The bullish correction within the larger Bear Market continues. It could go on for awhile. How high could it go? I dare not guess. One thing going against the Bulls is this correction started 3 months ago. Soon, there will come a day when this market will once again feel the hot breath of the Bear, and it will go down. When that happens we want to see how far it goes down. Will it once again go below the BEV -50% line? That's the question I have in my mind.
Also how will it get there? Will the Bear have to fight the Bull for every BEV point lower? That would be a positive sign of Bullish strength. But I'm suspicious of this market. The "policy makers" are up to their eyebrows manipulating the stock market higher. The Bear has gravity on its side, while the "policy makers" are fighting the market's primary trend. I'm expecting a day to come when the bottom falls out from under the stock market. That will be the day the "policy makers" called it quits. That day could be a long ways off, but maybe not.
As I've said before, long term Treasury Bond Yields are the key to this stock market. President Obama and Congress are promising trillions of dollars of additional spending in the years to come. Current bond holders will suffer. When the below US Long Bond is yielding over 5%, and the bond markets start to talk about a 6% on the long bonds, this will be very hard on the DJIA Bulls. There are some large auctions for US Long Bonds this summer. They should be interesting to watch.
The 8-Count is currently 2, but I believe that next week we may see the first 0 in the 8-Count since 22-Aug-2008. The 8-Count caught the DJIA BEV -40% Bear of October and the BEV -50% Market of March! Have people already forgotten the horrors of October and March? Sure they have! March was 3 months and 2200 DJIA points ago.
Remember, the 8-Count is only the number of (+or-) 2% Volatility days in a running 8 day count. It ranges from 0 to 8. Seeing many days experiencing high volatility is always a Bear Market marker. It's no surprise to see the 8-Count fall to 0 during a good run-up in the DJIA.
I'm glad I dropped the Volatility Moving Average chart. We've seen a superb 3 month rally and the 200 day M/A is still at 2.11%? Unlike a 200 Day M/A, the 8-Count reacts very quickly to market volatility changes. When the 8-Count picks up again, expect to see the DJIA heading down to test the 09-March-2009 lows.
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."
I can't argue with success. The Step Sum is at the -14 line. It hasn't been this high since 06-Feb-2009, and the DJIA is following nicely along. With a few good days we may see the DJIA over 9000.
But I'm still a Bear as the markets have been decoupled from the economy and hitched to the political needs of "economic policy." "Economic policy" is designed to keep elected officials in power. The "policy makers" only concern for profits is that they get taxed.
Washington is run by corrupt lawyers and power-mad social scientists. These people are left leaning, filled with contempt for bourgeoisie limitations the markets would impose upon their utopian visions of the future. Go tell President Obama or Congressman Barney Frank that floating trillions of dollars of new US Treasury Bonds over the next 4 years will crash the bond market and make long term yields soar, you would only provoke a feeling of annoyance in them. This is hubris on a Biblical scale. Mark my words: sometime in the next 4 years, the Bear will earn their respect. I suspect it will happen before the US Long Bond yields shoot past 10% too.
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.
Capital gains in financial or commodity assets, are a consequence of inflationary flows from the Federal Reserve. Capital losses, in bear markets, are deflating asset values from the previous bull market. To illustrate this fact, I have 4 large tables at the end of this article containing price data on financial and commodity assets from 1948 to 2009. The dates chosen for the tables was determined by the DJIA Dividend Rule; sell stocks at a DJIA Dividend Yield of 3% and return to the stock market when the DJIA yields 6% again. But what should investors do while they wait for a decade or more for the next DJIA buy signal? It seems taking the proceeds of your stock market profits and investing in commodities, gold, silver or the gold mining shares is the thing to do.
Much of this article's text is necessary boiler plate to explain these 4 large tables and provide background. So I recommend my readers skip down and review my tables containing The Barron's Stock Averages & CRB Indexes spanning 1948 to 2009 before reading any further. Take a few minutes and note how Financial Assets and CPI Inflation are countercyclical to each other, but both follow the DJIA's dividend yield since 1948. These tables document the history of shifting inflationary flows between Financial Asset and CPI Inflation.
Monetary Inflation in the US Dollar Economy has been an unrelenting fact of life since the US Congress created the Federal Reserve in 1913. Monetary Inflation is "Growth" only in the sense that an increasing money supply will cause prices somewhere in the economy to "grow." An illustration can be seen with electrical consumption. Since 1971, "growth" in Keynesian terms, has increased ten times while electrical consumption of the American economy itself has only doubled. For this reason, I doubt economic statistics such as GDP, as they are computed and published in US$ values.
