WL May 4, 2010 Special Bulletin

May 4, 2010 Volume 33: No.
SPECIAL BULLETIN
The market plunged today, with the DJI losing about 300 points at the low before
staging a mild bounce, closing with a loss of 225.
NEAR TERM: CORRECTION TIME!

The courage of the bulls will now be challenged. Today, many of the bulls fled the scene. Of course, the
commentators always have to find reasons for today’s plunge, such as the oil spill, the Euro-zone
problems, China tightening monetary policy, the Goldman Sachs problem, etc. But all these reasons
existed a few days ago and the market didn’t decline.
The real reason is the major resistance levels which were reached. For us it’s hard to believe it took so
long to get there. In mid-October Jim Cramer featured our chart of the S&P 500. We said that the 1100-
1120 area would be tough resistance for the market. However, if it were eventually broken, then the next
target would be 1200-1220, which would be like a brick wall. I never thought that it would take 6.5
months to get there.
The rally high so far was on April 26 with the S&P 500 reaching 1219.80. That’s right in our target area.
Technical analysis gave us the road map.
As we wrote in our SMARTE TRADER a few days ago:
This coincides with a whole litany of technical indicators which are calling for a sharp market
correction. This is not the kind of correction during which you want to stay invested. Market turning
points are usually very volatile. This means that there are a number of fake-out moves before the new
trend gets going. During that time, the casual investors usually get very frustrated.
Bert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049
Phone: (310) 476-6933 Fax (310) 440-2919 Website: www.dohmencapital.com E-mail: client@dohmencapital.com
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Wellington Letter TM
In our SMARTE TRADER of last Friday we recommended closing out all long positions on Monday
(yesterday) near the close of the day. Our signals were not yet conclusive, but we prefer being a little
early rather than being too late. It turned out to be a good trading move.
For new subscribers, in our issue of April 26 we showed two charts, one of the S&P 500 and that of the
NASDAQ. We wrote the following:
The S&P 500 INDEX (weekly) chart is long term. It shows the big bear market. Notice the rally from
last year’s bottom has now retraced a Fibonacci 61.8%. It is right there now. This is normally strong
resistance. It should at least cause a pullback, or even a correction. In that case, we would look for first
support in the 50% area, now at 112, which equates to 1120 on the S&P 500 index.
The S&P 500 INDEX (weekly)
The NASDAQ COMPOSITE (weekly) chart shows the stellar rally in this index, much stronger than the
other indices. It had the late January decline when all stocks plunged, but that was over in about 3
weeks. Now the index is at an even stronger resistance level. We would be very surprised if there
wouldn’t be a correction from here. The unknown is whether it’s just a pullback, or a potentially painful
correction. A 10% correction would be normal. But it could be deeper.
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The NASDAQ COMPOSITE (weekly)
CONCLUSION: Although the markets look OK on a fundamental basis until late this year, the way the
markets are refueled is through scary pullbacks. That generates new buying power and attracts new
money from the sidelines. The perfect time for that may be near. …Active traders will have some good
trading opportunities.
So far, that was right on target. In fact, the date of that issue, April 26, was the exact day of the 13
months rally so far.
The up move since the February low has not been easy for analysts who did very thorough research
instead of just following the crowd. Yes, sometimes you do better just being dumb. That was also true
for awhile in 2007, and again for a few months in 2008 before the near meltdown of the global financial
system. Some of our readers thought our bearishness was wrong just because the markets rallied for a
couple of months. For us a good indicator is always when we get some emotional client complaints. It’s
rare, but when we do, we know a market turn is near.
Speculation is now as great or greater as it was in the year 2000 which was the top of the tech bubble.
For example, volume on the NYSE has increased 12% since the beginning of the year versus NASDAQ
volume which increased an amazing 47%. The action is obviously on the NASDAQ. The year 2000
didn’t end happily for the bulls.
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Sentiment numbers show that all types of investors and traders are as bullish as at the market top in
2007. Well, the majority of investment professionals are wrong at major turning points.
Today’s volume on the NYSE was the heaviest since the February low, which was after the big plunge.
It was a turning point. At a low, that’s bullish. Now we get the heavy volume just days after a top. This
is a big negative signal.
Here are the two charts above, but updated. They no longer look that bullish. How fast things can
change in just a few days. All the evidence suggests that the correction has now started. The past several
weeks, stocks were being distributed, i.e. that’s when stocks go from the professionals to the novices.
