11 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.
Not much to say about the DJIA. It's making good progress. But why bother with good progress when Gold made a new all-time daily, weekly and monthly high this week! So, in Wk100 I'm focusing on Gold, Silver and Monetary Issues. It's not too late to jump on the precious metals band-wagon. Gold and Silver may be down next week, but a year from now, they will be higher.
Below is the 8-Count & DJIA BEV Chart
The DJIA's 8-Count is important to watch. But currently it's like watching paint dry. This could change very quickly.
DJIA Volatility
I used to publish the chart below each week. I haven't for awhile because the DJIA Volatility's 40&200 Day M/As have fallen far from their past highs. But Graham S. asked to see an update of this chart, and I'm glad he did as it shows the difference a year has made in daily volatility.
To understand the impact volatility can have on the stock market, in 1929, as the DJIA's 40-Day M/A was peaking at over 3.5%, leveraged investors were committing suicide in NY. But that didn't happen in 2008 when the 40 Day M/A reached 3.84%.
If I'm wrong about the Bear coming back, the DJIA Volatility's 40-and 200-Day's M/A will not see these levels again for many decades to come. After all, the DJIA Volatility's 40-Day M/A over 3% & the 200-Day M/A over 2% are extreme Bear Market events seen only twice since Dow Jones started publishing its Averages in 1885.
Note: As MS Excel doesn't do dates before 1900 & I'm not going to enter 15 Years of daily trading dates manually, so the above chart starts in 1900 instead of 1885.
The chart above makes clear the historic nature of last year's market. What a remarkable year we have just lived through! If the Bear returns, is it possible he can outdo himself in round #2? I have to be honest and say yes, I do expect the Bear's next wave to exceed last year's volatility. I just don't know when he's coming back.
The chart below is a comparison of the DJIA's #1 & #2 Bear Markets, but from the perspective of DJIA's 2%-Days in each 200-Day M/A data point. Instead of using Terminal Zeros (last all-time highs) as starting points, I started the plots when the DJIA's 200-Day M/A shifted from containing 1, to 0, 2%-Days before these two historic Bull Market Tops (1929 & 2007 Terminal Zeros).
The 2007-09 Bear came up fast and furious, and then quickly petered out, so far anyway. The Great Depression's Bear stretched out his accumulation of 2%-Days, and there were so many 2%-Days to accumulate! What a Grizzly-Bear Market the early 1930s had! We see the bottom in 1932, when every other day (50% of all trading days) were 2-Days! The 2007-09 period was not far behind at its peak, with 40% of its trading days (4 out of 10) being 2%-Days.
The next chart plots the number of 2%-Days in each DJIA Volatility's 200-Day M/A since 1900. Spike tops in the chart below are market bottoms, and low risk entry points to come back in the market.
No doubt about it, last year's market was historic. But there are two major differences between July 1932 & March 2009.
1. At the 1932 bottom, public participation in the market was long gone. But the 2007-09 Bear was not successful in shaking off the investing public. This may sound cruel, and I'd be happy if I'm proven wrong, but I just have a hard time believing this Bear Market is over until most people walk away from the stock market.
2. By July 1932, the banking system had written off much of the uneconomic-consumptive debt taken on during the Roaring 20s. This clearing of bad debt was the actual cause of the Great Depression's bank failures and its 25% unemployment. Debt default actually caused much more pain than the crashing stock market. Remember, debt is both a liability and an asset. When someone walks away from their debt, someone else loses their asset.
In September of 2009, how much of Congress's uneconomic-consumptive debt from their 2000-07 real-estate bubble has been written off? Not much, if any! And worse, Congress and President Obama are planning to create even more uneconomic-consumptive debt, by the trillions! And the Bulls think I'm strange for being Bearish. There's a world of pain ahead of us; I'm just being realistic. What must be, will be.
Bear Markets are attracted by the garbage Bull Markets and Politicians litter the economy with. And we live in an economy that is absolutely filthy with financial garbage. Who can walk down the street without passing by a few million dollars in defaulted-mortgage derivatives every few blocks? No one!
But currently, the DJIA's daily volatility has been less than 1% for weeks now. So it's easy to day-dream of a pleasant world, free from Bear Markets. But until America's balance sheet has been wiped clean of defaulted debt, and $trillions in losses have been recognized by bankrupted individuals, employers and institutions, the good times ahead are only day-dreams.
In September of 2009, it's a good stock market. But since 1971, the DJIA and Gold have been countercyclical to each other.
