The 1929 & 2007 Bear Market Race to The Bottom
Week 84 of 149
DJIA 2% Daily Volatility 8 Day Count Analysis
Continuing Earnings and Dividend Payout Problems
A bad week for the US Treasury Bond Market
22 May 2009
Color Key to text below
Boiler Plate in Blue Grey
New Weekly Commentary in Black
Here is the BEV chart for the Bear Race.
A quick look at the above chart, shows the DJIA sitting fairly well. But life is seldom so simple.
President Obama promised Governor Schwarzenegger enough TARP to keep California from being washed out to sea; gold and silver were up sharply this week, as were the yields on the US T-Bonds. The dollar was down. This is a double whammy for foreign holders of US Bonds.
Higher interest rates change everything! Real Estate, financial and money markets, as well as foreign interest in US assets are at risk if T-Bond yields continue to rise and the dollar fall. I suspect that many big players, those who over the years went along with US "policy makers" to get along in the US Markets, are now stuck with huge positions they would rather not have. I hope these people lose all of their money in their Long T-Bonds & dollar / Short Gold trade. What they did was dishonest. They had the inside scoop from a contact in "policy central" that some market was going to have its honest shorts or longs run out of town and it was going to be so much fun and yadda, yadda, yadda. So now after a few years of excitement and making the big bucks, these guys are now stuck on the wrong side of the market.
No doubt these positions are all hedged. But so were Bear Stearns' investments two summers ago. I expect another derivative fiasco when this house of cards falls. Everything needed for a financial panic is in place. All that is needed is a triggering event. President Obama making the case for bailing out the "un-named favored financial institutions" one more time might do it. Gold at $1100 might light the fuse. There are trillions of dollars out there. The dollar is multiplying like rats in a world with only so much gold and silver. The day is coming when holders of the precious metals or even oil will no longer trade for US dollars if Washington doesn't get control of itself, and soon.
Don't blame capitalism for the coming woes. Lawyers and Keynesian economists have been driving this bus over the cliff for decades. What is really amazing is how long its taken.
Below is my volatility chart comparing 2007's 40 & 200-day moving average closing price volatility with 1929 bear market volatility.
The DJIA 40 Day M/A is falling quickly. The 200 Day M/A will follow soon if the market stays quiet. Seeing the 200 Day M/A still at 2% tells us what a wild year we have had.
Note: 2007 values are actually positive. They were inverted so 1929 would fit on top and 2007 on the bottom. So for 2007, please forget the negative valuations and focus on the percentages.
(Remember, with the 2007 data, up is down and down is up!)
1929/32, Wk 84 200 Day Moving Average Volatility: 1.55%
2007/09, Wk 84 200 Day Moving Average Volatility: 2.11%
Historically, daily 1% swings from the previous day's closing price in the DJIA, while not uncommon, should not occur on an almost daily basis. The stock market is running a fever with its "Persistent, Extreme Volatility."
Changes were made in my above weekly Volatility Table to include NYSE 70% A-D Days and a new technical indicator, the DJIA 2% 8-Day Count, explained below.
DJIA 2% Daily Volatility 8-Day Count Analysis
Or the 2% 8-Day Count
Periods of frequent DJIA 2% Daily Volatility, either gains or losses, are historically hard times for Bulls. In past reports, I've charted the DJIA daily volatility's 200 Day M/A, in percentage terms, from 1900 to 2009 to illustrate this point. However, a 200 Day M/A is very insensitive to daily changes. It takes a month or more of increased volatility to move the average of 200 trading days.
Report 84 examines the DJIA 2% Volatility Days directly using an 8 Day Count. The DJIA 2% Daily Volatility 8-Day Count, or "8-Count", is exceptionally sensitive to changes in the DJIA's volatility extremes. As each data point is only an 8 day sample, the 8-Count registers every 2% day when they occur.
The construction starts by noting DJIA's +/- 2% days (or greater) as logic 1; all other days are logic 0. The plot consists of 8 day running sums for each day, the current day plus the previous 7 days. That's it. The values of the 8-Count range from zero to +8. Remember, DJIA +or- 2% days are all the same to the Bear. I like this indicator as it's very quick to pick-up any change in daily volatility greater than 2%.
The table below shows the construction of my 2%, 8-Day Count for 12 trading days in June 1930.
The chart below plots the DJIA 2%, 8-Day Count for 109 years of the DJIA. My DJIA BEV Plot goes nicely with the 8-Count data.
Excessive DJIA 2% days (up or down) is a Bear Market phenomena. Why does this happen? In the euphoria of the final phase of a Bull Market, many ill-considered schemes find ample financing. They soon prove to be unprofitable schemes, much regretted when the Bear comes to clean up the Bull's party.
