My NY Agents reported that on Thursday 04 Feb, things got a little out of control in Lower Manhattan. Attempting to get the "inside scoop", they were incognito outside the NYSE, posing as Pro-Bear PETA Protestors, when a speeding pickup truck, coming from nowhere, crashed into the Bronze Bull Statue not far from the Stock Exchange. Spock and the guys never got the chance to see what happened, as right at that precise moment, ten "So-Called" Cops came, covered them with Blankets, and took them back Up-Town for "questioning."
I told them thanks for the hard work, but they're going to have to call PETA for a lawyer. If Doctor Bernanke knew they were working for me, they would for sure get Camp Gitmo! I made that very clear; they know I'm only thinking of them. Anyway, I had to finish my weekly report for all of my readers. With the DJIA and Gold in freefall, I have no time for their personal problems. I hate this. First it was the Black Helicopters, and now it's some "So-Called" Cops? Things are heating up on Wall Street! We all agree my boys deserve Combat Pay, but where's The Bear?
As far as the Bear Race Chart goes, I note that in Wk 121 in the Great Depression Bear, it became a BEV -80% Bear. Our Bear Market is a long way from that. But President Obama, and the Congressional Leadership are doing everything in their power to correct this situation.
Below is the DJIA Volatility's 5 Day M/A & BEV Chart
Historically, the typical DJIA's daily moves, from one close to the next, are less than 1%, actually less than 0.75%. This week we had three of the five daily closings, more than 1% from the previous day's close, and one of those was a 2%er. If the "Policy Makers" didn't step in on Friday, it would have been 4 of 5 days with more than a 1% move from their previous day's close. With bad news from Europe, they didn't want to face next Monday with Thursday and Friday of this week seeing two big down days.
I still see "Experts" on CNBC recommending financial stocks. I think that's reckless. Here is a Chart of the NYSE Composite and Financial indexes starting on the DJIA's Terminal Zero; its last all-time high of October 2007. The Financials have underperformed the General Market for over 2 years.
The NYSE Financials have been in a topping formation since last August, with no sign of reversing. We should note the Financials saw their resent highs last October, and have been in decline since then. Doctor Bernanke's "Injections" aren't working like they use to. The NYSE Composite is looking very top heavy. There has been no significant movement in these Indexes since last September - we're due for a big move. I expect it will be a big move down.
We had a negative NYSE 70% Advance - Declining Share Day on Thursday. I calculate the data as a ratio of A-D / Total Number of Shares Traded. Volatility is the Bear's Calling Card, and NYSE 70% Days, when they come in clusters, are indicators of Extreme Market Volatility. This last NYSE 70% Day is part of a cluster that started in March 2007. It doesn't even stand out in this long term chart.
Solitary NYSE 70% days, both positive and negative, are the result of good or bad news that moved the market for a day or two, but didn't have long term significance. But the clusters that run on for years are a different matter altogether! And the fascinating thing in the data is how poisonous positive NYSE 70% days are. Look at what they did in the late 1930s.
Note my data begins in April of 1933, so we're not looking at the Great Depression Bear. And during the early stages of the 1932-37 Bull Run, there were plenty of positive NYSE 70% Days. There was also a BEV -37% Decline during the DJIA's Best Year Ever. From July 1932 to July 1933, the DJIA soared 163%, with a BEV -37% decline sandwiched in between. See my next Chart.
Obviously everyone in the early 1930s were traumatized by Battered Shareholder Syndrome; traders' nerves were on a knife's edge. But by 1935, the NYSE calmed down. After 3 years of good markets, the stock market in 1937, must have finally realized financial death no longer stalked Wall Street. I say that because the NYSE 70% days almost stopped. And look, the positive NYSE 70% Days stopped for the last 2 years of the 1932-37 Bull Market.
However, after the DJIA's March 1937 Terminal Zero (Green Line Marking the DJIA's Last All-Time High) the NYSE's 70% Breadth Days again became a regular feature in the Stock Market. These post 1937 Positive 70% days provided no lasting comfort for neither Bull nor Bear. The DJIA saw a BEV -40% Bear Market Bottom on 22 November 1937, and then a BEV -50% Bear in April 1942. The DJIA would not exceed its March 1937 High until December 1945.
