Today is Thursday, February 26th and today might be my most important informative post to date.

That’s right, today we are going to have a history lesson and not just any history lesson. This one may be a little tough to handle, but everyone should know the possibilities of where we are in the big picture and what could happen.

If you remember the movie, “The Matrix”, there is a scene in there where K. Reeves is asked if he wanted to take the blue pill or the red pill. The blue pill represented not wanting to know what was going on in the world around him, while the red pill represented what was actually happening. If someone asked you, which one would you pick? What we are discussing here is whether history is repeating itself, or is this recent downturn just another cycle in the making?

Below, are two charts, one showing the stock market’s escalation during the roaring 20’s and then the peak in October 1929, followed by the crash and the years thereafter. The other chart shows where we are in the current environment and how it may, or may not relate. Believe me, I do not wish that they relate in any fashion whatsoever, but I have been following and predicting this scenario for a good 20 years.

I would say it was in 1986, just before the big build up of the 1987 crash that took place on wall street, that I became very interested in trends and how history has a way of repeating itself. You all know the saying, that those who don’t learn from history are doomed to repeat it. I did not want to be one of those people who were doomed, so I began to arm myself with knowledge and information.

So I knew that this drop we are experiencing has been coming for a long time. In fact you will see the arrows that I have marked on the current chart which are the actual calls that I made during that exact time in history. Anyone who knows me can verify that this is true.

Anyway, I just need to show my readers what is going on and how it may or may not compare to the past. I will not tell everyone what to think, that would be irresponsible of me to do so, but I will just lay it out and you can make up your own mind.

I don’t want to talk about politics, but there are things that are changing that have not happened before in this country. The Feds are exercising and far over-reaching their intended roles as were originally set up. I think a lot of people will agree with that. I so often hear of how the markets seem to be manipulated and that might be true or it might not, but the answer to that is not as important as what can we do about it? My answer is: learn how to read price action and make a lot of money while we have the opportunity to do so. All news or intervention or what have you is reflected in current price action. If you know how to read it, then you will not be a victim and powerless. Taking control of your future is all of our responsibility individually and not the role government.

In the 1930’s the government was trying to prop up failing institutions and threw a lot of money at the depression but it did not help. Many experts say that all it did is prolong the depression for a whole lot longer than it needed to be and that it was W.W.II that lifted us out of the slump. That sounds about right. What I am seeing and hearing are similar potential scenarios.

We are currently into this decline by about a little over 1 year. Most declines of this magnitude take about 3 years minimum to work off the excess and be positioned for a move back up. I would expect this move down to be no different and in fact could last a lot longer. It will all depend on how fast we fall. So far, we have fallen pretty darn fast.

It has been a 50% + drop off the highs and we have not yet stabilized. The market is a funny thing in that it almost has a mind of its own. In a way, that is very true in that it is a collection of millions of people’s minds all being reflected in one place. They are sending a message out to the world that something is wrong and there needs to be an adjustmentto more properly line itself up with future earnings, which are expected to fall a lot.

You will get a wide array of opinion what this year’s future earnings on the S&P 500 will be. I have heard the main characters on the street predicting somewhere near 60.00 dollars. This is a collection of earnings which when divided by the companies they represent, gives you a number, a price earnings multiple. This week I heard that someone at Merrill Lynch was saying that it was going to be closer to 29.00 dollars. If that is the case, then you are going to be looking at valuations closer to half of what the current market is now at. That’s not good.

When you get something going in a certain direction that is so big and has moved so fast, with no sign of stopping as yet, it is hard many times to bring it to a halt. A couple of examples may be a big fast moving car or, better yet, a huge set of dominos all lined up. One just keeps knocking over the other, until they all fall down. This is what it looks like to me.

When you open your mind and look objectively without bias, you can see that something is seriously wrong with our current financial condition. Our debt load is so high, in all groups – personal, city, state, federal, corporate. This debt needs to be serviced by someone. China and Russia and Japan, as well as Europe, have been buying our government bonds making up the shortfall from what we are spending and I just heard tonight that our new federal budget is over 1 trillion in the red – for just this year.

That is the best case scenario, but you know that there are going to be many other unforeseen things to come up along the course of this year. We will be paying interest on all of that debt and all the other accumulated debt that is piling up so fast you can hardly count that high. In a nut shell, our current system is going to break eventually, unless there is some new discovery, like turning water into free energy of gas, etc. That will cause a new boom to take hold and pull us out of the mess.

I don’t see it happening fast enough to avoid the problems we face next week, month and year. I hear a lot talk about a “new global order” is what we need. Well, I could really run with that but will try and stay on topic. It is a related subject, because during the past 10 plus years, corporations went global, in order to continue to keep their earnings expanding, and they did a good job of sending our manufacturing industry around the world at a big savings, thus increasing their bottom line and in turn causing their stocks to rise. See my point? Now, things are changing and a contraction has taken hold, sending exports south, and thus earnings have turned down, translating into lower stock prices again.

What is going to stop the slide in earnings and consumption? I really do not know.  What some people may not know is there was a big push for currently trying to “buy american” made goods. In fact the president has said this as well. Canada got wind of this last week and had a little meeting with the White House and said their economy is 70% dependant on export and that a policy like that would kill their economy. Obama had to back track a little to cover himself.

Who knows what will really happen, but this is called protectionism and its what happened during the depression of the early 30’s. Again, we seem to be repeating the same things done during that era. Someone once said, “crazy is doing the same wrong thing as before and expecting different results”. I would have to agree.

Maybe I will talk more about it at another time. The interesting thing is, look at the two charts, then and now. We would all be best served to plan for the worst and hope for the best and make money if you can.

That’s where I come in. If anyone needs help in understanding the market and how to trade it, let me know. If you have questions, email me. Keep your chin up and let’s hold our leaders to their oaths of office, to ensure that this great country continues as it was intended.

http://www.screencast.com/t/4mHwcMhSx              1920’s rise and fall

http://www.screencast.com/t/o8nEON3Bs                 Today’s market

http://www.screencast.com/t/o8nEON3Bs                Live market trades