Harvard, Yale and Princeton Men who control "monetary policy" have done nothing to contribute to actual economic growth. With their refusal to allow bankrupt financial institutions to go bankrupt, they've actually done great harm to the dollar and the real economy. Their main accomplishment over the decades has been inflating and deflating Financial Assets, and lowering standards of living of the laboring classes with prolonged periods of high CPI Inflation. Mr. Bleiberg of Barron's had it exactly right in 1979.
"To serve as a central banker, as BARRON'S again reminded its readers early last year when G. William Miller took over at the Fed, one needn't be a flim-flam man, but it helps."
- Robert M Bleiberg: Barron's Managing Editor, 11 June 1979
There are two general economic categories central banks can "grow," via a regimen of "liquidity injections", but typically not at the same time:
I've commented upon this in previous Bear Market Reports. In Wk86 of my Bear Market Report, I'll present statistical evidence, using the Commodity Research Bureau (CRB) Commodity Indexes with the Barron's Stock Averages (BSA) & the Dow Jones Total Market Industry Groups (DJTMIG). I've included metal prices, as well as other interesting items in the mix.
Note on the BSA & the DJTMIG. The Barron's Stock Average was published from 1938 to 1988. They were discontinued in October 1988. Barron's replaced their weekly stock averages with the much superior Dow Jones Total Market Group. The BSA are averages, the DJTMIG are indexes. These dissimilar data sets are comparable to the DJIA (an Average) and the S&P500 (an Index). I've combined BSA and DJTMIG using factors to create stock groups spanning 1948 to 2009. I chose the 1948's DJIA 6% Dividend Yield for a starting point as the monthly CRB data starts in January 1947.
The following sectors were merged for my article's stock market groups. It's far from perfect, but good enough for my purposes.
In selecting the dates for my data samples, I've made no attempts maximizing the gains or losses of these assets. This is a study of the effects of the DJIA Dividend Yield trends on financial assets and commodity prices. Nothing more! My object was to examine the effects of inflationary flows from the Federal Reserve on asset valuations, or consumer prices as the DJIA Dividend Yield crossed over its 6% & 3% lines over time. So the table's sample dates were chosen by the DJIA Dividend Yield Rule, not the author.
The DJIA Dividend Rule requires one to sell stocks when the DJIA Dividend yield falls to 3% and buy the stock market when the DJIA Yield rises to 6%. However, Doctor Greenspan changed the rules in 1987. The DJIA Dividend Rule gave a sell signal in 1987 just months before Alan Greenspan became Fed Chairman. One might say that the DJIA Dividend Rule called the Crash of 1987. After the 1987 crash, Doctor Greenspan prevented the stock market deflating to a DJIA 6% dividend yield. Look at the DJIA Dividend Yield chart below.
So, as the 1990's bull market in stocks was a contrivance of the Maestro's, I thought it acceptable to use the January 2000, DJIA Yield of 1.30% as my sell signal. The third table of the series shows how grotesquely Greenspan inflated financial asset values as the DJIA Dividend Yield hit it's all time low of 1.30% in January 2000.
The DJIA has not given a 6% dividend buy signal since 1982. That's 27 years ago. Strict adherence to the DJIA Rule would have prevented investors from enjoying the 2003 - 2007 Bull Market. But when one considers the last 10 years, the stock market also experienced two horrendous bear markets. Very strange! Could it be that the two bear markets were actually the same bear, with the most extraordinary Bear Market Correction in the history of the DJIA in between? As Alan Greenspan was Fed Chairman until 2006, I think this is very likely as this is the same monetary stunt he pulled off from 1987 to 2000.
The DJIA Dividend Rule may not have given a stock market buy signal since 1982, but using its yield of 1.3% in January 2000 has proven a brilliant call for commodities as was its last call (DJIA 3% yield) for commodities in 1959.
Since 2000, financial assets have entered into a deflationary cycle. Commodities are now the sponge soaking up the Federal Reserve's "liquidity." The "policy makers" attempts to re-inflate financial assets from 2003 - 2007 are pointless acts. Our leaders are clueless when it comes to issues concerning the financial markets. Their botched attempts in raising financial asset values have only given additional stimulus for future inflation in commodity prices, and deeper deflation in financial assets as the tides of inflationary flows are now working against Washington. Resistance is futile. But the "policy makers" will continue in their attempts to manipulate market prices all the same. Princeton and Harvard professors in government service are paid to do this as they make the dirty business look respectable.
