4 September 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.
The intensity in the rise of the DJIA is slowing down, a lot. That's to be expected after a rise of 46.34% since March. (09 March to 27 August) The DJIA has slipped 2% since then. It might lose even more and still the DJIA will be okay. The one thing this market has going for it, (the only thing really) is the "Policy Makers" are 100% behind it. We can count on them to do whatever it takes to make sure 2009 ends on a positive note. Think of Dr. Bernanke as Santa Claus, and Santa wants to give higher capital gains to investors for their Christmas presents.
As I've said before, interest rates are the key to this stock market.
As long as Washington can continue to sell tens of billions of new US T-Bonds each week, as well as rolling over old US Treasury Debt, and have interest rates look like this, (Red Plot in the Green Box) it's possible for the DJIA to continue to rise, with occasional corrections along the way. So, if the Stock Market is to have a Merry Christmas this year, the Bond Market has to behave itself.
Below is the 8-Count & DJIA BEV Chart
DJIA 8-Count Charts 1900 to 35
Currently, there is no action in the DJIA's 8-Count. Not much to say about the current market from this perspective. So in Wk99 I'm including a little history lesson for the DJIA and its 8-Count from 1900 to 1935. The following charts will do much to clarify my claims that this market should be okay until we see some action in the DJIA's 8-Count.
DJIA & its 8-Count 1900 to 1914
Remember, the 8-Count is only the count of DJIA 2% Days during a moving 8 Day sample. A 2% day, in the 8-Count, can be either an up or down day, or a day whose daily volatility greatly exceeded 2%. No bonus points for a plus-10% daily move in the DJIA with the 8-Count!
DJIA & its 8-Count 1915 to 1935
The green box on the left focuses on the low 8-Count when the DJIA was in a Bull Market. Note how the 8-Count picked up as the market was topping. Also note the low 8-Count from 1921 to 1928. The DJIA was enjoying its "Roaring 20s" Bull Market with low volatility (low 8-Count). The DJIA's 8-Count started to rise early in 1929, (green box to the right) even as the DJIA soared to new highs. But the rise in the 8-Count was an ill omen of the things to come.
DJIA & its 8-Count 1980 to 2009
It's interesting comparing the Roaring 20s & Great Depression data with our current era's chart.
As I've said before, I think this market is going up until we see the DJIA's 8-Count rise above a 2, and stay there awhile. Personally, if I see the DJIA's 8-Count rise to a 3, I would take profits and get 100% out of the stock market. (Currently, I'm not in this Market.) I think gold, silver and mining companies would be a good place to find safety when the Bear returns, as someday he must.
When the market is almost going to sleep, it's difficult writing something exciting. All I can say about the Chart above is that both the DJIA and its Step Sum have an upward bias and that makes me happy, I guess.
What's bothering me is the fact that over time, nothing stays the same. Look at the daily moves in the chart below from last November to this week. We have gone from one extreme to another in daily volatility.
The above chart doesn't even include the plus-10% moves in October 2008.
In the past, I've used the plot line for a horror movie as a metaphor for a Bear Market. At the last all time high (BEV Terminal Zero) of the soon-to-disappear Bull Market, everyone is fat, dumb and happy as the Bear comes into his first scene. Then comes a series of events that create * emotional rises and falls,* like a roller-coaster, that in turn, brings both horror and forlorn hope. But, in a good horror movie, (and Bear Market) there always comes that final scene where forlorn hope is seen for what it is - futile.
After reading my below focus piece on the DJIA and its Volume, and comparing what happened with the DJIA and Market Volume in 1920-34 to our 1980-09 market, I don't believe we have seen the Bear's final scene to his movie. Even after the lows of March (the #2 worst Bear Bottom since 1885) I don't believe the participants in this market have yet lost their hope of survival.
I say this because in 1932, the lows of the DJIA occurred with the lows in NYSE Volume. By July 1932, the Roaring 20s Investors just walked away from the NYSE, and took the market's volume with them. NYSE Volume languished for decades.