So why are positive NYSE 70% Days so bad? Because after the Bulls' Bacchanal of cheap money and easy credit; Mr Bear comes to Wall Street hating everybody. One day he mauls the Bulls, then a few weeks or months later, he turns cannibalistic and feeds on his own kind. How easy is it making money shorting the market, when Mr Bear blind sides the Shorts with a +10% day when they least expect it?
Let's take a look at our current chart of the NYSE's 70% Breadth (70% A-D) Days. Since March 2007, about the time Bear Sterns must have been aware they had problems with their Sub-Prime Mortgage portfolio, we've seen a couple of NYSE 70% Day every few months. From October 2008 to March 2009, when we had our BEV -40% & 50% bottoms, two or three 70% Days a week was typical. Normally we only see a NYSE 70% Day once every few years! Frequent big breadth days are now an established, long term pattern. That isn't good for the Bulls.
As I expect the 2007-10 Bear to be a similar market event to the 1929-32 Bear, I'm anticipating multiple positive NYSE 70% Days in the next few months. But that won't happen until the DJIA declines to a point where everyone knows Mr Bear is Back. I anticipate seeing Bullish Market Commentators cheer every time we have a positive NYSE 70% Day. Remember, + 10% day moves for the DJIA are exclusive Bear Market events. History tells us when NYSE +70% A-D Days occur within a cluster pattern, it's only the Bear eating his own. He will come back later to deal with the cheering Bulls.
That's what I'm expecting, but only time will tell if I'm correct. Until then, just keep telling yourself the driver of the pickup truck my Men saw slam into the Bronze Wall Street Bull was only a Government Regulator who couldn't find any other place to park his pick-up truck. It happens. But, with a bad omen like that, you should reduce your investments in the Stock Market and raise cash. Really, you should because Mr Bear has many financial issues to discuss with "Policy Makers" worldwide.
Gold and silver are taking a good whacking. They'll come back up. But there is fear that the Euro may fail. The European Central Bank is only an experiment: the Euro is a currency, issued from a Central Bank, with no Country to call its own. The Euro is just another of those really bad ideas that somehow always becomes manifest when Keynesians Economists control a University System.
Don't think the Bear doesn't read the newspapers. He knows all about Paper Money Scams. If gold and silver are going down in Wk 121 of the 2007-10 Bear, it's only because Bankers and Politicians fear what would happen if they were to go up. Remember, Gold has been removed from the World's Monetary System since 1971, and 40 years later, the world is now crummy with paper money. That means that currently Gold doesn't have a single friendly government, in the entire world, to support it. Every government in the world cooperates in its price suppression to protect their paper currencies. But incredibly, Gold has still risen for the past nine years!
Most importantly to us, we know Mr Bear never has, or ever will, care what the world's governments want Gold to do. He rather likes the idea of rising Gold Prices * because * of the pain and suffering it will cause the world's governments, and their citizens.
As he will be calling the shots for the next few years, you should like Gold and Silver too! Purchasing Gold and especially Silver Coins are the safest ways to Short the Stock and Bond markets. Keep it simple - and safe.
We see the DJIA's Step Sum turning down, and taking the DJIA with it. This could very well be the pattern we will see for the next year.
I've received some letters asking about the Step Sum's Bull and Bear Boxes. I've never really covered these technical indicators properly. So I spent a good portion of Wk 121 in correcting this lapse on my part. In the process, I learnt a lot too.
Over any given period of time, there are only three things the valuation of an asset, financial or real, can do:
Because the Step Sum's trend is dependent upon the trend of its Asset, as it travels from Bull to Bear Markets, and back, it's expected the Step Sum should track with, and so confirm the Asset's Price Trend. But interestingly, there are times when the trend of a Step Sum diverges, for months or years, from the trend of its Asset. At such times, a Lundeen Bear or Bull Box forms.
Let's take a look at some examples, first the Bull Box that formed after the devastating bottom of the Great Depression Bear Market. After the 89% decline from 1929-32, from July 1932-33, the DJIA saw the best year in its 125 year history: 163.63% in a single year!
