March 1st, 2015

The Crash is Coming, The Crash is Coming!

The following piece appeared here on March 25, 2013 entitled The Known Stock Market World, almost exactly three years ago. I repeat it here because Paul Farrell just came out with another one of his dire, “end-of-the-market-as-we-know-it” predictions. What prompted Farrell to make his doomsday call in 2013 was the fact that the market was about to cross into all-time new high territory and he, along with many of the other gloom-and-doomers were saying that the market was about to swoon into a major correction. In today’s blast (see today’s MarketWatch), Farrell claims

“the crash of 2016 really is coming. Dead ahead. Maybe not till we get a bit closer to the presidential election cycle of 2016. But a crash is a sure bet, it’s guaranteed certain: Complete with echoes of the 2008 crash, which impacted on the GOP election results, triggering a $10 trillion loss of market cap … like the 1999 dot-com collapse, it’s post-millennium loss of $8 trillion market cap, plus a 30-month recession … moreover a lot like the 1929 crash and the long depression that followed.”

Everyone put a link to this MarketWatch article in your “stocks” Evernote folder, in your electronic calendar, where ever you can so that you’ll be alerted to it then, can quickly retrieve it (unless MarketWatch pulls the story by then) and can lobby to take away Farrell’s soapbox.

Back in 2013, it was clear that the market would be going to new heights, which it did.  In 2015, when we’re in the sixth year of a secular bull market, there’s no question there will be a correction soon.  But no one today can predict when it will begin nor how far it will carry the market down.  Anyone who claims to know, like Farrell, is taking you for a sucker.

***************************************************************************************************************************************************************

imageI was asked to read Paul Farrell’s most recent blurb on the Wall Street Journal’s blog site Marketwatch.com entitled “New Critical Warning as 2013 shocker looms” in which he enumerates 6 new critical warnings, which added to the 7 he says were issued last year but to which there doesn’t seem to be a convenient link of the site.  This “critical warning” comes from Gary Shilling (the others came from Bill Gross, Nouriel Robini, Reinhart and Rogoff and Farrell himself.

Farrell clearly spells out that their vision of economic and market doom is rooted in their dislike and distrust for Fed Chairman Bernanke and his policies.  Is it professional jealousy?  Does it come from an contest between Keynesian and Austrian monetarist inside schools of economic philosophy?  In Farrell’s own words:

“Timing is critical at a turning point. We warned of the coming crash well in advance in 2008. We picked the bottom in March 2009. We are in the fifth year of an aging bull. These six Critical Warnings tell of a hard turning point dead ahead. Wake up. It takes time to restructure a portfolio. If you think you can do nothing and just wait for another year, you are like most investors: You just “can’t handle the truth.” Or you “have no idea what’s about to happen.” Or you believe “this time really is different.”

But the truth of the matter is that all these perma-bears have continually been calling for the market’s reversal and demise since last year, a 15% missed opportunity had you taken their heed and fled the market.  Was the turning point in 2012, in January 2013 or some undefined point in the future.  Why do these guys want us to sell equities?  Where do they want us to put our money?  Are they gold-bugs in disguise?

I’ve been reading much over the past couple of years from those who view a market reversal at the level of the previous all time high high as indisputable.  The reasons they offer could be technical, like Prechter’s obtuse Fibonacci reckoning, or fundamental economic, like those of Farrell, et al.  To me, it all sounds like a through-back to beginning of the Age of Discovery in the 1500’s when most believed the world was flat and you’d fall off if you sailed to the end.

1500 WorldYou could sail the Mediterranean Sea or Indian Ocean but sailing beyond the sight of land meant sure disaster.  It’s like the course the market’s followed since 2000, the Secular Bear Market seas.

Map of Known Stock Market

So long as we don’t venture outside the bounds, we know the landmarks, the levels at which the market pivoted in the past and has a probability of pivoting again in the future.  If the market reversed direction for a third time, we can guess, by looking at the above “map of the known stock market” where islands of rest might be and where it might reverse direction again.

But if half the stocks break into their own all-time new high territory and cause the index, by definition, to also begin to venture into uncharted territory then where will the first island be?  Where might we hit and wreck on a market/economic shoal or reef?

