October 2007 Shows Us How This Rally Ends

• By Ron Coby
• On 2:10 pm EDT, Monday October 19, 2009

Crisis, What Crisis?

As I scroll through hundreds of charts, I continually see that markets are right back to where they were before this credit crisis began.

It's almost like investors have completely forgotten why markets collapsed more than 50%. They must believe the Federal Reserve has once again saved the day.

Who can blame them really? The Fed saved the day in 1987, 1997, 1998, and 2001, so why not today? You know the formula: Markets correct or crash, the Fed floods the system with liquidity and cuts rates, and a new bull market or a new bubble emerges.

Back then, Alan Greenspan was the hero, and today it's Ben Bernanke who supposedly saved the country -- and possibly the whole world -- from financial Armageddon.

Deja Vu on Oil, Gold, the US Dollar, and Stocks

I reexamined the bubble peak of October 2007 and"surprise, surprise" -- it's deja vu all over again. If you recall, in October 2007 the US dollar was tanking and oil was ripping higher. The talk was about how the dollar had nowhere to go but down.

Sound familiar? It should because the dollar is tanking again and the talk is how the whole world is turning away from the dollar as the world's reserve currency. Gold today is also making new highs just like it was back in October 2007, on the back of a weaker dollar.

The stock market in October 2007 was making new highs as the dollar tanked. It feels like deja vu to me because today we have the dollar tanking, oil and gold breaking out, and stocks making new yearly highs.

If you also recall, there was a lot of talk about Iran and Israel back then which made oil traders nervous, just like today. (See Rising Oil Prices May Be the Forerunner to War.) Tensions are now hot as ever and oil is once again on a breakout moving higher. In October 2007, oil started a powerful 68% run until it finally peaked in July of 2008.

The charts on oil before its final run and on the US dollar before its final plunge look eerily similar.

The US dollar in October 2007 looks just like today -- in a slow-motion free fall. In 2007 the dollar fell one final time. This 7% drop held and became the major bottom in July 2008.

The talk of a coming dollar collapse and the noise in the media on Iran are also carrying a similar tone. Oil made a new yearly high last week just like it did back in October 2007. Folks, if we continue to follow this path, we're heading for a top to form in the stock market right now into year-end. This, in turn, would set up for a serious plunge to begin in January 2010.

If the dollar and oil follow the 2007-08 paths, the dollar should touch a new low for a final bottom as oil makes go on another new powerful run. And if gold goes down the 2007 path, it should make another 30% run to a new high.

What Should Investors, Traders, and Money Managers Do Now?

The key to making money in any market is to be long in a Bull Run and short before a major reversal when a new bearish trend begins.

This top-down approach to markets is your game plan on how to be positioned, long or short, in any market.

First, the US dollar is coming close to making a bottom. Recent surveys show dollar bears at 97% with traders and at 99% for individual investors. By the way, I'm one of those bears on the long-term outlook on the greenback. Heck, I even wrote a whole chapter on the US dollar,"Today's Dollar is Worthless, Tomorrow's Dollar Could Become Worthless," in my recently published book The Upside of Down.

However, the dollar looks set to make that final move down to put in a cycle low before a major short squeeze reversal begins. This means oil's breakout move needs to be respected.

Oil, however, is getting overbought near-term and in its seasonally weakest period until January. Look to accumulate oil and oil stocks on weakness, like in late 2007, with the expectation of a much bigger move starting in early 2010 -- just like the final explosive run in 2008. Once gold has a correction into this seasonally weak period, look for gold to head to the 1300 area likely by early 2010.

Happy Halloween

So, if you're feeling the deja vu vibe, it's because we've all seen this horror movie in 2007-08. (See We've Seen This Movie Before.) Markets are setting themselves up today just like they did in October 2007. The stock market should register its high soon if it hasn't already.

In other words, we're in the ninth inning for the bear market rally. (See Is It Extra Innings or Game Over for the Stock Market?)

Next, look for an explosive move in oil as tensions over Iran heat up and as the US dollar makes a final low. Don't chase strength, but instead buy weakness into year-end.

Also, look for gold to have another leg higher after a near-term correction. The October-2007-to-March-2009 plunge was like living through a gory slasher flick.

The good news? We already know how this movie ends! There's no longer any reason to be scared. We've already seen Halloween part one in 2007 so we know Halloween part two will have a very bloody ending.

This rally looks to be a bear market trick so investors should look to raise cash in the 2009 cyclical bull market treat. (See An Old Bear Market Trick or a New Bull Market Treat?)

Nothing contained in this article is intended as a solicitation for business of any kind or for investment in the firm.

Buzz up!