not going to begin to recover until the credit market issues are resolved. So don't expect the stock market to head higher in any meaningful way until there is some clarity regarding solutions to the problems in the credit markets.
When you try to pinpoint when this all started, you can point to a number of timeposts:
1) November of 2006...this is when, in my opinion, New Century knew, for real, how bad things were within their portfolio. They didn't forward the information until December, but the Captains at New Century had to know in November.
2) March/April 2007...in four short months virtually every subprime lender in the country went bankrupt.
3) May 2007...this is when Fannie Mae's Desktop Underwriter began to tighten. For conforming loans, this is the beginning of the de-leveraging.
4) June 2007...we began to see a number of loan programs taken off the market. Programs such as no-ratio, no-doc went bye-bye.
5) July 2007...Prominent 2nd mortgage lenders began to discontinue their 2nd mortgage programs.
6) August 2007...Construction lending programs began to bite the dust at various lenders. Jumbo loans became virtually non-existant,and when you could get a Jumbo loan, very expensive. The Fed makes an inexplicibly stupid decision not to cut rates. I mean this was downright dumb as a stump type of decision. I still can't figure this one out. It is clear that our Federal Reserve was absolutely clueless about the problems in the credit markets in August '07, 100% head in the sand clueless. This Fed meeting should go down in infamy.
7) September '07 through January '08...the above trends continued unabated. Finally, with a series of rate cuts, and an extremely rare inter-meeting rate cut, the Fed signals that they FINALLY understand the severity of the problem in the credit market.
8) February '08...President Bush signs the fiscal stimulus package that along with sending out checks to everyone, also temporarily increases the conforming loan limits, as well as temporarily increasing FHA loan limits.
9) March 17 '08...JP Morgan/Fed intervene to engineer a JP Morgan buyout of Bear Stearns. This buyout essentially averted what would've been, most probably, at least a short term halt in our credit markets.
As you can see from the timeline above, while our credit crisis began 19 months ago, we've only really begun to address the problem within the last 6 months.
Other shoes that may drop in the coming weeks/months:
Mortgage insurers begin to fail. Remeber, the mortgage insurers are also in other insurance businesses. They've taken a number of very hard body blows through this mortgage debacle, and even though they're still standing, it won't take much more to knock them out.
Could Bank of America back away from the Countrywide deal? I think that's a decent possibility.
I could see at least a half dozen major wholesale mortgage lenders close their doors in the next six months. I'm not naming names at this point, but I've got several lenders on my major distress list.
Could we see 2nd mortgages disappear completely? It's possible, there are only a handful of wholesale mortgage lenders that haven't shut down their 2nd mtg programs.
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