The DJIA closed exactly on its BEV -30% Line in Wk 104 of the 2007-09 Bear Market. I don't have a crystal ball, but I would be surprised if the DJIA was not comfortably above 10,000 by November.
There is no volatility in this market. We see a 1 in the 8-Count, but it will be a 0 on Tuesday if we don't have a 2% Day on Monday. It's a waste of time trying to guess what a market is going to do next month or even next week. But my expectations are, when Volatility picks up, the DJIA will come under pressure to do down. I spent a lot time this week going deeper into volatility, with a little review on the BEV Chart.
I still think the key to the Stock Market is the US Treasury Bond Market.
The current low yields in the above US Long Bond will be impossible to maintain if Washington continues to float tens of billions in new bonds every week for the next year. And that is what they seem intent on doing. When the yield on this bond rises above 5.00%, I expect the stock market's current dead-cat bounce to terminate.
I thought I'd have a review, and an expanded examination of the DJIA Price Volatility's reaction to Bull and Bear Markets. My technical analysis is unique, as it's mostly derived from the DJIA's price data itself. This makes it simple for anyone with a spreadsheet to do. So it's good I do a little review now and then, as I'm hoping to popularize these techniques.
Since the first NYSE trading day in the 20th Century, January 02, 1900, there have been 29,881 trading sessions in the NYSE. The chart below displays every DJIA daily percentage move, from the previous day's closing price, for all 29,881 trading days.
I've often stated how the Bear loves volatility. That is not my opinion; that's a historical fact; and the Bear is not particular as to whether the volatility is to the up or down side. Take a look below at the big daily advancing moves. Almost without exemption, they are Big, Bear Market Events. Last October's +10.88% daily move occurred as the DJIA was melting down. We have to go back to the 1929-32 Crash to find better days in the stock market!
The Chart above is fascinating, but to really draw all the information from this data we need to convert the declining daily moves to their absolute values. In other words, convert the down days into positive values. With that done, take a 200-Day Moving Average for the DJIA Daily Volatility. The results look like this.
The chart above has one extremely desirable characteristic; it places eleven decades' of the DJIA's daily trading (all 29,881 days) into a comprehensible format based upon percentage moves. Spiking high points in volatility are Bear Market bottoms. Declining, or periods of low volatility are either sideway-trending markets, or Bull Markets.
The chart below plots the DJIA's raw data from 1900 to 2009. This data is the source for the chart above. Unfortunately the DJIA's data, as published, renders itself into a useless chart for much of the DJIA's history. Where is the Great Depression's Bear Market, and what's the big deal with the panic of October 1987?
The problem is, since 1913, the Fed has grotesquely inflated the DJIA's valuation by devaluing the US dollar. Consider the following.
At the top of the 1929 DJIA Bull Market, the DJIA stood at 381.17. By July of 1932's bottom, it had fallen to 41.22. This was a loss of only 339.35 DJIA points, but a massive drop of 89.19% in the DOW. We should understand the Bear performs a necessary, if unappreciated service in cleaning up after the Bull's party. But he doesn't work for free. So think of the 339.35 points the DJIA gave up from 1929-32, as the Bear's wages to drop the DJIA down 89.19%.
Using this logic for our current Bear Market, with its October 2007 high of 14,164.53, how much would the Stock Market have to pay the Bear to take the DJIA down 89.19% from its October 2007's highs? In 1932, it only cost 339.35 DJIA Points. But, like everything else, prices are higher in 2009 than they were in 1932! In 2009, the Bear is demanding 12,633.34 DJIA Points to crash the market by 89.19%.
In Wk 104 of this Bear Market, the final bill the Stock Market pays the Bear is something we do not yet know, or even when the Bear's final bill comes due. But if the 2007-09 Bear matches the percentage lows of 1929-32, his bill to the stock market will be 12,633.34 inflated DJIA points. That would leave the DJIA at a Bear Market bottom of 1558.09.