Based upon the patterns in the tables below, I expect these current trends to continue until the DJIA Dividend Yield reaches an upside extremes that mirrors its downside extreme of 1.30% in January 2000. A DJIA yield north of 10% is very possible before we see the peak in commodity prices. Remember, these cycles take on a life of their own, and continue for years. Prices of assets from beginning to the end of these cycles often move to levels thought impossible only a few years earlier.
A final note on the tables themselves, I've color-coded the classes of assets and consumer goods. This allows you to go quickly from one table to the next, observing the rising and falling of the colored bars as inflation flows from one asset class to another. There are real patterns in pricing trends associated with the DJIA Dividend Cycle.
Below is my first table covering the 11 years from 1948 to 1959. Periods of declining DJIA Dividend Yields are stock bull markets and commodity bear markets. This is evident in the table below, shown by the excellent returns in the stock groups. Note how the CRB indexes of commodities actually declined in price. From 1948 to 1959, inflationary "liquidity" flowed into financial assets and avoided CPI Inflation.
The 15 years that separated the 1959 DJIA 3% yield and its next 6% yield was a difficult period for the general stock market. Few stock groups exceeded CinC or CPI. Those groups that saw a nominal rise, but fell below inflation, resulted in people paying capital gains taxes on their inflationary losses. Washington wouldn't have it any other way.
Rising commodity prices, except for textiles, all exceeded CPI. However CinC Inflation did exceed most CRB Indexes. But remember, in September of 1974, the commodity bull market still had 6 years and much higher prices to go!
In September 1974, The Barron's Gold Mining Index was the top performer followed by silver and gold bullion. But in 1980 the BGMI peaked at 1285.16, Silver spiked over $50 and Gold saw $840. Once again, the dates chosen in my tables were by the DJIA Dividend Yield, not the author. I've made no attempts maximizing the gains or losses of these assets. This is a study of the effects of the DJIA Dividend Yield trends on financial assets and commodity prices. Nothing more! But it's obvious that the results of this study are valuable to investors.
In 1974, gold and silver still had six full years in their bull markets, as did commodities in general. But with the DJIA Dividend Yield reaching 6% in 1974, I'm coming back into the stock market. The first 8 years were brutal!
The DJIA rule states I should sell the stock market at the next 3% DJIA Yield. But Alan Greenspan ignored that rule. Curiously, on 05 December 1995 with the DJIA at 5087 and yielding and historic low of 2.30%, he gave his famous speech on "irrational exuberance" at the American Enterprise Institute for Public POLICY Research. What made Doctor Greenspan think of "irrational exuberance" as a topic for this speech? Maybe it was the DJIA yielding 2.30%?
From 1948 to 2000, (52 years) stocks and commodities have been countercyclical to each other as the DJIA Dividend Yield pendulum swung back and forth from one extreme to the other. The DJIA pendulum may swing back and forth, but it's the Federal Reserve's "liquidity injections" that powers its movements.
The Greenspan Bull Market is generally thought of as a High-Tech stock market bull. However, few, if any of the software or semiconductors companies contained in these DJTMIG Indexes existed in 1974. So my Barron's Stock Averages, once the mainstay of the American Stock Market in 1938, were no longer the darlings of Wall Street by 2000.
But we see in the next table, even less glamorous groups from the now extinct Barron's Stock Averages, benefited greatly from Greenspan's "liquidity injections." But as usual, when the DJIA's Dividend declines, so do the commodity plays.
Now you know why ten years ago, everyone in the world loved Alan Greenspan. But note how yesterday's heroes become today's zeros with a simple change of trend in the DJIA Dividend Yield.
In 2009, we see the pattern starting in 1948, still holding true 61 years later. Rising DJIA Dividend Yield results in falling financial asset prices but rising CPI inflation.
With the Fed desperately "injecting liquidity" into the financial markets, with no regard to any historical rule of prudence, I believe history will judge Bernanke's "monetary policy", a willful criminal act against dollar holders world wide. The same will be said for President Obama and the Current Congress, for their deficit-financed spending. Every month there are new programs that will require hundreds of billions in additional bond sales in the US Treasury Market. They will tax the American Middle Class to extinction before this is all over. I'm sorry to say that "irrational exuberance" is alive and well in 2009! This cannot end well.
In the next decade I see stock and bond prices falling to levels that are unthinkable today. Ten years from now commodities will still cost money. The question in my mind is if those prices will be in US dollars?
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.