"The Setup Continues" A lot of technical damage has been done this week. The DJIA lost 140.15 points for the week closing the week at 9,628.53. The DJTA lost 82.32 points for the week closing the week at 2,845.32. It is not the number of points lost this week that is so negative. It is the fact that my intermediate term indicators have turned bearish. However, in spite of the down turn of these intermediate indicators, price has continued to hold up rather well given the technical weakness that has now surfaced. Also, the Dow Industrials have managed to remain above their 50% level at 9,504.64. The Dow Transports have now closed below their 50% level at 2,862.85.
The short-term indicators are getting pretty over sold and we are moving into the timing window for a short term low. Therefore, we should expect to see a short term low in the market in the next few days. It is certainly due. Any rally that materializes from this short term low is very important. Should any such rally prove to be a failure it could be real trouble for the market.
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Anatomy of a Typical Crisis
The Model“We start with the model of the late Hyman Minsky, a man with a reputation among monetary theorists for being particularly pessimistic, even lugubrious, in his emphasis on the fragility of the monetary system and its propensity to disaster. Although Minsky was a monetary theorist rather than an economic historian, his model lends itself effectively to the interpretation of economic and financial history. Indeed, in its emphasis on the instability of the credit system, it is a lineal descendant of a model, set out with personal variations, by a host of classical economists including John Stuart Mill, Alfred Marshall, Knut Wicksell, and Irving Fisher. Like Fisher, Minsky attached great importance to the role of debt structures in causing financial difficulties, and especially debt contracted to leverage the acquisition of speculative assets for subsequent resale.
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Although Minsky’s model is limited to single country, overtrading has historically tended to spread from one country to another. The conduits are many. Internationally traded commodities and assets that go up in price in one market will rise in others through arbitrage. The foreign-trade multiplier communicates income changes in a given country to others through increased or decreased imports. Capital flows constitute a third link. Money flows of gold, silver (under gold standard or bimetallism), or foreign exchange are a fourth. And there are purely psychological connections, as when investor euphoria or pessimism in one country infects investors in others.
The declines in prices on October 24 and 29, 1929, and October 19, 1987, were practically instantaneous in all financial markets (except Japan), far faster than can be accounted for by arbitrage, income changes, capital flows, or money movements.<cut>
The specific signal that precipitates the crisis may be the failure of a bank or firm stretched too tight, the revelation of a swindle or defalcation by someone who sought to escape distress by dishonest means, or a fall in the price of the primary object of speculation as it, at first alone, is seen to be overpriced. In any case, the rush is on. Prices decline. Bankruptcies increase. Liquidation sometimes is orderly but may degenerate into panic as the realization spreads that there is only so much money, not enough to enable everyone to sell out at the top.
The word for this state---again, not from Minsky---is revulsion. Revulsion against commodities or securities leads banks to cease lending on the collateral of such assets. In the early nineteenth century this condition was known as discredit. Overtrading, revulsion, discredit—all these terms have a musty, old-fashion flavor. They are imprecise, but they do convey a graphic picture.
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