For almost 40 years, the DJIA has never prospered, long term, while gold was rising. That's a fact. So, seeing Gold hit new weekly, daily and monthly highs this week are ill-omens for the DJIA's future.
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.
Gold and Silver's Breadth Indicators
The Stock Market's Example
The Advance - Decline Line (A-D Line) is a market breadth indicator used to gauge the market's appetite, or lack thereof, for buying shares. What's advancing and declining are daily or weekly share prices. This information is recorded every week in Barron's. Here's how an Advance - Decline Line works.
An exchange has listed 1000 shares that trade daily. On day 1, 700 shares rise in price while 300 fall. That's a bullish day with a net of 400 shares rising in price.
Day 1's A-D Line: 400
On day 2, 200 shares rise in price while 800 shares fall. This is a bearish day with a net of 600 shares declining in price. By adding Day 1's 400 to Day 2's -600 we derive Day 2's A-D Line to be -200.
Day 2's A-D Line: -200
The actual number value of the A-D Line at any given point is unimportant. The A-D Line is only the sum-total of all the net daily A-D share prices at the exchange, over time. Its importance is seen in its upward and downward trends as well as its trend reversals.
The A-D Line works best with a fixed number of advancing and declining items; for example, the 30 shares comprising the DJIA, or the 500 Shares in the S&P 500. However, the number of shares trading on a stock exchange varies from day to day, as well as from decade to decade. In April of 1933, the NYSE had about 800 shares trading daily. Seventy years later, in 2003, the NYSE had about 3500 shares trading daily. The NYSE's expansion of listings creates distortions in the 70-year record of the A-D line. The net daily Advances and Declines of 1933's 800 shares on the NYSE's A-D Line have been overwhelmed by 2003's 3500 shares.
To compensate for the distortions this brings, I convert these numbers into a ratio by dividing each net A-D data point by the total number of shares traded. This changes the A-D Line into an A-D Ratio. The A-D Ratio gives equal weight to each daily data point in its plot.
For the Stock Market, we can use the NY Stock Exchange's weekly or daily Advancing and Declining Shares data to construct our A-D Ratio. In the Chart below, I've plotted the daily DJIA and the NYSE A-D Data. For your information: In 1980, the NYSE listed about 1950 shares. By 2009, the number of companies trading on the NYSE had increased to 3100.
The two Green Boxes contain the bottom and top of the DJIA 1982 - 2000 Bull Market, the Green Lines mark the first and last days in this historic Bull Market. The 12 August 1982 start exploded from its starting block with impressive market breadth. For the next year, many more shares advanced in price than declined, a clear reversal of the previous year's pattern.
Stock market relationships are important to follow, but as I've said before, they are seldom bolted tightly together. The Green Box containing the top of the Bull Market (upper right) makes this point. So while the DJIA Bull still charged upward, after 1998, the declining A-D Ratio indicated something changed in the stock market. One by one, the companies trading on the NYSE were beginning to lose their upward momentum as the 2000 market top approached. It took two years, but finally the declining A-D Ratio took its toll on the 30 companies comprising the DJIA.
Gold and Silver Step Sums
Last February, in Wk72, I covered Gold and Silver's Step Sum. This is a good time for an update. The A-D Line (or ratio) examines the breadth in an exchange or industry sector by measuring the Advances and Declines of many stocks, while a Step Sum is an A-D Line for a single stock, or commodity. In my example for the A-D Line above, I used an exchange trading 1000 different stocks. But if we took a single company from that exchange's A-D Line, say Microsoft, and isolated its A-D contribution to the exchange's A-D Line, that would be Microsoft's Step Sum - the Sum of all the Up and Down price Steps Microsoft has made over time.
Gold & its Step Sum
The chart below gives Gold's daily BEV Plot (Blue Plot) with its Step Sum (Red Plot) since 1975. Remember, the Step Sum is only the sum totals of each up and down day.
Over time, all markets, Bull, Bear or trendless, have about as many up as down days. Below, we see the Gold Market during an 8,707 trading day period. Gold's Step Sum is based on the small bias of net up or down days within these 8,707 days.
Look at the 2001-09 rise in Gold's Step Sum. This period covers 2,171 trading days on the Comex. But note Gold's Step Sum is only the result of 160 more up than down days from 2001 to 2009. That's a net of only 7.3% more up than down days since January 2001, and look at the information contained in this 7.3%! The price of Gold is rising in a powerful Bull Market!
The Red Step Sum Plot is useful, as it graphically indicates the market's bias (investor's sentiment) over a certain period of time. And it's so easy to construct. All one needs is the daily or weekly data of the stock, index or commodity.