It's the Federal Reserve's "Liquidity Injections" (monetary inflation via the banking system) that has made the above chart of the DJIA useless, as the Federal Reserve has made the US dollar, the unit which the DJIA is priced in, a terribly flawed unit of measurement. What a DJIA point was worth in 2007 is only a fraction of what it was worth in 1929. But note - an 89.19% crash, in either 1929 or 2007 dollars, maintains the same effects on the investors' net worth, no matter what the Fed has done to the US dollar over the decades. To eliminate monetary inflation effects on the DJIA's valuations from 1900 to 2009, we have to convert the DJIA data, from DJIA Points to DJIA Percentage.
The Bear isn't stupid; he knows exactly what the Politicians & Bankers have done to the US dollar. So he's not interested in getting paid in dollars. His is a business based on percentages, as is obvious in the Bear's Eye View (BEV) Chart below. The weekly DJIA's BEV Chart shows us the precise fees paid to the Bear, for his "Services Rendered", in every Bear Market since 1885.
So what are we looking at with a BEV Chart? It's the same data we see in the "horrible chart" plotting the DJIA's raw data, but a view which converts DJIA points into negative percentage terms by the following formula.
New all-time highs are recorded as zeros in a BEV Chart, as every new all-time high is divided by itself, and then has 1 subtracted from it. The last BEV Zero Value of a bull market, (the last new All-Time High of a Bull Market), is called the "Terminal Zero." A Terminal Zero marks the last successful effort of an aging Bull to make a new all-time high. All other data points * not * new all-time highs, are registered as a negative percentage, below their last all-time high.
This formula displays Bear Markets, and corrections within Bull Markets, in precise mathematical terms. Ignoring the effects of monetary inflation, the BEV Plot allows for direct comparison from one Bear Market to any other in a data series. The above BEV Chart allows a direct comparison of the 1890s DJIA to the 1990s, even though they are separated by 100 years.
Look at the two green dashed boxes in the BEV Chart above. The 1890s was a Bearish Decade with few BEV 0% points. The 1990s were the most bullish decade in the DJIA's history, as is obvious with almost continual BEV 0% points. Exactly how high the DJIA rose above the previous Bull Market's Terminal Zero is something the BEV Chart cannot say. But even so, the BEV Plot provides the most comprehensive and informative view of the American Stock Market's history available anywhere.
Also, and very importantly, because the BEV Chart restricts the movement of the DJIA within a range of 0% to -100%, the BEV Plot enables us to plot the DJIA with an internal indicator, such as the above DJIA Volatility's 200-Day Moving Average. This allows us to peer into the workings of the market as Bull and Bear Markets age over time.
Below, we see how smoothly the DJIA's BEV Plot (Blue Plot) overlays the DJIA Volatility's 200-Day M/A (Red Plot). It's self evident, since January 1900, that periods of high volatility usually correspond to Bear Markets, and Low Volatility with Bull or trendless Markets.
As I said at the very beginning of this review, and is evident in the Chart above, when the Bear goes to work, the DJIA's Volatility increases. As is usually the case, when the DJIA bottomed last March, its Volatility's 200-Day M/A also peaked, as is seen in the green circle. And as the DJIA's Volatility declined, the DJIA itself started to increase. This is a 110 year pattern, and why I follow volatility so closely. History strongly suggests as long as price volatility stays low, the Bullish Correction within our Bear Market should be okay.
All 200-period Moving Averages are stiff, meaning it takes a long time for them to reverse directions. This is not a bad thing when used with the DJIA's BEV Plot above, as 110 years is a very long time! But to see what the Bear is doing on a short term basis, we need to take a look at the DJIA Volatility's 5-Day M/A with the BEV Plot.
The DJIA's relationship between its Volatility and BEV Plot, still holds up with a 5-Day M/A, but we see something that was missed in a 200-Day M/A, when the Bear's Pick-Up Truck pulls up next to the NYSE.
Look at the two Green Dashed Boxes in the chart above. They both start at the bottom of a Bearish decline. In both cases; as the DJIA starts to recover from a market decline, the DJIA Volatility's 5-Day M/A also begins to decrease, and stays low for most of the Bull's move. But we can see when the Bear's Pick-Up Truck returns to the NYSE: the 5-Day M/A starts to increase, even as the DJIA is still making new BEV 0% Data Points. This is a typical topping formation for the DJIA's Volatility with a BEV Chart.