But Bulls are an optimistic bunch, slow to understand the rules have changed. Formerly profitable bullish habits turn into expensive bad habits during the Bear Market. So, groupings of large 8-Day Counts show periods when investors are running after Bear Market's bullish corrections, only to flee their losses when the market turns on them. As always, there are exemptions to any market rule. Look at the #3 DJIA Bear Market in 1942. It hit bottom with a BEV -52.20% and an 8-Day count of only 1!
Remember, studying the market is not studying science. Still, if you can find a pattern that repeats 50% of the time, or better, it provides investors with an edge. My 2% DJIA Volatility 8-Day Count repeats well over 50% of the time. So the best way to study the charts below, is to find the times when BEV bottoms don't line up with the 2% 8 Day Count high points, as well as the times they do. Remember, market rules change without notice.
I divided the 109 year chart into 4 to facilitate reading. The first chart spans 1900 to 1926. In the first 26 years of the 20th Century, the BEV bottoms and the high 8 Day Counts line up nicely. Note how the DJIA advances as the 8 Day Count drops.
The 1920 to 1955 chart below is fascinating! The 8 Day Count was huge during the 1930s. With its two massive Bear Markets, this is to be expected! However, when the 1942 -50% DJIA bear bottomed, the 8-count was only 1. What happened?
I can't say anything for certain on this glaring anomaly in the chart below, nor could anyone else. The 1942 Bear happened over 60 years ago. But I suspect the 1942 Bear Market occurred with almost no retail participation. After the 1930s, retail investors gave up the dream of making a killing on Wall Street. So Wall Street was a professional market in 1942, staffed with jaded money managers who survived the 1930s. These professionals made the 1942 Bear Market an orderly retreat. Retail demand for stocks didn't develop again until a new generation was born & raised. Let's call them the Baby Boomers. The 8-Count caught their arrival in the stock market.
This is just a guess on my part. But something significant happened after 1939. Significant groupings of large 8-Day Counts are absent for the next 35 years. The exodus of the Roaring 20's Generation from the market in 1939, and the re-entry of significant retail investing in the 1970s by the Baby Boomers is a logical explanation for the reduced 8-Day Count from 1939 to 1974.
In the chart below, we see the 8-Day Count was subdued from 1950 to 1974. Still, when the BEV chart spiked down, the 8 Day Count rose to confirm the BEV bottom more often than not; and when the 8-Day Count declined, the DJIA raised from its bottom. As I've said before, periods of low volatility favor the Bulls.
But something happened in the early 1970s to increase the number of DJIA 2% Volatility days. My theory that the market shifted from being a professional market to a retail market seems to fit. The late 1970s was when Congress passed legislation for tax-deferred retirement accounts, and the markets again filled with retail investors who had no personal memory of the traumatic 1930s. These events had a huge impact on Wall Street.
I've said it before, and I'll say it again, LOW DAILY VOLATILITY (less than 2%) IS GOOD FOR THE BULLS! This has been especially so from 1980 to 2009. Note below what happens to the DJIA when those nasty DJIA 2% days start to pile up, and when they decline.
The chart below plots the 1990's Blow Off in the DJIA and the two big Bear Markets since 2000. This chart speaks for itself.
Note, from the 17 June 2003 to 11 July 2007, the DJIA had only three 2% Days during a 4 year rise in the DJIA from 9,323 to 13,577 (+45.6%). The 8-Count rested on the zero line for those 4 years. Even during Greenspan's Bubble, we didn't see that. Today, the 8-Count hasn't seen zero since 22 Aug 2008. Since 2000 we have lived in a unique time in market history.
What insight can be gained from these observations? The market is being manipulated with constant "injections of liquidity." Since October of 2007, it seems that the "injections" have not been as effective as they once were. That is what I see. You might disagree.
In the Great Depression Bear, there were plenty of times the 8-Count hit the zero line. So if this indicator hits zero in the near term, it doesn't mean the Bear Market is over. There is still plenty of garbage from the last Bull Market laying around the dance floor for the Bear to eat. And now President Obama is considering bailing out California! China and the rest of the World are not going to like that!! The US Treasury and US Dollar are very vulnerable. Rising AAA bond yields and a falling dollar will be very bad for the Bulls in the stock market.
I'm very curious to see how my 8-count performs in the next year. If (when) it hits a 4, I think the market becomes a sell. But we have to wait and see what happens.
After studying the effectiveness of DJIA 2% Days from 1900 to 2009 in calling Bull and Bear Markets, I've decided to add the "8-Day Count" to my weekly Volatility table above. The NYSE 70% A-D Days deserve notice too.
It's good the DJIA resisted the Bear's assault on the Step Sum. That actually shows strength. But Fudd's Law clearly states: "Push hard enough, it will fall down." Fudd's Law is universal and all encompassing. So if the Bear keeps this pressure on the DJIA, the DJIA will fall down as predicted by Doctor Fudd.
