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A Lackluster Bull Market In Stocks

May 10, 2015

The one word that best describes the stock market since early March would be “lackluster,” a market that’s neither hot nor cold.   The Dow Jones Bear’s Eye View (BEV) chart below begins at the absolute bottom of the credit crisis bear-market.  Using the Dow Jones starting point of 09 March 2009 (6,547) gives the impression that it is a new high for the move, which it is if you begin the series on 09 March 2009.  Have a look at the Dow’s BEV plot as it rises above and falls below its -3.75% line.  Then look at the green box I placed after 02 March of this year.  It’s been oscillating between -1.25% and -3.30% (call it a 2% band) from its last high of the move on March 2nd until today, with the Dow Jones jumping up once again on a bogus employment report.   There hasn’t been a two month period this lackluster at any other time over the past six years.  The BEV chart also shows it’s been four years since the Dow Jones’ last double-digit correction.  Since 1982, for the Dow Jones Industrials that’s a long time. 

Question: with the Dow now only 0.53% away from making a new all-time high, will it go on to make new highs or return to its trading range of the past few months?  If this is a bull market it had better take out its last all-time high pretty soon, especially now that it’s so close to making one.  As for myself, I’m still a bear on the stock market.  Even if the Dow Jones were to make a new all-time high I still think there’s more room to the downside than up.

However, there’s still no denying the Dow Jones has been a raging bull for the past six years.  How raging you ask?  With decades of market history compressed into a 100% band by the BEV plot, each data point of 0% (aka BEV Zero) indicates a new all-time high (or high for the move before 05 March 2013 above) and -100% indicates a total wipeout of market value, allowing us to compare  empirically one era of market history to any another. 

The tables below tell the story.  The table on the left shows the frequency distribution of daily closing BEV values for the Dow Jones BEV data from January 1900 to January 2000, all 31,288 NYSE trading sessions during the 20th century.  The 0% row lists the number of daily closings when the Dow Jones made a new all-time high (1,231 days / 3.93% of total days).  Since some days may be only pennies away from making a new all-time high, the -0.000001% row catches all trading days just short of making a new all-time high to -4.9999% from making one (6591 days / 21.07% of total days).  Note the -50% row; it includes the losses during and after the 1929-32 -89% crash.  Almost the entire 1930s and most of the 1940s had passed before the Dow Jones once again came within 50% of its 1929 top.  After its 1929 top The Dow Jones didn’t see another new all-time high for 25 years until November 1954.  But despite the depressing 1930s and war-torn 1940s, the 20th century at the NYSE was one roaring bull market.

The left frequency table is another way of seeing how the Dow Jones was inflated from 68.13 to 11,497.12 in just one century, an increase of 16,705%.  Adding together the 0% and the -0.000001% rows we see a full 25% (one of four) daily closings during the 20th century were either new all-time highs or within 5% of becoming one.  Compare that performance with the frequency table to the right, the action at the NYSE since the bottom of the credit-crisis bear market (BEV chart above): 82% (eight of ten) of all Dow Jones daily closings have been BEV Zeros or less than 5% of becoming one.

Now let’s compare the performance of the Dow Jones’ over the past six years with its performance during the last six years of the Roaring 1920s bull market (below).  Note on the Roaring 1920s frequency table (left side):  the NYSE during the 1920s also traded on Saturday.  So even though both tables cover six years we see more trading days from 1923 to 1929.  Still the past six years have seen more BEV Zeros and days closing within 5% of their last all-time high than did the last six years of the 1920s Roaring Bull Market.  Note also that during the 1920s’ the Dow Jones saw 55 daily closings between 25% & 29.99% from their last all-time highs, whereas the post credit-crisis bull market’s most severe declines  have been less than 20% (eight days / 0.51% of total days).

Remarkably, the six year performance of the Dow Jones during the 1920s (309%) was almost twice that of its post credit-crisis advance (179%).  Remember though that in the 1920s the glamour stocks were the blue-chip industrials, that hasn’t been true for decades.  So all things considered, a six year 179% advance in the Dow Jones is fairly impressive.

So what the heck is going on here?  Washington’s politicians looking for a quick fix for the mortgage crisis, academics controlling “monetary policy,” and Wall Street’s bankers clamoring for public bailouts from their fraudulent financial schemes have ignited the greatest and most grotesque bubble in stock market history. 

But all booms and busts are purely monetary events, as seen with the Roaring 1920s boom and depressing 1930s crash.  Below we see how the 1920s’ Dow Jones bull market (Red Plot) floated upward on a sea of rising “liquidity” (Blue Plot) flowing from the newly created Federal Reserve, until it began capsizing in September of 1929, a full month before the banking system began withdrawing its “liquidity” from the stock market.

Below, we see the same vicious cycle in NYSE Margin Debt repeating three times since 1979, with credit flowing to Wall Street from the Federal Reserve igniting three booms and two busts, with a third bust still awaiting its triggering event in the fixed income or derivative markets before it becomes operational. 