What happened in the left Green Box is unique. The Bear was ready to take the DJIA down in 1997. But the 1997- Jan 2000 period was when the "Greenspan Puts" entered Wall Street's lexicon. Students of the Market will remember how 12 years ago, every time the DJIA was stumbling, Doctor Greenspan gave the Bull a big shot of "Liquidity" to get the dumb beast going back up to new all-time highs, (BEV 0% Points). We can see how tired the Bull was from 1997 to 2000, by the rising DJIA Volatility's 5-Day M/A, as it exits from the green box.
We see the identical pattern for the second green box. But note the topping formation only took a few months. Obviously, Doctor Bernanke was focusing on blowing bubbles in the real estate market in 2007.
Below, I've plotted the last 3.25 years from the Chart above. The Green Dashed Line identifies the DJIA's October 2007 BEV's Terminal Zero (last all-time high in the DJIA). Look at the DJIA Volatility's 5-Day M/A. Can you see the Bear's Pick-Up Truck arriving in front of the NYSE?
Notice above, where the October 2008's BEV -40% Bear Bottom had higher volatility than the March 2009's BEV -50% Bear Bottom. Remember, this isn't science! For all of our work, all we can reasonably expect is better than house odds, and that's what we have here.
So, in Wk 104 of the 2007-09 Bear Market, is there any sign of the Bear's Truck in front of the NYSE? I have to say no. But we can see a double bottom in the 5-Day M/A (June and Sept) and currently, the 5-Day's plot is peeking above the dashed downtrend line. It's fair to say, the Bear is at least at a Dunkin Donuts drinking coffee and enjoying a jelly donut, while contemplating whether or not he should go back to work. But remember, dollars flowing into the stock market is what makes stock prices go up. And dollars is one thing the Fed and US Treasury will never be short of.
Forget about the Bear for a moment. Even if the DJIA is going up, this is a treacherous stock market! Oh yes it is!!
On 06 Oct, the DJIA closed up 1.37% after it became known that the oil producing nations were going to discontinue pricing oil in US dollars * and * gold closed at a new all-time high. This has since been officially denied. But as Otto von Bismarck said "one can't be sure of anything until it has been officially denied three times." This is as momentous an event as was the ratification of the Bretton Woods Accords in 1945, but bad! So the Stock Market goes up on the news? "Well stupid is what stupid does."
I think the Step Sum is going up. I think the DJIA is going up. And as we all know, Gold, Silver and the Barrons' Gold Mining Index (BGMI) are also going up. We are currently in one of those abnormal periods when both the DJIA and Precious Metals Assets are all trending in the same direction. These are strange times, but they won't last.
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.
I've indexed gold, silver and the Barron's Gold Mining Index (BGMI) with Currency in Circulation (CinC). The chart below shows us the relative performance of precious metals, and the mining shares, to monetary inflation since 1969.
I chose 1969 as a starting year, as gold began showing daily price changes around that time. You should understand that the relative performance of these indices can change greatly depending on the date the index starts. But with a 1969 basis, when Gold was trading for around $43 an ounce, forty years later, gold is leading the pack. I like gold, but I believe for the average person, silver coins, bars, and mining shares promise better performance in the years to come.
I don't like making specific recommendations on which mining companies to invest in, and there are plenty of bad ones to choose from. Barrick Gold heads my list of where * not * to invest money in. But there are many good companies to invest in, too. Gold Eagle and other fine gold-focused web pages have many mining and exploration companies that advertise on them. The Bull and Bear Financial Report is another valuable investor resource.
But just because a company advertises, is no reason to invest in them. So make an effort at it, and perform a little due diligence and research in a prospective company. Make sure you call the company and ask them why anyone would buy their shares. They better have a good story. Some of these companies will be big flops, but others will rise to levels beyond your wildest dreams in the coming Precious Metals Bull Market. So make sure to spread your investment capital around. I like Canadian companies as they trade in Canadian dollars, and are outside the US. But I can't help thinking that just purchasing old US "junk grade" silver coins, dated before 1964, will be a simple and safe home-run investment.
How big a home run? Let's look at Gold and Silver in 1969 dollars.