Bottom line: are you someone who has the confidence to sail where no one has ever sailed before to discover new lands and new wealth?

Technorati Tags: ,

October 23rd, 2012

Important Stock Market Supports

I must confess that I’m disappointed by both Romney’s lack of fire in his belly during last night’s debate and in the market’s negative reaction to that performance.  I’m one of the crowd who was looking for a bounce rather than a swoon as we moved on to the election and for several weeks after a Romney victory.  My market optimism was based on the belief that a Republican victory in both the White House and Congress would a big risk factor overhanging the market (whether fairly or not) as far as economic growth and would also reduce the risk associated with the country’s falling over the fiscal cliff at year end.

This morning’s reaction forces me to go reevaluate the game plan.  Perhaps the market will slip over the edge before the economy does.  But then again, there are many potential support levels to stop the fall …. albeit after some major damage to stock prices and portfolios (click on image to enlarge):

 

Those supports are indicated on the chart:

  • The lower boundary of an ascending channel that begin in late-2011.  Perhaps, not coincidentally, that trendline actually stretches back to the 2009 Financial Crisis Crash low (see chart below) and should, therefore, be considered an extremely important and strong one.
  • Three slow moving averages that all happen to currently be ascending
  • A horizontal trendline at approximately the prior 2012 low for the year

Unfortunately, however, my proprietary Market Momentum Meter will turn red suggesting that a move into cash is advisable based on similar situations in the past.  If the decline continues at the current rate, it will be similar to the rapid decline in 2011.  The recovery from that correction was fairly quick and dramatic so many investors, including me, were whipsawed and are still trying to recover.

Some look at the long-term chart a see the market back at the top of its 12-year secular bear market tradition range and, consequently, see the beginning of another major market crash (i.e., decline of 30-50%):

One usually bearish pundit recently wrote the following typical view of an impending market top,

“Cyclical bulls follow cyclical bears, so from those panic ashes a new cyclical bull was indeed born.  And coming from excessive lows, it would more than double the stock markets again.  Over the 3.5-year span running to just last month, the SPX blasted 116.7% higher!  And that brings us to where we are today, what is almost certainly the third major bull-market topping witnessed in this secular bear.”

Rather than the proximity to the top of the secular bear market range, my focus will be on that ascending trendline from the 2011 and 2009 lows, currently at around 1400.  A cross below that line would be a clear indication of more declines to come.

 

January 4th, 2012

Preliminary Positive Signs on Banks and Financials

A market timing strategy sometimes recommended by professionals like Fidelity Investments assumes that the various phases of the stock market’s life cycle correspond roughly to the stages of an economic business cycle.  To aide investors following the strategy, they developed the following schematic which overlays a typical economic cycle, the market life cycle phases corresponding to the various economic sectors and the industry groups that typically tend to perform best in them.

In the Financial Crises Crash, financial stocks was one of the first (after homebuilders) and most beaten down of all the Industry Groups having come under new, intense Federal scrutiny, regulation and restructuring and, up to now, the stocks have been slow to recover.  But their time may be coming.  The XLF (Financials ETF) appears to be struggling to form a small reversal bottom with a neckline at 14.00 which if crossed could carry the stock to the next resistance at 17.00:

The XLF is comprised mostly of the larger-cap, money center banks and insurance companies (click here for the current list of top holdings).  The ETF of smaller regional bank stocks, RKH, looks similar and the the various IBD regional bank groups are continually advancing in their ranking among the 197 Industry Groups.  Two examples of groups moving higher and above their 20-week moving average are the Midwest and Southwest banks:


If these aren’t apparitions but inklings that the financials are actually beginning a recovery reversal then the market may also finally begin to break out of it’s long trading range, emerge from its funk and begin an assault somewhere down the road on it’s all-time time high.