As we can see in the chart below, the DJIA and its Step Sum's tracks were in synch with each other from January 1931 to July 1933. Or as the Navy would put it: from 1931-33, the DJIA and its Step Sum "were steaming in close formation." However, after July 1933, their tracks diverged with the DJIA "Maintaining Course 090" (Due East) while "maneuvering" to avoid The Bear's torpedoes, while its Step Sum made a "Hard Right Rudder to Starboard, to a new course at 180" (Due South). A Lundeen Box was formed.
Oh by the way, when two Naval Ships are steaming together, both ships actually maintain a "Dead Reckoning Plot" that looks much like these charts.
The Step Sum is a sentiment indicator, derived from the price movement of the Asset itself. To the Survivors of the Great Depression Bear Market, and there were darn few of them, after seeing the DJIA soar 163.63% in only 12 months, the smart move would have been to take the money and run. This is exactly the sentiment we see in the DJIA's Step Sum above. Remember, the Step Sum is a Single Item A-D Line, in this case, of the DJIA itself. So from July 1933 to October 1934, we see more days on the NYSE closing down than up, especially after May 1934! But the price of the DJIA ignored its own A-D Line, the Step Sum, and trended sideways for 15 months.
The Bull "Came out of its Box" in October 1934, as the trend of the Step Sum, reversed and took off, taking the DJIA up to its 1937 highs. But, would this have been a Bear Box if the DJIA had broken downwards, in agreement with its Step Sum? No it would not have been. Why? Because with this Report, I'm nailing down the rules and technical parameters of these Boxes. The only trend that really matters is the Asset's Trend. The Bulls and Bears invest money in the Asset, not the Asset's Step Sum. So it's logical to name the Box after the Asset's Primary Trend. The Box is confirmed when the Step Sum is proven incorrect, and is forced to reverse and confirm the Asset's Trend.
So a Box forms when an Asset's price and its Step Sum trends diverge, signifying an internal struggle between the Bulls and the Bears as to the correctness of the Asset's current trend. The Box is closed when the Step Sum reverses its trend, and once again tracks with the trend of the Asset's price movement. There are times when the Step Sum has it right, and the DJIA reverses. But when this happens, the Box is invalidated.
In the 1980s, the DJIA and its Step Sum formed two Bull Boxes. On the first day of the 1982-2000 DJIA Bull Market, a Bull Box formed as the DJIA's price trend took off, while it's Step Sum treaded sideways from August 1982 to January 1983. The Bull came out of his Box when the Step Sum's trend reversed and confirmed the DJIA's Bullish trend. The next Box formed 21 months later, in October 1984.
The Step Sum is a sentiment indicator, and in October 1984, Bears were in great abundance. Remember, to the 1984 stock investors & traders, their memories were of the 1960s & 70s, and for 20 years, there was nothing more Bearish than seeing the DJIA trading over 1000. Seeing the DJIA rising as its Step Sum is crashing is an impressive display of market strength! Once again, the Bull came out of his Box as the DJIA's Step Sum's trend reversed, taking the DJIA up to new highs.
In this battle between the trends of an Asset and its Step Sum, sometimes the Step Sum wins, as it did with the DJIA from 1971 to 74. From November 1971 to January 1973, a Bull Box formed in the Orange Rectangle.
However, the Step Sum had been declining since May 1971, and proved a better predictor of the future than the DJIA's price trend. The Bull Box Failed in January 1973, as the DJIA collapsed into its first -40% Bear Market since 1942.
Prolonged periods (months or years), where these two trends diverge are infrequent. And whether they form a Box or not, investors would be wise to take note of their occurrences.
In the Chart below, we see the trends diverging from 1947 to 49. The DJIA had seen a 100% gain from 1942 to 1946, and then corrected 20% from its 1946 highs. Put yourself in the situation of the 1947-49 stock investors. Investors were still very much aware of the 1937-42 BEV-50% & and the 1929-32 BEV -89% Bears. They had just seen the DJIA gain 100% from 1942 to 46. Was this 20% decline a Bull Market correction, or something else?
In 1949, it proved to be just a correction in a Bull Market that continued to the mid 1960s, just as the DJIA's Step Sum indicated.
First of all, we should note the Step Sum's action during the October 1987 Market Crash: "Crash? What Crash? Full Speed Ahead!"