Gold may be over $1,000 an ounce in 2009. But for every $1 US dollar circulating in 1969, the Federal Government, via the Federal Reserve, has issued an additional $17.90 into circulation. Taking this into consideration, we see that gold is only $56.07 an ounce in 1969 dollars. Silver, in 1969 dollars, is actually cheaper today than it was 40 years ago, falling from $2.02 to $0.91. No better way to make money than investing in an undervalued asset like silver.
The Chart below plots the BGMI and the DJIA in 1969 dollars. I find the DJIA's plot depressing. With very few exemptions, all governments, since money was created, have loved inflation. It's a tax few people understand, and extracts wealth from the public in ways most people think impossible.
Quickly go to my chart above showing the DJIA plotted as published by Dow Jones from 1900 to 2009. The chart I called horrible. Looking at the DJIA from 1969 to 2009, we see a huge increase. In unadjusted dollar terms, this is correct. But if we measure the DJIA in constant 1969 dollars, the DJIA did not return to its 1969 levels until 1999. After an investor pays their capital gains taxes on holding the DJIA for 30 years, they would have lost money. No wonder the Bear bases his services on a percentage basis! He's not a chicken to be plucked clean by the "Policy Makers" like you and I are!
The BGMI has also suffered the effects of monetary inflation, but in 2009, it is poised to benefit from the Fed's inflationary flows, exactly as the DJIA was in 1982. This is the key in making real profits in an inflationary market.
To profit in today's markets, one has to accept that monetary inflation is the most significant factor in all major market trends since the creation of the Federal Reserve in 1913. The "Policy Makers" like to believe that they have control over their flows of inflationary "liquidity", but over the long term they really don't. Over the decades, their "liquidity" has flowed into either Consumer Prices or Financial Assets, in regular cycles of inflationary expansion and deflationary collapse.
In Wk 86 I used CRB Data (Consumer Prices) from 1948 to 2009, with Dow Jones and Barron's Averages (Financial Assets). to show how inflation flowed back and forth between Consumer Prices and Financial Assets. We see how gold mining stocks rose and fell with Consumer Prices, and that the DJIA rose and fell with Financial Assets. So, Barron's Gold Mining Index (BGMI) and the DJIA have been countercyclical to each other for decades.
Below, I indexed and plotted BGMI, DJIA and US Currency in Circulation (CinC) together. This chart shows how either the BGMI or the DJIA is being inflated by CinC, as the other is deflating. In Wk 98, I broke this chart down into three, to allow a better examination of the 1938- 83 period.
However, in Wk 104 I found a superior way of illustrating my point that the Federal Reserve's inflationary flows frequently shift their direction from Consumer Prices to Financial Assets Valuation, and then back again.
I've taken the data charted above and created two series of ratios for each of the 3716 weeks of data I have in these series.
The resulting chart is amazing! Really, we owe a lot to Barron's Statistical Department for maintaining the BGMI during the decades when absolutely no one cared about Gold Mining Stocks!
As we saw in Wk 86, the BGMI was very closely correlated to the CRB's Consumer Price movements, and the DJIA was closely correlated to Financial Asset's Bull & Bear Markets. And monetary inflation (increases in CinC) over the long term either flows into CPI Inflation or Financial Asset Bull Markets, but not both at the same time. This is precisely what we see above.
If the current inflationary flows coming from the Federal Reserve maintain their historical patterns, we should anticipate a new cycle of major price rises in Gold, Silver, Mining Shares and Consumer Prices, as well as much lower Financial Asset Valuations (bonds, stocks and real estate) for at least another decade. The above chart's movements typically take 1 or 2 decades to complete. The above chart provides an excellent timing mechanism for investing in either Financial Assets or Commodities.
We are entering this cycle's midlife. Events will begin to gather momentum as we move towards the cycle's end. Gold at $1040, and Silver at $17, are high compared to their lows in 2000, but I suspect today's prices will be seen as very low compared to their final Bull Market highs. I have no idea how long this Bull Market in Gold and Silver has yet to run, or what their ultimate tops will be. But now is the time to shift your wealth into precious metals and mining shares.
If anyone has data on Homestake Mining for the 1920s to 1940, I would love to have it. I could expand the above chart with this data.
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.