Now it will get more serious.
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Note that both indices today hit their 50-day moving averages at their lows. That’s usually first
support. Therefore, we could get a 2-3 day bounce from here. That would coincide with some closing
out of short positions ahead of the German parliament vote on Friday. Then the decline can continue
next week.
Remember the old Wall Street wisdom: “Sell in May and go away.”
In our case, that means go to our SMARTE TRADER service, or the FEARLESS ETF & INDEX
TRADER, and profit from the correction.
THE STOCK MARKET
THE U.S. STOCK MARKET: PAST IS PROLOGUE
A REPLAY OF 2007?
At times it’s very important to look back and see what happened at other important turning points.
That’s why I went back to the year 2007. Please read carefully the text below and see how it applies to
today.
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Bert Dohmen’s
One month before the 2007 bull market top, we wrote in the Sept. 19 2007 issue:
We have some new subscribers who are now quick to accuse us of failure, as we did not forecast the 50
point cut (Fed discount rate cut). Well, it is not always possible to forecast the behavior of others,
especially Fed members. But we are pretty good in assessing what the markets will do over the next
several months, or longer. Unfortunately, some neophyte investors don’t have patience beyond one day.
But by definition, one data point does not make a trend.
Alan Greenspan speaks out!
By the way, x-Fed chief Greenspan is making the media tour to promote his $8 million book. On one
show he said that 10-year T-bond yields would go to 8%, presumably because of high inflation. That’s
double today’s rate. Don’t worry about that forecast. It may happen sometime over the next 10 years,
but not the next 1-2 years. When Dr. Greenspan had his own economic research firm, we used his
interest rate forecasts to do the opposite. He is very intelligent, but not good in forecasting rates.
(NOTE: Obviously he was totally wrong, as the yield on 10-year T-bonds dropped to 2%)
SENTIMENT IS STILL COMPLACENT TO BULLISH (from the Sept. 19, 2007 issue)
I continue to be amazed by the complacency and non-recognition of the serious problems in the credit
markets. Now everyone in the investment business is advising to buy the “bargains” in the stock market.
The financial media is full of articles about specific money managers, citing their track records. What
they never mention is how much they made or lost during the last bear market. These people, virtually
without exception, are now talking about the “bargains” in the market. But they are only bargains if the
economy continues to grow at the current pace. If the current credit crunch brings a recession, then all
the numbers are out the window.
They talk about the P/E ratio of 16, which supposedly is very low. Well, I remember P/E ratios of 7 on
a multitude of stocks in a bear market, and the stocks were still plunging.
A Barron’s article quoted a London-based strategist for Morgan Stanley. He is bullish. He mentioned
the things normally seen at market tops. So he asks, “where is the massive buying of stocks by
individuals that typically fuels the late stages of a bull run? Joe Sixpack doesn’t seem to have been
sucked in so far.”
We could answer, that “Joe” lost all his money in the last bear market, when the NASDAQ plunged
80%.
(NOTE: Doesn’t some of the above sound very applicable to the situation of the past two months?
Human nature never changes.)
In early October 2007, investor sentiment became so bullish that there was actual animosity against
anyone voicing a bearish opinion. We got the usual number of emails question our mental capacity.
They asked, “Isn’t it obvious” that the stock market will go to the moon? Well, we were doing our
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analysis which showed that the rally from the August correction low was manipulated and lacked the
internal strength. Therefore, it was a “distribution” rally.
If you listened to the tedious Goldman Sachs (GS) inquisition on Capitol Hill last month, you got some
good insights, but only if you listened closely. One of the GS traders had written in a 2007 email that
they had to “distribute” whatever they still had in their own portfolios. They talked about the “cat and
dog” stocks, a term we have used often to describe the mania in the last phase of an up move. And then
you heard that they were not able to sell the worst parts of their holding, and were forced to hold them
during the plunge, accumulating a big loss.
The Sept-October 2007 rally was a fake out. It was used to present the illusion that there was no crisis
that the Fed was in control that stocks were cheap, and the bull market was in tact. We took quite a bit of
flack during that two month rally, similar to now. The subscribers who cancelled weren’t around for us
to safe them a fortune in losses during the 2008 debacle. Nor were they able to profit from the bear-
ETF’s we had recommended.
During 2008, our PRIVATE PORTFOLIO program soared in value although it was the toughest year in
the markets since the crash of 1929.
The WELLINGTON LETTER OF Oct. 1, 2007