I frequently hear that "green shoots" are sprouting in the economy. Being May, I see green shoots sprouting up in my garden too. But most of my green shoots are weeds. So let's review the DJIA and its Step Sum during the Great Depression era.
The chart below illustrates a fascinating market fact from seven decades ago. From the time the DJIA entered the Lundeen Bear Box until it left, the DJIA dropped from 288 to 180, but the DJIA's Step Sum was unchanged at +60. This means the DJIA was down by -52% with 15 net up days at the 440th day mark of the Great Depression Bear. But after the Bear came out of his box, we can see how it made the Step Sum catch up with the DJIA.
This collapse in the Step Sum is the final capitulation of the Bulls. It's what Bulls do at the end of a Bear Market.
In my article on the Step Sum, (linked below for your review) one can see the Step Sum catch up to the DJIA in the final phase of massive -40% Bear markets. This is the Step Sum's expected climatic act before the termination of a Bear Market. It has been that way since 1900.
When we plot the 1929-32 & 2007-09 DJIA Step Sums together, it seems suspicious that we don't see a climatic sell off in the current Bear Market's DJIA's Step Sum. Why is this Bear's Step Sum resisting 109 years of DJIA history? Well, maybe it's not. Maybe the 2007-09 Bear is operating on its own schedule. The Great Depression Bear's Step Sum tells us that it wasn't in a hurry to finish off the Bulls.
So if you are long and making money, that's good! Just keep in mind that if the stock market going into a true Bull Market in May 2009, a Bull Market that can fend for itself without "liquidity injections" from the Fed or arm-twisting from the US Treasury, it will have done so without the Bulls being chastised with a climactic collapse in the Step Sum. That has not happen since 1900 during the other eight DJIA -40% Bear Markets. It could be different this time, but you're fighting market history if you assume this Bear is finished. Keep this fact in mind every time the financial media talks about all the "green shoots" growing in the economy. Personally, I think the market is full of weeds.
The Step Sum is an indicator of market sentiment. When the underlying sentiment is bullish, the Step Sum will rise. 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.
Continuing Earnings and Dividend Payout Problems
Some people think the DJIA's 30 Companies are too small a sample for the market. Okay, here is the S&P 500's earnings. The larger 500 company sample is doing no better or worse than the DJIA's 30 companies.
This chart below is really bad. But this is what company earnings at the bottom of a massive bear market should look like. These companies are really beat up. But as bad as this looks, I question the accounting that produced these numbers. I'll admit it; I'm not competent to judge the work of the people producing them. But my ignorance in accounting doesn't mean I should have faith in today's accounting standards.
Most investors pay no attention to dividend data, but they really should. Earnings are only as good as the accounting that calculates them. We live in a world where the accounting standards, set and policed by Washington's regulators, catastrophically failed investors in Enron and Worldcom. Now we are told the Federal Reserve performed a "Stress Test" on the Big Banks. Really?
I think Ken Lewis of Bank of America got the Fed's "Stress Test" exactly right!
"He said a hung-over JPMorgan Chase had shown up for the stress test the next day reeking of alcohol, and he wasn't entirely certain that Goldman Sachs had shown up at all.
"I heard," Mr. Lewis said, "Goldman got some brainiac bank from Canada to take the test for them."
-Kenneth D. Lewis, the chief executive of Bank of America, May 2009.
We live in a corrupt world. How many times in the past ten years did we discover numbers from Wall Street and Washington didn't inform, but deceived us? Too many times! Dividend data is different. Dividends are based upon actual payment of money to investors. Companies either have the cash or are capable of finding the cash in the financial markets or they don't send out the checks. And companies are loathed to cut their dividend payouts. To see significant cuts in dividend payouts for the S&P 500 would have dire consequences in the stock market.
So when we see the 500 companies in the S&P 500 paying out $3.20 in dividends for each $1.00 of their earnings, this data is our best "stress test" for corporate America's ability to generate profits. This situation will not last long. In the next 4 to 5 quarters, (maybe sooner) either earnings rise or dividend payouts fall. I'm not predicting what will happen or when, but I'm thinking that dividend payouts will fall, and will do so soon.
I wonder where the extra $2.20 is coming from? It could be a bunch of TARP.
A bad week for the US Treasury Bond Market.
This T-Bond, maturing in 2036, has lost 25% in value since December 2008, and now Washington wants to bailout California! Interest rates are going to soar in the next twelve months. I expect the DJIA's valuation model will switch from an Inflationary Expectation's Price Model to a Dividend Yield Pricing Model. The impact upon the DJIA's valuation will be horrific when this happens.
Here is a link to an article on the current situation of the US dollar as a reserve currency. The dollar, and the American financial situation is a mess.
www.gold-eagle.com/editorials_08/willie052109.html
This Bear isn't going anywhere. With all the time in the world at his disposal, he's just not in a hurry.
22 May 2009
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.
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