There are times when the Step Sum is out of sync with the price plot. Such a formation is called a Lundeen Box, which can be either a Bull or Bear Box. Boxes are markers of a market's forlorn hope (Bear Markets) or incredulous disbelief (Bull Markets). Since 1975, we see no Lundeen Boxes in the Gold Market. Gold's Step Sum from 1975 to 2009 has possessed an excellent correlation to the price action of Gold. The chart above indicates the current Bull Market in Gold has real power behind it.
Silver & its Step Sum
I had to adjust Silver's BEV Plot. That means that I reset the series on my spreadsheet to a new beginning after the 90% decline. BEV Charts are superb in Bear Markets, but leave much to be desired in their rise from a -90% bottom. The easiest solution to this problem is to just restart the data series. This produces a false new all-time high, (BEV Zero Line) as the new starting point is actually at a market low, far from Silver's old all-time high. But the BEV Plot displays future data more realistically.
From 1975 to 2003, Silver's correlation to its Step Sum is minimal. Silver's Step Sum ignores the price trends of Silver itself, and seems to only want to go up! Silver is unique. From January 1981 to January 2003, (Green Box) silver had 31 net * advancing days * during a 5,529 trading day period. It may have been a Bear Market, but the Bulls had more up days than the Bears had down. Since 2003, Silver and its Step Sum have had a good run-up.
I don't know exactly what to think of Silver's Step Sum. Over the past years, much has been written concerning downward price manipulation in the Silver market. Yes, I believe that's true. So maybe the unusual Red Plot above is someone's finger prints on the Silver Market. I can't say this is a fact. But if the stories of thousands of years of silver production being consumed, Silver will be the precious-metals sector's glamour girl in the years to come.
Gold and Silver's Advance - Decline Lines
Using Gold and Silver, priced in US Dollars, is sufficient information to construct a Step Sum Plot from the daily price changes in Gold and Silver. But Gold and Silver are bought and sold internationally, and in different currencies for decades. As I have weekly data for various currencies, and weekly Gold and Silver prices since 1975, I can convert US dollar prices of Gold and Silver into prices other than US dollars, and create a weekly A-D Line using the ups and downs in five currencies.
Keep in mind the charts above are daily, while the charts below are weekly data. There are differences.
The following currencies are used in the A-D Lines below:
- Canadian Dollar
- Japanese Yen
- Swiss Franc
- UK Pound
- US Dollar
Gold & its 5-Currency Advance - Decline Line
Below, we see Gold's 5-Currency A-D Line caught Gold's 1980 top and its 1999 bottom, and closely tracked the price of Gold for the past 10 years. Gold's breadth indicators (Step Sum and A-D Line) have tracked the price of gold very closely since 1975. Importantly, as the A-D Line is based upon Gold's price in 5 major currencies, this proves the current Bull Market in Gold is international.
Silver & its 5-Currency Advance - Decline Line
Unlike Silver's Step Sum, its A-D Line has good correlation to the US$ price of Silver. When we recall that Silver's Step Sum is based only on Silver's US$ price, while it's A-D data uses the price of Silver in US$ and four other currencies, I think something is darn suspicious in the Silver Market.
Let's compare Silver's Step Sum (based solely on the US Dollar Price) to its 5-Currency A-D Line. Note: the most any Step Sum can move in a day, or in this chart, a week, is 1, while the A-D Line can move up or down 5 on a good or bad week. So expect differences between these two plots in their extreme movements, both up or down.
But that's the problem with Silver. Since 1975, we never see its 5-currency A-D Line fall extremely below its US$-based Step Sum. This tells us that there is something unusual in the US$ Silver Market. Let's compare Silver to Gold's Breadth indicators. With Gold, we see its 5-Currency A-D Line cross its single currency (US$) Step Sum on both the up and downside, as logic would expect it to.
So what should we make of the US$ Silver Market from its Breadth indicators? I really don't know. I'm only commenting that it's obviously irregular, likely manipulated, and very bullish.
Starting in 1986, I have weekly data on many more currencies. So, I've constructed Gold and Silver A-D Charts using 34 Currencies.
From 1987 to 1991, Gold went down as its A-D Line went up. Obviously a simple case of lose connection bolts between the two plots. This happens all the time with technical indicators. But since 1991, someone found a wrench and tightened the bolts between Gold and its 34-Currency A-D Line. The 1999-09 Bull Market in Gold is intact, or so its 34-Currency A-D Line tells us. I'm a believer!