Technorati Tags: , , ,

December 21st, 2011

2012 Stock Market Predictions

‘Tis the season and predictions for 2012 abound.  Like the market, they are a confusing and contradictory bunch.  Here are a few that fell into my inbox just this morning:

  • According to the Wall Street professionals assembled by Barron’s, “all expect the market to rise about 11.5% next year, which is about what they expected to happen last year and in 2010.”  And in the next breadth, Barron’s seemed to undermine the prediction by inserting the following quizzical chart:What the chart says to me is that: 1) the divergence in Wall Street’s views are as wide this year as they had been the prior two years and 2) Wall Street is batting .500 by the average prediction being dead on correct once and being totally off the next year.  So how much credence would you give to Wall Street’s prediction for 2012.
  • USAToday also assembled their own, different Wall Street Crew for their views of what to expect in 2012.  “….a quick survey of New Year‘s prognostications from investment strategists suggests stocks might deliver the double-digit gains that they have put up, on average, over the long term. A snapshot of 2012 year-end-price targets from five firms shows an average gain of 10.5% for stocks.”
  • If you want a fundamental-based set of explanations for why we’ve been experiencing such an exasperating market you can turn to IBT (International Business Times) who have assembled a Chinese menu sort of prediction for 2012.  Pick any predictions for column A (Bullish) an column B (Bearish) and come up with your own number:

I, for one, am not going to try to pick what I think might be the most probable outcome, I’m not smart enough for that. But I am going to stick with the long-term “reversion to the mean” projection that has been true since I first wrote about it here on December 9 2009 which you should read to understand how it was derived.  In short, the assumption is that we are at the end of a secular bear market similar to the one in the 1970’s and the path out might be similar to the last one.

It may be a queer anomaly but the market has been tracking fairly similar to the path laid out back in the 1970’s.  If it continues the path then the market might touch between 950-1000 sometime in the first half of 2012 and then begin and succeed in another attempt to cross into new all-time high territory in 2013: Would I be disappointed if this prediction failed?  Not at all; I’d be ecstatic.

April 19th, 2011

Kass: Today’s Broken Clock?

I’m not sure whether he actually believes what he wrote, whether he actually acts on his own recommendations or whether sounding bearish alarms at Cramer’s TheStreet.com is just his role but the more Doug Kass says, the less credible he seems to be and the less respect I have for him as a prognosticator.

I base this view on a recent piece on theStreet.com entitled “Kass: Apocalypse Here?“, Kass’s second call about the market topping out or, in his words “A week ago, I wrote a column, “Apocalypse Soon,” which outlined, in a comprehensive way, the ingredients for a market fall.” In his RealMoney Silver trading diary (also on theStreet.com) he wrote that a market correction loomed ever closer.

His reasons are a perma-bear’s litany of all the bad things wrong in the world, in financial markets and in government, including these ten:

  1. higher oil and input prices;
  2. a debased U.S. currency, lingering budget concerns and political partisanship, which could jeopardize a budgetary compromise (and resolution);
  3. screwflation of the middle class and its inevitable impact on economic growth and corporate profits;
  4. the specter of structural unemployment;
  5. the absence of a recovery in home prices;
  6. the fiscal and monetary “stabilizers” are soon to be taken off;
  7. vulnerability to consensus 2011 growth projections, corporate margins and profitability;
  8. the euro sovereign debt crisis, thought to be contained, has continued to spread;
  9. a relatively anemic recovery exposes the economic cycle to the vulnerability of more black swans (and tail risk), which are occurring with greater regularity; and
  10. investor sentiment has moved to a lopsidedly bullish extreme.

I believe Kass is a victim of the condition usually afflicting analysts who focus exclusively on business and economic fundamentals in making their investment decisions to the exclusion of market technicals, investor sentiment and momentum. Each of Kass’s ten points truly are risks, however none of the them are facts today (exception, perhaps, the failure of a recovery in home prices).

Rather than trying to figure out the likelihood of each of the above risks actually becoming a reality and, if and when they do, what their impact might be on the economy and stock prices, you should expend your effort on the likelihood of these risks becoming fact as assessed by the majority of investment money around the world yesterday, today and in the future as evidence in the hard facts of the actual trend of stock prices (click on image to enlarge):

Over the last 3 1/2 years, there have been two inverted head-and-shoulder bottoms, one at the launch of this bull market recovery and the second at the mid-point last year. The principal question on which investors should focus is whether or not the congestion the market’s has been trying to work its way through since the beginning of the year is a reversal top or merely another consolidation half-way through the “mid-term election year cycle” which will serve as a launching pad for another move higher to 1500-1550, the market’s all-time high by year-end.