That is not what happened last March, as you will see below. I suspect that most people who were in the stock market at the 2007 top, are still hanging in, hoping to make good their losses. I may be wrong, but I believe their hope will prove to be a forlorn hope.
I expect volatility to return someday, and with it, we will see a new low in the DJIA with * Greatly Reduced * market volume. With losses mounting, fewer people will want to play. They will leave the stock market, and not come back. When will this happen? It might be years from now if the "Policy Makers" continue with their success in their market manipulations. But as I've said before, the keys to this market are interest rates. As long as they behave, I'm expecting a Merry Christmas for 2009.
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.
Economic Index Charts
If a picture is worth a thousand words, the next few charts are worth their weight in cyber ink.
Above we see the effects domestic investments have made in various economic categories. Note the impact these "investments" have had upon America's Industrial Output for the last 17 years.
No surprise seeing CinC rise with these "investments." The source of these funds is not savings but bank loans, made possible by the Federal Reserve's "Liquidity Injections." "Monetary Policy" has come to its end-point. Further debt expansion will actually shrink the economy. So, the "Policy Makers" have brought us to this.
Debt service for past loans is consuming the lion's share of economic production, and people's income. In all too many instances, businesses and consumers now work only to pay interest and principle for their own debts, and higher taxes to service the interest and principle of debt taken on by their City, County, State and Federal Governments. Baby may need a new pair of shoes, but baby will have to take a number and wait in line with everyone else for Mommy's and Daddy's money.
Credit has become a pernicious economic drug. Like all addictions, credit (debt) follows the law of diminishing returns. The credit addict's life cycle started out with all pleasure and no pain, but finishes with all pain and no pleasure. Like all addicts, they end up lying, cheating, stealing, or worse, to avoid the horrors of credit withdrawal. If you really think about it, this explains Washington's behavior these days.
Credit addiction is a disease of denial with frequent bouts of delusional behavior. It made perfect sense to the "Policy Makers," in the 1980s & 90s, to allow America's industrial base to rust under the sun. Washington thought it found something better than industrial production to create wealth: Alan Greenspan and the Federal Reserve's ability to create bank debt from thin air.
Let the Third World deal with all those nasty smoke stacks. America converted its economy into a high tech "service economy", with a residential and commercial construction industry. The US expanded credit to the masses with credit cards, and actually encouraged single-family-home mortgages to be written on inflated home values to function as ATMs for purchasing imported consumer goods. This debt-based economic model worked like a charm for over two decades. Not because it was a good idea, it never was, but because the US was successful in addicting the entire world on cheap dollar credit. The credit crisis changed all this. But the "Policy Makers" are in denial. They still believe they can continue funding "economic growth" with further "Liquidity Injections" into the world's economy. They are wrong!
In the chart above, note the increase in "Investment" for Residential construction after the 2000-02 Stock Market bottom, and its collapse starting in 2006. For all the subsidizing of mortgage rates and "tax advantages" the Federal Government created for the real estate market, the orange plot above shows inflation's disastrous effects on the middle class. How many people are currently struggling with their debts? From this point on, rising unemployment will ensure that there will be more pain than pleasure from all future increases in US Treasury Debt.
Above are a few more indices for construction and real estate. Last week, much was made on CNBC of the reversal in the trends for new home permits and starts. If we look at the actual data going back 17 years, such claims are clearly dubious. Maybe its time to go back into real estate and the home construction stocks, but I doubt it. The Bulls in the home construction companies disagree with me.
The home construction stocks fell over 80%, so a good dead-cat bounce is to be expected. On a weekly basis, the Dow Jones Index of Home Construction Companies have increased over 80% from their March lows. But note how little the 80% increase erased the 80% crash. It would take an increase of over 700% to make some investors whole again.
With pending foreclosures a continuing problem, how much more can these companies rise in valuation? I don't know. However, as the Fed and US Treasury are succeeding in continuing to funnel their "Liquidity" into the stock market, we may all be surprised at how high these stocks go. But when the end of the current rise comes, expect future declines in anything based upon the housing market, to be brutal.