No loose bolts in the Chart above! There was a breakdown in the US$ price of Silver late last year, but the decline didn't last long enough to bring its A-D Line down. We should expect transient bearish events during a long term Bull Market, and that is what we saw last year. I think it's safe to say that Gold and Silver investors, the world over, are enjoying a Bull Market in Gold and Silver. I think the party has a long time to go.
The US is Monetizing its National Debt
The 1960s & 70s are known as decades for substandard returns on Financial Assets, with rising levels in CPI Inflation and unemployment, peaking in the early 1980s. These decades were also a period when the Federal Reserve monetized a significant portion of the US National Debt.
Remember, economic cause and effects are not instantaneous. Mix one part gasoline with 10 parts air within a closed container, introduce an ignition source, and the results are an instantaneous - BOOM! The chart above shows the effects monetizing debt has upon CPI Inflation, but it takes years before they become obvious.
But now, look at what is happening in 2009! (green oval) We see debt monetization spike up to 13% as CPI plunged to a negative 2%. How does reality develop a 15% gap? Well, CPI has always been a bogus government statistic that understated the actual cost of living increases. But after a year of historic money creation by the Federal Government for bailouts and economic stimulation, seeing a negative 2% CPI one year later is just preposterous!
Foreign CB's US Dollar Reserves
Everyone should keep two things in mind when we think about today: yesterday was different, and tomorrow will bring pleasant surprises and disappointments we can't anticipate today. So, if in the past, Foreign Central Bankers had only purchased US Treasury Bonds, we would be wise to anticipate that sometime in the future they will cease doing so.
In fact we can see signs of this changing today. Here is a link to a Money and Markets article on exactly this. The publisher, Martin Weiss, called out Amazon.Com 10 years ago during the High Tech Bubble. Mr. Weiss called Amazon Books, "Amazon.Bomb," long before the high tech crash came. He took heat from financial media on his call. But, a decade ago, he was right on Amazon, and I suspect he will be right about China's US Treasury Debt problems.
The chart below plots the year-over-year change in Foreign CBs purchases of US Debt.
These CB positions in the US T-Debt Market are a major factor in world trade, global employment, and America's debt-based Standard of Living. How often do we hear from the financial media or economists about the sustainability of the above double digit CB trends in purchases of US T-Debt? Never! Does anyone in authority even track this?
Here is how I look at this data. Let's change the title of the above chart to "Hot-Stock-Everybody-Buying.Com's Year-over-Year Earnings Increase." How long can "Hot Stock Everybody Buying.Com" continue its double-digit earning growth? I don't know, but I suspect their extraordinary double-digit growth is closer to its end than its beginning.
Since 1990, we investors have lived through two massive inflationary boom-bust cycles with the High Tech and Real Estate Markets. After 20 years of dealing with inflationary-asset markets, we should all know that double-digit year-over-year increases, in anything, are inflationary booms that terminates in a deflationary busts.
But the above chart is for Foreign CB's US Treasury Bond Reserves. The implications of a reversal of this trend are disastrous for the American economy and Washington's political landscape, as well as world trade and international employment. This is huge!
The World's CBs are currently walking on egg shells. For the last two years, the US Treasury Debt Market has lacked the liquidity to absorb significant sales from foreign CBs. And it's certain that China would like to sell a good portion of its US Treasury Reserves, if we can believe Mr. Luo of the China Banking Commission.
"We hate you guys. [Washington's "Policy Makers] Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do."
- Luo Ping, a director-general at the China Banking Regulatory Commission, 11 February 2009
Before 2002, CB's routinely sold down their positions in US T-Debt a few percent in conducting their business. When the "Asian Contagion" hit in the late 1990s, Asia needed cash fast. The US T-Debt market had no problems finding willing purchasers. As Asia sold their US Bonds, the bond market actually rallied and yields on the US Long Bond dropped a full percentage point. The events of 11 years ago are clearly evident in the BEV Chart above, and the US Long Bond Yield Chart below. But, since 2002, my BEV Chart above shows how US T-Bonds have become increasingly illiquid for CB's as they've increased their positions by 460% since 1998.
This is not a stable situation, nor is the world's monetary system. It's a Keynesian's False Vacuum that will eventually break. When it does, all the old business and economic rules and relationships will change beyond recognition. For instance, the Federal Reserve, and US Treasury, will find it impossible to simultaneously monetizing US Treasury Debt, subsidize the US Mortgage Market with cheap credit, and maintain low interest rates.
It will not be difficult to know when the Keynesian's False Vacuum finally breaks. US interest rates will rocket to the moon, taking energy, metals and food prices up with them.
No the Bear has not gone away, he's just taking a little nap.
11 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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