To his credit Kass called the Generational Low at the depths of the Crash on March 9 when the market was at 676. However, many big name pundits live off their one, last great call (recall Elaine Garzarelli for her predicting the 1987 Crash or Joseph Granville for his bearish calls in the 1970’s, ’80’s and ’90’s).

Kass’s current call of “stated simply, get defensive” reminds us of his call. On CNBC last November 8 in “The Market Has Hit the Top” he said, “To me, there’s an artificiality of the program. We had ‘Cash for Clunkers.’ Now we have ‘Cash for Stock Market Gains.'” Since then, however, the market has risen 6.7% to yesterday’s close. The benefit those calling for a market downturn (Robert Prechter of Elliott Wave Theory comes to mind) have is that “even a broken clock is right twice a day”.

The market will eventually correct but it could be from a level 10-15% higher than when the pundits first made their calls. You can be ultra-conservative and allow to fear drive you to the sidelines now or you can try to benefit of a move higher ahead of the reversal, whenever that might come. I’ll stick to my discipline and move to the sidelines only when the market tells me its time, not when the pundits do.

August 23rd, 2010

Laws of Supply and Demand At Work In The Stock Market

A recurring theme over the past week has been the talk of the money flowing out of equities and into fixed income, like the following from Bloomberg:

“The amount of money flowing into bond funds is poised to exceed the cash that went into stock funds during the Internet bubble, stoking concern fixed-income markets are headed for a fall. Investors poured $480.2 billion into mutual funds that focus on debt in the two years ending June, compared with the $496.9 billion received by equity funds from 1999 to 2000….”

or

Stock funds have had $215.4 billion of outflows the two years ended June, ICI data show. Citigoup’s Tobias Levkovich says “The extremities of the money flows into fixed income from equities is troubling. In 2000 or late 1999, we saw massive amounts of money going into the equity market at just the wrong time. I feel the same way when I look at all the money going into bonds.”

Anyone who has taken Econ 101 understands the laws of supply and demand. We’ve see it at work in the fixed income market where the demand has pushed bond prices up and interest rates down to levels not seen in 60 years. But what’s going happening in the equity market? Shouldn’t we have suffered through an offsetting and equally large decline in equity prices due to the large volume of stock sales triggered by the mass exodus?

Actually, we haven’t and it’s perplexing. As frequently pointed out here, the market has been in an interminable horizontal trading range of 1025-1150 for about a year. Rather than correcting 20-25% to the 850-950 range after it’s dramatic run-up from the March 9 bottom, the market has remained relatively flat for some inexplicable reason.

Some take that as proof that the big drop is about to come but I understand it to mean that there’s been more than sufficient demand to absorb all those dumped shares. If I remember my economics correctly, price changes happen coincidentally with the trading volume, not as a result of that volume. Prices change to encourage and facilitate transactions not as a result of trading that took place sometime in the past.

I side with those who believe that some or all of the money that flowed into fixed income will, sometime in the near future, begin migrating back into equities. However, this time, those who absorbed those disposal sales by being on the buy side won’t be in such a rush to relinquish their shares. They’ll hold on and demand higher prices since there aren’t many attractive alternatives (as all those fixed income holders will soon find out).

That’s how supply and demand works. I’m not the one who’s bullish, it’s the market and it’s price action over the past year that is convincing me to be so.

August 19th, 2010

Becoming A "Go-Ahead" Nation … Again

Please pardon my getting political but since there’s nothing really very interesting or pleasant taking place in the stock market and because this is my blog, I want to get something off my chest.

I’m a history buff (what true chartist wouldn’t be?) because it provides context within which to better understand current events. I recently finished reading, for example, “The First Tycoon: The Epic Life of Cornelius Vanderbilt” by T. J. Stiles (I highly recommend the book to anyone interested in knowing how the United States evolved from a collection of disparate states into a linked nation of commercial interests).