CinC & Bank Credit
A note on the use of CinC in my examples and charts. CinC has closely followed the Federal Reserve's Total Fed Credit & US Securities Held Outright for decades. As these indexes are the base for bank credit, (banking loans) I see no reason not to use CinC to illustrate the increases in bank credit.
These three indexes, in the chart above, stayed close to each other until the credit crisis scattered them. Note how the Fed's US Securities Held Outright is now quickly rising up to Total Fed Credit. It's reasonable to expect CinC to do likewise in the next year or two. The nice thing about CinC is that it's something we can hold in our hands: paper dollars and base metal coins. This makes it easy for most people to understand, and for this reason I use CinC as often as I can in my articles.
DJIA & its Volume 1950 to 2009
In Wk75 I covered the DJIA and NYSE Volume from 1900 to 2009. That was last March, so I thought I would revisit this topic to see what has happened in the last six months. As we will see below, the past six months have been as historically weird as any other period since 2000.
As I have the daily DJIA Volume from 1950 to 2009, I thought I would use the DJIA's own volume in this update. Also, I'm using a 10-Day Moving Average in Wk99, where I did not in Wk75. The 10-Day M/A causes the volume plot to have a slight shift to the right, but that has little effect on the relationships between the DJIA and its Volume in the charts below, while the moving average cleans up some of the visual noise.
Two things I've uncovered in my market studies:
- Bear Markets see increases in Volatility.
- Bull Markets see increases in Volume.
These relationships go back to 1900, but I say this with the understanding that markets' relationships are not always bolted together, as are relationships in the hard sciences. So if market volatility is increasing, it's a bearish omen. But realize the market might not go down this week, this month or even this year. The same is true with volume and Bull Markets. Sorry, I can't offer my readers certainty; they will have to settle for better than house odds with this information.
Keep this in mind as you study my charts. In fact I would urge you to look for those periods where the DJIA violates my two rules of thumb.
DJIA & its Volume 1950 to 1965
Below we see a 16-year period where the DJIA's volume increased 5 fold as did the DJIA itself. But neither the DJIA, nor its volume, went up in a smooth straight line. There were periods in this chart when the volume went down with the DJIA going up, and vice-versa. But over time, we see the DJIA followed its volume up. Why? Simple: money was coming into the stock market. As it did, there was more buying and selling, which raised both the DJIA and its Volume.
Regular readers of my articles know I have a constant theme I often repeat: since the creation of the Federal Reserve in 1913, inflation has been a constant factor in the American Markets.
Dollar inflation has become chronic in the past 96 years, and CinC Inflation has its effects seen in rising prices.
The Fed's inflation has two channels which it can flow to:
- Consumer Prices (CPI Inflation)
- Financial Asset Valuation (Bull Markets)
From 1950 to 1966, the Fed's inflationary flows went into financial assets. So the DJIA and its volume saw increases, while commodity prices were largely unaffected by increases in the Fed's CinC inflation.
DJIA & its Volume 1964 to 1982
Below is not a BEV Chart. Rather it's an amazing period in market history. In these 18 years, the DJIA made five attempts to break above the 1000 line, only to fail five times to hold above it. When the DJIA did break above 1000 in October of 1982, (on its way to over 14,000 in 2007) many 1982-84 market commentators doubted the DJIA could stay above its 1000 level! Like today, the DJIA at 3000 is unthinkable.
Volume did rise during this period. But from 1964 to 1978, (14 years) volume didn't even double. The pattern of DJIA lows before and after the 1974 DJIA -40% Bear Market are interesting. From the 1966 DJIA 1000, each attempt at the 1000 level resulted in a deeper bottom, until the 1974's 44.86% decline, marking the bottom of this 18 year garbage market. But note how after 1974 the DJIA still could not break above and hold onto 1000. But then the Bear's reaction to each 1000 DJIA attempt was less effective too. Something changed! The key in understanding this can be seen in the 1978's increase in volume. This increase in volume marked the change in the tide of inflationary money coming from the Fed. After 12 years, money was slowly coming back into the stock market again and draining from consumer prices.
