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A Dow Breakout Will Be a Fakeout


The call: a false breakout that forces all shorts to be covered.

Editor's Note: This article was written by Richard Suttmeier, chief market strategist at, a fundamentally-based quant research firm in Princeton, New Jersey, that covers more than 5,000 stocks every day.

Three small private community banks failed on Friday bringing the fourth-quarter total to 38.

The deflation of the credit bubble continues as credit conditions remain tight. With increasing bad loans, expect waves of bank problems and numerous bank failures.

Former Director of the Federal Housing Finance Agency James Lockhart says there will be another leg down for housing because of the pace of foreclosures. He agrees with me that hundreds of additional banks will fail.

As of December 11, the tally for banks failures has reached 158, on the way to 500 to 800 by the end of 2012 or 2013. There were 25 failures for all of 2008, 21 in the first quarter of 2009, 24 in the second quarter, 50 in the third quarter, and now 38 so far in the fourth quarter.

All three closures last Friday were overexposed to Construction & Development Loans and Commercial Real Estate Loans, which I've said would be the Achilles Heel for the banking system since April 2006.

The Deposit Insurance Fund is now in arrears by an estimated $16.8 billion with $45 billion in three-year of regular assessments due by the end of the month.

The bulls cite positive fundamentals, but it's the technicals that will decide the Bull/Bear Debate.

With ValuEngine showing seven of 11 sectors overvalued and with elevated P/E ratios, the fundamentals can't justify a new bull market for stocks. Basic Industries is 14.5% overvalued, just as the commodities carry trade appears to be ending. At the other end of the spectrum is health care at 10.5% undervalued with the features of the Health Care Bill still being ironed out in Congress.

Technically the multi-year bear market is over if the Dow breaks out above the downtrend that goes back to October 2007 and is broken to the upside, and that resistance is 10,520 this week. This week's pivot is 10,435 and this month's resistance is 11,035, which favors a breakout.

My call is for a false breakout that forces all shorts to be covered. Then when the fundamentals deteriorate, the new trading range market will seek its low end. The projected range is 6,500 to 11,500 in 2010.

The Obama Administration Owns "The Great Credit Crunch".

Most on Wall Street say that the recession is over -- I don't think so, but the NBER could use the November hours worked at 33.2 up from 33.0 as the reason for it to time stamp the end in November.

On Meet the Press, David Gregory asked White House economist Christina Romer, "Is the recession over?" Her response was, "Of course not". She later said that the Obama Administration inherited this economy, but I say by continuing programs such as TARP, they now own it.

Romer was asked what the unemployment rate would have to be to declare an end to the recession and her reply was a more normal number around 5%. Keep in mind that the unemployment rate was 4.6% when the NBER time stamped the recession's beginning in December 2007.

Former Federal Reserve Chairman Alan Greenspan says that the unemployment rate will be lower a year from now, but will remain elevated. His concern is that 38% of the unemployed have been so for more than 27 weeks. He also reiterated that the economy needs to create 100,000 jobs per month just to maintain a status quo.

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No positions in stocks mentioned.

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