At the time of the 1990's DJIA's downward plunge, the Pink Oval could be called a Box, But it was the DJIA's trend that reversed itself, so it's not a Box. But I note that the Step Sum did have a slight downward budge to it. And like the DJIA, the Step Sum ended at about the same place where it started, as did the DJIA when it returned to its old highs in 1991. Unlike the 1987 Crash, all and all, the Step Sum did little to clarify the situation from 1990-91.
The 1991-92 Bull Box is a classic clash of the Bulls and the Bears! And if you look real close, the Bears did force the Bulls to reverse the DJIA's trend in December 1991, invalidating the Box for a few days. But the Bulls had Doctor Greenspan on their side in the 1990s, and the Box was confirmed by early January 1992.
In January 1992, Doctor Greenspan used to regularly kick sand in the Bear's Face. But those were the good-old days.
Above we see Weekly DJIA data with the Fed Funds rate. Not obvious in the above chart is what was happening in the late 1980s. The Leveraged Buyouts Bubble, funded by Junk-Bond Financing, via the "Junk-Bond King" (Michael Milken) was deflating. Many NY Banks had "bridge loans" to bridge the "LBO Artists'" financing until the Junk-Bond Deal was done, when they would repay the Banks' loans. Unfortunatly, late in the 1980s, many of these deals came undone, leaving the Banks with a multitude of bad loans on their books.
Sound familiar? It should! So Doctor Greenspan flooded the markets with "Liquidity", bailing out the Banks, and much of this "Liquidity" flowed into the Stock Market. In the early 1990s, as Fed Funds approached 3%, Barron's noted savers were abandoning their savings accounts at banks, for lack of a decent rate of returns on savings, and were heading to the Stock Market in search of Capital Gains.
In the early 1990s, I doubt Doctor Greenspan spent much time thinking about the Stock Market. His lowering of the Fed Funds rate was intended to save the Banks from their Junk Bond Follies. But by 1999, the Stock Market was all he thought about. It was his low interest rates that pushed the American People away from banking deposits and US Savings Bonds in 1992, and motivated them to risk their money on Wall Street.
A very strong case can be made that the late 1990s High-Tech Stock Bubble, was the consequence of the Fed Bailing out the Banks from their 1980's Leverage Buyout, Junk Bond Bubble. And the 2000-07 Housing Bubble was the consequence of the Fed Bailing out the Middle Class's Retirement Accounts from the 1990's High-Tech Bubble. Now in 2010, Bernanke has to worry about the Banks, the Stock Market the Real Estate Market and horrifyingly: the US Dollar itself!
This is what happens when academics interfere in a market: they prevent asset bubbles from deflating with ever increasing doses of "Liquidity" until the Monetary System itself becomes the last Bubble standing. Would the world be any worse off if "Monetary Policy" was managed by "C Average" High-School Graduates? These Doctors in Economics are killing us!
One last Step Sum Chart for our current Bear Market. I don't see any boxes forming just yet. Both Bull and Bear Boxes tend to form at bottoms. I only note how it took only 25 net Down Days in the Step Sum, from October 2007 to March 2009 to drive the DJIA into the #2 Position of Record Bear Markets. Only 25 net down days over a period of a Year and a Half took the DJIA down 53%. That just seems odd to me.
What would this chart had look like if Congress, the US Treasury, and the Big NY Banks didn't have all that TARP to "Stabilize" the market with a year ago? I think we would have seen more than 25 Net Down Days! On the Recovery from last March's lows, we saw 34 net up days in the Step Sum. I don't think I'm risking much saying this market seems to go down easier than it goes up.
The Step Sum is an indicator of market sentiment. When the underlying sentiment is bullish, the Step Sum rises. When bearish, it falls.
Think of the "Step Sum" as the sum total of all the up and down price "steps" in a data series over time; an Advance - Decline Line for a data series derived from the data series itself. Logically, bull markets will have more net up days, while bear markets will have more net down days. Understanding the Step Sum is no harder than that.
Since August 1971, when the US "Closed the Gold Window", refusing foreign Central Banks their legal right of converting their paper dollars for US Gold, US Treasury Debt replaced Gold as the world's major reserve asset. That seemed like an Okay idea in 1971, but forty years later, the World is having second thoughts.