Vanderbilt was an astute young man, unrecognized by the establishment in the 1830’s for his business acumen in applying steam power to river transportation (and later to railroads). The debate at the time was between progressives who saw a need for public investment in transportation and communication infrastructure in order to further territorial expansion and conservatives committed to the traditionally individualistic, independent and agrarian roots of the country.

As described in a PBS special about the Mexican-American War of 1846-48:

“People in the United States [in the 1830’s and 40’s] had a reputation that they were in awe of nothing and nothing could stand in their way. The word was boundlessness — there were no bounds, no limits to what an individual, society, and the nation itself could achieve. There was a reform spirit involved in the spirit of the age. It was a period of tremendous, exciting change.

The period was really the kind of coming of age of the United States, for the American people and their institutions. There were drastic changes in political ways, economic development, and the growth in industrial establishment in this country with technological advances that made individual lives easier than they had ever been before.

One example is the application of steam power to transportation. The United States often times was referred to as a “go-head nation” — a “go-ahead people” with the locomotive almost as a symbol. The railroad became a metaphor for American ingenuity and development.

In printing, the rotary press in 1846 made possible the mass production of newspapers more cheaply than ever before, enabling newspapers to produce for and circulate in the national market rather than just regional or local markets.

Some of the things that were happening bordered on the miraculous, such as the magnetic telegraph in 1844. The very thought of sending words over wires — it just couldn’t be. It was a wonder of the world, even surpassing the application of steam power to transportation on land and sea.

While railroads and communication were the technological sparks for the 19th century, the 20th Century, according to a recent survey of scientists, also had 20 top scientific and technological advances (see Wikipedia):

  1. Electrification
  2. Automobile
  3. Airplane
  4. Water supply and Distribution
  5. Electronics
  6. Radio and Television
  7. Mechanised agriculture
  8. Computers
  9. Telephone
  10. Air Conditioning and Refrigeration
  11. Highways
  12. Spacecraft
  13. Internet
  14. Imaging
  15. Household appliances
  16. Health Technologies
  17. Petroleum and Petrochemical Technologies
  18. Laser and Fiber Optics
  19. Nuclear technologies
  20. Materials science

Whether it was railroads, steel or oil in the 19th century or any of the above developments in the 20th, each represented sparks that drove industrial advancement and, indirectly, the stocks of companies in those industries that lead markets higher.

But what about the 21st Century? So far, there seems to be little leadership in any field, be it technology, business or politics. Since entering the new millennium, our country was attacked for the first time since Pearl Harbor, we’ve been stuck in two wars (the longest in our history), we’ve had two financial bubbles burst and, as a result of one, suffered the worst recession in nearly 70 years. Finally, at the risk of sounding political, the country has been without leadership and direction through two administrations.

No wonder the stock market can’t move ahead. And it won’t until it finds new technologies, new industries, new growth vehicles, new catalyst to spark this century’s “go-ahead” enthusiasm. That’s where the country’s leaders should be focused. Rather than looking out for the interests of minorities (those without health insurance, those who aren’t legal aliens, those who default or are underwater on their mortgages, those who are on unemployment insurance, those who haven’t saved up enough for retirement, those who want to build a mosque near WTC site) – they should focus on the rest of us.

Rather than focusing on the minority, they should fund technological innovation, incentivize capital investment, reward risk taking and innovation, spur hiring in ways that help the majority. That’s what made the country great 1800’s and 1900’s and that’s what will help it not fall too far behind in this century.

August 13th, 2010

Breaking Into the Circle of Fear

When I was a kid in Sunday School, our teacher asked the class “How do you know if a prophet is good?” Hands shot up. “If the people listen to him” the first student answered. A second said “If his prediction comes true”, a most logical response. After shooting down similar answers from half the class, the teacher finally said “If his prophesy doesn’t come true.”

“Huh?”, the class said befuddled. “What’s he talking about?”

The teacher finally said “He’s a good prophet if the people hear his prophesy of doom and change so that it doesn’t happen. He fails as a prophet if the people don’t listen to him and they perish in the forewarned calamity.”

