Bears Reported to Have Begun Munching on Bulls Who Have Fallen Into Bear Trap

I'm sorry it has to be this way, folks, I really am. But it looks like the bears have set the trap. The bulls have wandered in. And now, there's only one thing left: for the bears to have their lunch, and for the bulls to meet their fate.

Fundamentally we know the story: unemployment and low retail sales in the US economy are all the talk. And while the January effect coupled with inflationary stimulus packages may have helped the market engineer a bit of a rally, the economic woes are still clearly in place, and it looks as though the primary trends are preparing to resume themselves. For instance, at the time of this writing, S&P 500 futures are pointing to a fifth loss in a row.

Technically we see a nice potential trade lining up on SPY, particularly if SPY can break support at 85.43. The market is now trading below the 5, 10, 20, and 50 simple moving averages, all of which are converging -- another indication the bear market rally may be concluding. A break below 85.43 could pave the way for a retest of previous lows at 75.

Check the chart below.

A lower S&P 500 is also generally correlated to a stronger yen. We have seen the yen begin to rally again, as the USDJPY exchange rate has broken below 90. The chart below plots the USJPY (blue and gray candles) against the SPY (red and green candles). In sum, a resumption of the bear trend in the S&P would be a bearish sign for USDJPY, which stock market traders can take advantage of via the FXY ETF.

Disclosure: Short USDJPY.

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S&P 500 Heading to 500?

In David's wrapup yesterday, he posted this monthly chart of the S&P 500, going back to 1982.

As the chart illustrates, the S&P is approaching a trendline that has been in the making since 1982.

The market may bounce off this trendline, or trade in a range for some time. But consistent with the fundamentally bearish view I have over the long-term, I think this trendline is going to break, and I don't think it will take too long -- within six months, if I had to guess (but of course, traders will let the technicals tell them when to enter).

The viewpoint from the perspective of Austrian economics is that the stock market bubbles created under Greenspan's Federal Reserve are now being deflated. The big run up from 1995 to 2001, as visualized in the chart above, was largely the result of the Fed's lax monetary policy in the early 90s; now, as debts are being eradicated, the stock market is naturally correcting itself and removing the malinvestments and excessively high prices that resulted from such an artificially lax monetary policy. Note the significant downturn in the chart above in 2002 and 2003; this was the market trying to deflate itself, though the Fed intervened again by forcing rates too low and thus resulting in an expansion of the money supply and a reinflation of assets. Now, the Fed is once again trying to to cut rates and re-inflate the market -- but it seems as though no one is buying the debt (at least for now).

A full correction of the Greenspan bubbles would result in the S&P going to at least 500, probably further, in my opinion.

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