In the October 1, 2007 issue we wrote: Of course, the markets always look the best just before an
important top. The markets usually ignore genuine concerns for a long time. But eventually, reality
returns, and often with a vengeance.
Let’s look at two charts, which reflect the above: The first chart is of the DJI. But it was a long time ago.
It certainly looks like a powerful up move, similar to the market we are seeing now. Would you buy it?
Probably most people would.
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Now look at what happened to the DJI right after that. The last date shown on the above chart is August
25. Here is what happened thereafter.
Yes, it’s the 1987 October crash. You may remember, in that crash the DJI lost 22% of its value in one
day. The difference with the DJI now is that the potential “secondary top” now is actually a new high.
That’s always possible. However, the chart of the broader indices, such as the RUSSELL 2000, is very
much like the DJI above, where the secondary top is lower.
If our scenario is to be correct, we must see a close below the close four days ago. That would put the
secondary top in place.
The most important index for professionals is the S&P 500. It is now coming up against the previous
high, which is a critical level. It will be interesting to see if it can decisively close above the July high.
Just remember, a few days before the July(2007) market peak, the DJI had a 283 point upmove in one
day. That was followed by three mild days to the upside, making a top, followed by a stiff decline into
August.
In 1987, we had a subsidiary which managed money, using the same strategy employed currently for our
PRIVATE PORTFOLIO service. In mid-September 1987 we started reducing exposure. By early
October 1987 we were 77% in cash, which is huge for a money manager. We got some very angry
phone calls from clients who told us they “knew” that the market would soar to the moon. As is
customary, they questioned our competence, mental health and birthright.
Then came Oct. 17, and the crash heard around the world. Interestingly, not one of these people
apologized for the prior abuse. Three days later we bought back some of the positions we had
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sold…about 50% cheaper than our sell price. And you know what: we got angry calls for getting back
in, when “obviously the entire financial system will collapse.” I sometimes wonder why such people pay
for professional advice when their own opinions are so much more important to them.
We don’t have a crystal ball. We don’t always get it right (God always tries to teach humility). A bear
market rally may last 2-3 months, instead of the one month we had expected. We don’t know when the
manipulation in any rally will end. We don’t know what new plan Washington will announce tomorrow.
But we do know something about analysis. We will compare our 33 year track record to anyone in the
business. But we cannot compete with the amateurs who think you can invest based on hindsight. We
can only make decision on a real time basis, not looking in the rearview mirror.
Oct. 15, 2007 issue
Getting back to the bull market top in 2007, in our Oct. 15, 2007 issue, which was two days from the
top, we headlined the issue: ‘TOP OF THE RALLY.” We wrote the following closing paragraphs:
The Fed has the so-called Plunge Protection Team (PPT), which was instituted after the 1987 crash. Its
job is to promote “orderly markets” when there is dangerous turmoil. It has always been rumored that
one of the firms the Fed uses to support the markets is Goldman Sachs. It appears that some Wall Street
firms were informed of the surprise rate cut of Sept. 18 the prior day, and these firms were called upon
to help produce an astonishing short covering rally. It was easy to do this, with so many hedge funds
being heavily positioned in shorts and in put options.
The performance of the stock of Goldman Sachs (GS) since the August low, rallying from 169 to 240,
suggests that the firm made a lot of money in the rally. At the same time, it is now obvious that the
phone lines between GS, the Fed, and the U.S. Treasury are quite busy. Therefore, GS is bound to be on
the right side of most important moves. By the way, Robert Rubin was also a top executive at GS before
becoming Treasury Chief under Clinton.
We don’t complain about this apparent conflict of interest. It’s all “for the greater good” of keeping the
financial markets functioning...and educating the Fed. In a way it’s comforting to know that the
professors at the Fed are getting some guidance. As investors, we can benefit from all this as well by
investing in GS. Isn’t our system great?
What more can we conclude from this? If GS and some other firms bought in a big way to produce
the rally, they will now sell to get rid of what they bought, as they realize that the credit crunch is not
going away…
Now that the masses are very bullish, and mutual fund managers are buying, these firms have
someone to sell to. Once the selling gets noticed, it will put pressure on the markets. Of course, there
has to be some negative background news on which the next decline can be blamed. That could come
soon.
Sentiment is now very euphoric. Investors Intelligence (www.investorsintelligence) survey of investment