I can’t bear to hear any more from Nouriel Roubini, Robert Shiller, Peter Schiff or any of a handful of other prophets of financial gloom. Were they good prophets since they predicted way back when the housing bust, mortgage meltdown, or rush to gold and other safe haven investments? Actually, they weren’t good prophets because we either didn’t heard them or, if had, we didn’t believe them enough to act on their warnings. But yet they’re still around, still being given mics and still spewing their prophecies of gloom.

An on-going debate I have is whether this economy will ever get off its back and on its feet if the housing market doesn’t first hit bottom and start coming back. In other words, in this cycle of

  • foreclosed housing,
  • stubborn unemployment,
  • fear of deflation,
  • fear of inflation,
  • lack of business spending,
  • lack of bank lending,
  • ballooning Federal debt,
  • broken state and local budgets,
  • tax increases,
  • federal stimulus spending,
  • burgeoning consumer savings rates,
  • cash hoarding by businesses,
  • no-win wars,
  • shrinking $US and rising import prices,
  • economic anxiety,
  • economic uncertainty,
  • economic malaise

which is the cause and which is the effect. If we array all these problems in a circle, which link, if removed, starts the disintegration of the whole circle and begins the path to confidence and recovery. If we can’t deal with them all at once, which item needs to be tackled first, which item might be easiest to fix and offer a fairly certain and high payback.

Hear the voice of FDR in his stirring first inaugural address (the text and an audio excerpt is available by clicking here) and you might hear a good place to start. As you read the speech you’re struck by how often his words then could have been spoken by a leader today:

“This great Nation will endure as it has endured, will revive and will prosper. So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance. In every dark hour of our national life a leadership of frankness and vigor has met with that understanding and support of the people themselves which is essential to victory. I am convinced that you will again give that support to leadership in these critical days.”

Without endorsing the Roosevelt’s political orientation (my political persuasion does leans the other way), I do endorse his optimistic and hopeful style of speech and leadership. We might be able to begin breaking the circle of our current malaise if we were better able to deal with our own anxieties and fears.

A good place to begin, CNBC and Bloomberg, might be to deny a mic to those doomsayers. It’s not like sticking our heads in the sand because we now do know what the problems are. We just need to begin focusing on the problems as manageable and solvable and believing that our future includes prospects of better days. And we could use an inspiring leader to keep us all moving together in the right direction.

August 5th, 2010

Deflation: Déjà vu All Over Again

The last post generated more discussion than most and rightly so. Gloom abounds in and around the market these days. On the fundamental side, there’s the stream of CNBC guests discussing the prospect, risks and negative consequences of deflation. On the technical side there’s the blizzard of warnings sent out doomsayer like the people at Elliott Wave. This is what they wrote in a promotional piece I recently received from them:

“The major stock indexes lost more than HALF their value, but it’s not because “half” of all shareholders tried to dump their stocks. Not even close….More people can still decide to sell, but it won’t take many. When they do, prices can fall a lot further.”

If you want to know how all this will end, I recommend you read “Lords of Finance”, one of Best Books of the Year on the NYTimes Book Review in 2009, by Liaquat Ahamed. Ahamed traces the actions of the four major central banks of the first half of 1900’s from the start of WW I to German hyperinflation to the Roaring 20’s to the Great Depression to the risk of deflation in the US to the start of WW II. Going through it was like reading a historical mystery, you couldn’t wait to see what the next shoe would be to drop.

It was also perhaps a little like reading a science fiction novel since the similarities between then and now was so eerily similar. Reading the last few chapters also revealed what might be down the road in our future. The economy in 1931 was in the Great Depression and, like there is today, there was also a great divide between those wanting budget cuts and increased taxes to balance the budget and those who wanted the US to increase Federal supports. The constraint was that the US was on the gold standard. That meant that government finances were limited by the amount of gold held by the Fed and the Treasury.

Deflation was the fear then too and no one knew how to end it. After consulting with economists of different points of view, Roosevelt surprised them all shortly after taking office by taking the dollar off the gold standard, effectively resulting in a $US devaluation.