I don't have this data going back to 1971, but from 1995, we see the US Exporting its domestic inflation to our trading partners, whose Central Banks then purchase US Treasury Bond. That makes these US Bonds bank reserves, and since 1995, these banks have increased their reserves by 560%. And what happens when Central Banks expand their reserves by 560% in only 15 years? Financial Bubbles! But this expansion in Banking Reserves has been going on for a very long time. In the 1980s it was the Japanese Real Estate market, thirty years later it's Greece's Sovereign Debt, and in between there was the US Stock and Real Estate Markets.
What do these Wealth Destructing Financial Bubbles have on common? For one thing, this chart below. The other they have Keynesian Professors teaching Economics in their Universities.
Here is how much of the US National Debt is used for domestic and global banking reserves.
Foreign CBs are still buying US Treasury Debt, but as a group, they are refusing to hold more 25% of the US Treasury Debt's total float. So to finance the US's Trillion dollar deficit, the Federal Reserve had to step in. The question I have is how long before the Foreign CBs start selling their US Bond portfolio? Maybe never as what would they sell them for?
Here is a Bear's Eye View (BEV) for the holdings of US Bonds by Foreign Central Banks. Remember, every time the plot rises to the BEV Zero line, it's a new all-time high in the Foreign CBs' holdings of US T-Bonds.
During the 1990s, Foreign CBs could sell down their US T-Debt by a few percent in the course of business and not produce any Global Earth Quakes. The Big Down Spike was the result of the "Tiger Economies", credit panic. The World's CBs sold 15% of their US Treasury Bonds in 1998, and the Sun still rose morning after morning.
Here's the BEV Chart for 2002 to 2010. It provides a clearer picture of the current situation than the BEV Chart above.
So far, the CBs are holding their "Reserves" of US T-Bonds, but it's not because they love them! If they wanted to sell, who would want to buy them? In 1998, the bond market could absorb 15% of the World's CBs US Bond reserves. In fact, the yields on the US Long Bonds fell as the CBs sold.
But then shouldn't have such a flood of US Treasury Debt coming into the market made the yields rise? Not when Doctor Greenspan was Fed Chairman! Check out the CBs BEV Chart spanning 1995 to 2010. As soon as the CBs started to sell in May 1997, to the Week they stopped a year later, the Long Bond Yield dropped. Very suspicious!
What a week for Gold and Silver. These Charts by Kitco shows what happened when the DJIA was melting down on Thursday, and the NYSE had an A-D Day of -81.48%.
Silver suffered too!
Why did Gold and Silver have a bad week? For the same reason US Bond Yields Fell from May 1997 to May 1998 - The Fed and the US Treasury made it happen. Put your self in Doctor Bernanke and Secretary Geithner's place: since 1971 the Financial markets have become bloated with US Dollar inflation, while the world's supply of Gold and Silver, in comparison, hasn't increased to any significant extent. Actually, Silver's above ground supply has shrunk.
Washington knows there is a tipping point where wealth will abandon US paper financial assets, seeking the safety of Gold and Silver. This is going to happen; no one can stop it. But Washington is buying time by flooding the paper derivatives market with paper promises of delivery of Gold and Silver that doesn't exist. It will all end badly for the US Dollar, but what that means for the price of Gold and Silver is incalculable. Can Gold rise above $10,000 an ounce? Sure it can! But when it does, how many people with an ounce of gold would be willing to exchange it for $10,000?
Personally, I really don't care how many dollars an ounce of Gold or Silver are worth, as a dollar, thanks to people like Greenspan and Bernanke, isn't worth a damn thing! The day is coming when wealth can once again be measured on a bathroom scale. If you are still looking at monthly financial statements to see how "much you're worth", the day is coming when you're wealth will be weighed and found wanting.
Dow Jones -40% Declines From 1885 to 2008 is the article that inspired this race of 1929 & 2007 Bear Markets. You may want to read that article to understand my "BEV Chart."
Dow Jones Industrials Average Market Volatility is the source for my volatility studies.
The Lundeen Bear Box and Step Sum is the source for my Lundeen Bear Box and Step Sum Chart
Note For the Record: Mark Lundeen does not want a devastating bear market in the next two years. However, in full view of Congressional Market Oversight Committees and under the supervision of Government Regulatory Agencies, things were done that I believe will make a historic bear market inevitable. If you have a problem with this bear market, contact Washington, not Mark Lundeen.