Within the red circle covering this past year we see something unusual, unlike every other peak in margin debt since 1926:  for more than a year it has oscillated in a tight range around 450 billion dollars.  I don’t understand why, but I suspect the market gains over the last year have been more due to Fed intervention and corporate share buyback programs than to retail investors speculating on margin.

But keep in mind that the “policy makers” ability to levitate market valuation is finite.  Banks, both foreign and domestic have now “monetized” all of the US national debt in existence up until Obama’s inauguration in 2009 (chart below).  The US banking system’s free reserves now include the entire US national debt at the time of President Reagan’s second term of office, which today amounts to only 14% of our current national debt.

The table below breaks down the data, with the right side (lower portion) containing the data used in the chart above.  I’ve also included data from the Barron’s 08 January 2007 issue (left side), a week when all seemed well with financial markets before sub-prime mortgages began to decay, to focus a spotlight on the monetary frenzy of the previous eight years.  The global banking cartel used up a lot of ammo rescuing Wall Street from itself and maintaining inflated market valuations.  Just look at the US banking system’s free reserves.  Over the past eight years they’ve increased from $1.25 billion to $2.52 trillion dollars – three orders of magnitude and a double!

The table above makes it clear why pension funds and insurance companies (private sector) have been forced to purchase lesser quality debt for their reserves; banks have been hogging the supply of US Treasuries debt trading in the fixed income market.  Using free money from the Fed, banks are purchasing Treasury debt at unrealistically high prices to keep yields low so the US Treasury can pay all its bills, allowing politicians to continue spending freely: not just your tax dollars, but even more money that they borrow into existence.

Yet despite all this, over the past two months the Dow Jones’ performance has been lackluster.  And it’s not just the Dow Jones performance which has been lackluster; the Dow Jones Total Market Group (DJTMG) 52Wk High-Low Ratio has been trending steadily downward since Barron’s 20 May 2013 issue (far right star).

I also track the 3Year High – Low Ratio, chart (below).  It takes a lot to move a stock or market group from a 52Wk Low to a 52Wk High, and even more for a 3 Year high.  The same can be said about moving from a 52 Wk or 3 Year High to a new low.   These charts provide a unique view of the ingrained bullishness of the past few decades, especially the 3 Year data.  During the 1990s seeing even one of the DJTMG indexes reach a 3 Year Low was a rare market event.  Even during the high-tech bear market the DJTMG wasn’t overwhelmed by 3 Year Lows.  But all that changed during the 2008-09 credit crisis.  With zero interest rate policy since 2008 and three unprecedented programs of QE, the DJTMG’s 3 Year High-Low Ratio rose from -65 during the credit crisis to 56 in Barron’s 20 May 2013 issue.  But since 2013, it too has turned lackluster as the groups continue to drift down from their 3 Year Highs.

Barron’s 20 May 2013 issue seems to be a high-water mark for both the 52Wk and 3 Year H-L Ratios, so let’s look at what was happening with the DJTMG in May 2013 below.  58 of 76 market groups made a new 52Wk High.  And groups not making a new 52Wk High (#59 to #71) missed by only single digit percentages from being one.  And notice how far these 52Wk Highs had moved from their 52Wk Lows: Airlines (#1) had moved 86% above their 52Wk Lows in Barron’s 20 May 2013 issue.  Groups #1-5 were all more than 70% above their 52Wk Lows.  Only Aluminum (#72), Coal (#73) and Gold Mining (#76) failed to realize double digit gains from their 52Wk Lows, with gold miners actually making a 52Wk Low.

But that was two years ago; since then the market has bogged down as seen in the table below.  It’s not just that the number of new 52Wk Highs has been reduced; #8 through #45 are in scoring position being less than 5% from making a new 52Wk High.  The problem is that the market has become lackluster, as seen in the percentages these groups are currently above their 52Wk Lows (Blue column below).   All the 52Wk advances of 50% or more seen in May 2013 are now gone.  The best performing group now is the Biotech group (#38).  It’s 41% above its 52Wk Low, (but note that it’s fallen 4.48% from its 52Wk High).

One group, DJTMG’s Home Construction Group, tells the story of many of the other groups.  It made a substantial move from October 2011 to July 2013 pushing its 52Wk High line higher as it advanced, dragging its 52Wk Low Line upward with it, earning the #3 position in May 2013.  But the Home Construction group has lost most of its steam and now is #61 in the table above.  Like most of the DJTMG indexes in the past two years, it continues to advance, but not with the enthusiasm it had before 20 May 2013.

Lackluster, that’s what a market becomes when an old bull gets tired.  One of the tricks Alan Greenspan and Doctor Bernanke used to do was to hide in the bushes with a big syringe of “liquidity” in their pocket.  Any time an aging bull appeared to be slowing down they jump on the dumb beast and give it a big shot of encouragement.  Maybe it’s time Janet Yellen shows the bull her needle.

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