“Taking the dollar off gold provided the second leg to the dramatic change in sentiment, which had begun with the bank rescue plan, that coursed through the economy that spring….injected $400 million into the banking system during the following six months. The combination of the renewed confidence in banks, a newly activist Fed, and a government that seemed intent on driving prices higher broke the psychology of deflation, a change reflected in almost every indicator. During the following three months, wholesale prices jumped by 45 percent and stock prices doubled. With prices rising, the real cost of borrowing money plummeted. New orders for heavy machinery soared by 100 percent, auto sales doubled, and overall industrial production shot up 50 percent.”

I’m no economist, but I disagree with people like Larry Kudlow who continue to argue for “kind dollar”. He recently wrote

“In sound-money terms, it would be okay with me if the Fed held the monetary base steady for a long, long time. That would keep the dollar stable and would probably keep gold prices steady. If investors actually believed in a stable policy, perhaps the greenback would rise while gold fell.”

I think that, if it becomes more an more apparent that we are on the verge of sliding into a deflationary period, I would keep my on the following indicator:

That’s the US Dollar Index. It worked to stave off deflation in the 1930’s and 40’s and it will probably work now. Plus, perhaps the only way we can pay off our debts is to deflate our way out of them. It wasn’t a bad strategy then and it may not be a bad one now.

April 18th, 2010

From Jaw Boning to Sledge Hammer

I was fairly sanguine about the course of the market over the near term but Friday’s events surrounding the SEC and Goldman Sachs was chilling. It reminded me of something I had written on January 22 entitled “Jawboning Didn’t Work in 1962; It Doesn’t Work Today“. It’s worth reading again.

For those who may have missed the piece, it dealt with apparent, at the time, similarities between Obama’s lashing out at banks and Wall Street, on the one hand, and J.F.K.’s attach on the steel industry in 1962. What was the price on the stock market of Kennedy’s confrontation with Steel, a sector that was a larger portion of the economy then than it is today? From the day of the news conference to June 26, the market suffered a mini-crash of 22.9% over the next two months (Obama’s tirade cost the market 8.13% in 14 trading days!).

On January 21, Obama said the following about “financial reform”: “We have to get this done. If these folks want a fight, it’s a fight I’m ready to have.” Friday’s announcement of a suit by the SEC against Goldman Sachs seems to be his dropping the jawbone and picking up a sledge hammer. Will this fight end with GS or will it spill out to mangle and mutilate the prospects of the whole industry? Will this and any future action against one of today’s largest industry undermine the nascent recovery in these stocks and, indirectly, the whole stock market?

But market participants seemed to have regained their footing after the initial adverse reaction to Obama’s speech. In addition to a 13.64% recovery move since the correction, trading volumes also seem to have picked up (click on image to enlarge):

Average volume of the stocks comprising the S&P 500 Index (as reported by Yahoo-Finance) reflected in the 50-DMA line turned up for the first time since September 2009 as the sales volumes increased every so slightly due to the panic aroused by the uncertainties of Financial Reform and the European sovereign debt crises, both occurring in February. On Balance Volume continued to trudge higher (light line) indicating that volume on up-days continue to surpass down-days – a promising prospect.

Will market participants again shy away from more commitments? Will all that supposed “money on the sidelines” stay there with already committed funds reverting back to cash positions? Will all this discussion concerning Financial Reform be the catalyst for a major correction that many have been waiting for? And will the coming mid-term elections (see “Mid-term Elections in 2010 and the Stock Market” of January 28) be the antidote that brings the market back to recovery? We won’t know for several weeks.

But I’m standing up the dominoes once again to see if the market is going to start knocking them down (click on image to enlarge):

The market dynamics still look strong even in the face of the damaging news on the political front:

  • The four moving averages indicating momentum are still trending up.
  • The index itself is still within an upward sloping channel within the major recovery move since last March 9.
  • The dashed red line was identified in February as the potential neckline of a reversal pattern; if a correction resulting from “banking reform” does materialize, that might still be the last line of defense. Interestingly, it converges with another bulwark for the bulls, the 200-day moving average.
  • Each of the moving averages and trendlines, if violated, represent another need for becoming increasingly more cautious and take more steps to liquidate some holdings and move, once again towards higher cash balances.

But lets not count any “black swans” until they hatch.

p.s. For those who follow this sort of thing, remember that the period to April 28 is supposed to be the bearish lunar phase.