Financial history books comment on the "high inflation" of this period. Gold, silver and consumer prices were rising at double-digit annual rates in the 1970s, and yes, inflation (increasing money supply) was to blame for this. But for the period covered in the next chart, (1979-91) we are told "inflation" was low as Financial Asset Valuations increased. I disagree.
The correct way to understand what happened to inflation after 1982 is CinC inflation stopped flowing into consumer goods and commodities, and began spilling into Financial Assets. Stock volume increased dramatically, as did the valuation of the DJIA itself.
DJIA & its Volume 1979 to 1991
Not much to add to this chart. Rising volume = rising DJIA, except from 1988 to 1991. Remember, this isn't science!
DJIA & its Volume 1990 to 2000
Again, rising volume = rising DJIA.
DJIA & its Volume 1998 to 2009
For the past 9 years, volume trends have been decoupled from the DJIA. We see rising volume as the DJIA falls 34% in 2002 and as the DJIA fell 54% in 2009. In 2007, the DJIA saw a 124-year high on reduced volume. This is also true for the March-August "Bernanke Bounce" in DJIA. These four reversals in 109-year history of the volume / valuation patterns are really weird. How weird? Let's take a look at my Great Depression DJIA & NYSE Volume Chart from Wk75.
The plot's colors are reversed, and the DJIA (Red Plot) is in a BEV Format, but we see rising volume in the 1920s kept the DJIA's BEV Plot near the zero line (rising bull market). After the 1929 top, the DJIA fell with reduced volume on the NYSE. The actual bottom in July of 1932 occurred with extremely small volume on the NYSE. How many people were on the floor of the NYSE in July of 1932? I'm sure not as many as in August of 1929!
I'm the first to admit market relationships are not bolted together. There are frequent instances where DJIA valuation and volume trends have not held for a year or two. But when we see how the volume / valuation rule kept true during the 1920s & 30s, and then see it break down not once, but four times in a 9-year period from 2000 to 2009, well that's just darn suspicious! If I claim the "Policy Makers" are fixing prices in America's financial markets, I have my reasons.
DJIA & its Volume 2005 to 2009
Let's take a closer look at the DJIA and its Volume from 2005 to 2009
It's very strange seeing the DJIA rising up to it's 124-year high in 2007 on crummy volume, and then fall down into the 2nd worse Bear Market since 1855 on surging volume. Very strange indeed!
CFTC Wins Big Victory over "Inflation"
Last week I covered the CFTC clampdown on Energy and Grain ETFs. I made the case that the CFTC's real concern was not excess speculation, but fear of "liquidity" flowing from the financial markets into commodity prices. Deutsche Bank, the offending ETF sponsor, announced this week it is going to discontinue these ETFs, and Barclays has decided to not issue its commodity ETFs.
Here is another article on this topic from Seeking Alpha. This article's author, Craig Pirrong, is at a loss to explain the CFTC's action. But you and I know the truth. The Feds have issued trillions of new inflationary dollars, and they are all looking for a new home. The CFTC is a Team Player, so it will do what it can to keep these inflationary dollars from flowing into food and energy prices. Note how the SEC was never worried about ETFs trading in the stock market. But then the stock market is where the "Policy Makers" want those trillions of dollars of inflation to flow into.
The CFTC will be successful, for awhile, in keeping inflation from flowing into consumer prices. But the world is going to succeed in trading their wasting dollar assets for appreciating energy and grain products. If the CFTC insists the world will not do this in its jurisdiction, the world will take its business elsewhere. Asia, Europe and South America would love the new business! This could be very bad news for New York and Chicago, and even worse news for you and me, when our dollars are not accepted for imported energy.
We travel into an uncertain future aboard a ship of fools. Let me be the first to say it: "Obamanomics!"
4 September 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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