advisors, shows that over 60% are bullish now. That’s very high, and is usually seen near the top of a
rally.
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Bert Dohmen’s
We concluded the Oct. 15, 2007 issue with this paragraph:
The rally since August was engineered and manipulated. The volume was much too low to suggest that it
is a normal continuation of a bull market. A rally after a plunge on lower volume is the hallmark of a
“secondary top,” which is then followed by a more serious, and longer term decline. The “rising
wedge” formations on the charts of several broad indices are ominous. The NASDAQ rising wedge was
just penetrated to the downside, which strongly suggests that the top is in place, and that a
meaningful decline is ahead. The prudent investor will act accordingly.
(NOTE: That was the 5 year bull market top!)
The above describes parts of the current situation very closely. Past is prologue. History rhymes. Don’t
ignore it.
WHAT’S AHEAD?
The Euro market problems are now very important. Just a few weeks ago, the size of the bailout for
Greece was to be around $25 billion. Well, over last weekend, the Euro-country ministers approved a
$146 billion package. Obviously, Greece hadn’t revealed the size of the problem until the last moment.
That’s incredible.
But the Euro problem is far from resolved. In our trading services last Friday, we said that over the
weekend they would approve a bailout, but the positive market reaction would last only a matter of
hours. Today, that came true as all the markets plunged, and the Euro currency was demolished.
The German Parliament still has to approve its part of the bailout on Friday. The following Sunday,
there is an important election. The Germans don’t like bailing out countries which wasted their resources
and had no financial discipline. Will the politicians vote against the plan so they will not be punished in
the election? If they reject it, all hell will break lose on Monday.
If they do approve it, reality will still prevail. And that is that Greece has no chance of meeting the
deficit targets. And thereafter comes the problems of Portugal and Spain. There is an estimate that it will
take about $800 billion to take care of the sovereign debt problems of the Euro zone. That’s huge! Who
has that much?
Today it was said the president of the ECB (central bank) may decide that the ECB will take Greek
bonds as collateral against loans. That’s similar to accepting Monopoly money. They are getting
desperate and the markets smell it.
The China speculative bubble is probably the largest ever in history. The government can keep a bubble
going for a long time under normal conditions. But when the rest of the world is fleeing to safety, even
the Chinese government can’t repeal market forces. A real estate collapse in China would be extremely
serious, and it may be closer than you think.
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In summary, the global stock market rallies since March 2009 were produced by the injection of trillions
dollars of central bank stimulus, and many more trillions of governmental guarantees. This is money
created by computerized bookkeeping entries. Is it really that easy to stop a global crisis produced by
excessive debt? For the answer, let’s see what an astute economist, Ludwig von Mises, wrote on the
topic in the 1930’s:
“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The
alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of
further credit expansion, or later as a final and total catastrophe of the currency system involved.”
He should have said “credit expansion caused by the central bank.” That’s the key, because this is totally
artificial. During the 1930’s depression, governmental stimulus actually worsened the situation, except
for the initial boost from 1933-1937.
Looking out beyond 2010, we are still bearish on the markets. Of course, situations can change
especially on the political scene. We never hesitate to change our view when the facts change.
Greetings,
Bert Dohmen
Pursue life, liberty and happiness at....

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May 4, 2010 Volume 33: No.

NEAR TERM: CORRECTION TIME!

As we wrote in our SMARTE TRADER a few days ago:

The S&P 500 INDEX (weekly)

The NASDAQ COMPOSITE (weekly)

THE STOCK MARKET

THE U.S. STOCK MARKET: PAST IS PROLOGUE

Alan Greenspan speaks out!

The WELLINGTON LETTER OF Oct. 1, 2007

Oct. 15, 2007 issue

Sentiment is now very euphoric. Investors Intelligence (www.investorsintelligence) survey of investment

We concluded the Oct. 15, 2007 issue with this paragraph:

(NOTE: That was the 5 year bull market top!)

Pursue life, liberty and happiness at....

If you are interested in attending the FreedomFest, please send us an e-mail to :

Hotel room is $97 per night.

We hope to see there!

Client Services: Dohmen Research Inc. EDITOR: Bert Dohmen

THIS NEWSLETTER MAY NOT BE REPRODUCED EXCEPT BY PRIOR WRITTEN PERMISSION.

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