Days Of Extreme Breadth & Volatility Update
It's a corrupt world we live in. Historically speaking, big corruption and big government go hand in hand as they shepherd their sheeple over the cliff. This cheery thought comes to my mind with the story of PFG Best, another commodity brokerage whose management spent (commandeered, hypothecated, misappropriated, stole, filched, you pick the verb) $220 million dollars of their customers' money, only nine months after MF Global. Here is a 28 minute YouTube Video by RT's Capital Account video that explains the details better than I can. This is serious, if farmers can't hedge their crops, there may not be any farmers to grow our food. Where in the hell were the regulators at the CFTC?
To me, the most disturbing thing about all this is that PFG Best forged its own bank statements which they then delivered to the Federal Regulators, who for years took the phony documents with no questions asked. Less than a year after MF Global, and only three years after Bernie Madoff's Ponzi scheme blew up, the federal regulators are still living up to my expectations of what can be expected from Washington bureaucrats.
When do you expect these brokers' regulators will finally begin verifying documents sent their way to discern fact from fiction? Most likely never for companies with the right political connections, but sooner or later a few smaller brokerages will probably be made scapegoats. Much like when the G-Men went after Martha Stewart to show how tough they are when insider-trading laws are broken. But we should note that, Jon Corzine is still out and about, most likely flying beneath the media's radar by doing penitential-campaign-finance work (working for Obama with these same media people), as the injured clients of MF Global, and now PFG Best, are kept on perpetual regulatory hold. PFG Best may not be all that small, and likely would have been swept under the rug along with the likes of Corzine, but their suicidal CEO (a wannabe outsider, unlike Corzine) left the FBI with a signed confession, forcing their hand to prosecute.
Russell Wasendorf Sr, arrested on Friday, confessed to a 20-year fraud at his now-bankrupt Iowa brokerage. source: Reuters
So much for that, because this will be the way it stays until the entire financial system comes tumbling down on the heads of everyone, including the media and Hollywood. When this corruption finally hits the media in a very personal way, (in THEIR wallets) then they will begin asking serious questions.
Days of Extreme Breadth and Volatility
So let's now examine the tracks Mr Bear, and his cleanup crew will leave on Wall Street when they return to finish what they began in 2008-9 with a review of Days' of Extreme Market Breadth (NYSE 70% A-D Days) and Extreme Volatility (Dow Jones 2% days). First, here is a chart for the NYSE's days of extreme market breadth from 1924 to 2012. Days of extreme market breadth are computed by subtracting declining issues on the NYSE from the advancing issues, and dividing the results by the total shares traded that day.
NYSE A-D/Total Shares
Monster clusters of days of extreme-market breadth are markers of huge deflationary bear markets that always follow huge inflationary bull markets. These clusters of extreme breadth are clearly obvious in the chart above. After all, Mr Bear can't deflate what the bulls haven't first inflated with their inflationary-credit expansions, as was the case during the Roaring 1920s bull market, and then again, seventy years later, during the 1990s High Tech bull market.
Usually, NYSE 70% A-D days are rare market events. Since June of 1928, there have been 22,175 trading sessions at the NYSE, during which there were only 353 days of extreme breadth. The table below breaks down the breadth trends into the two massive deflationary bear markets, and all the other years since 1928.
Excluding our current deflationary-bear market (Feb 2007-July 2012), the Great Depression bear market era (1928-40) saw more days of extreme breadth than did the following 67 years. The "Average/Year" column puts these events into perspective. From 1928 to 1940, there was an average of 12.92 days of extreme breadth per annum, or one a month. The following 67 years saw only 1.55 such days, on average per year. Then beginning in February of 2007, the current cluster of NYSE 70% days of extreme breadth began forming, even denser than during the Great Depression, and has yet to taper off. Since May 18th (just two months ago) we've seen four days of extreme breadth; two negative and two positive. This is the hot breath of Mr Bear as he probes for weakness in the stock market.
And for your information, the mini-clusters of * POSITIVE * days of extreme breadth within the larger clusters denote those times when Mr Bear was most active in deflating over valued asset share prices. The 2.5 year gap of no positive NYSE 70% days found in the 1930s occurred during the mini bull market from July 1932 to March 1937. As soon as these positive days of extreme breadth resumed in July 1937, the Dow Jones once again began deflating to massive percentage declines that would not again be exceeded until March 2009.
Look at the table below. Until March 2009, the top three Dow Jones bear markets occurred within the depression era massive cluster of NYSE 70% A-D days. Also note that when our current bear market became the #2 bear market on the list, it too, occurred within a massive cluster of NYSE days of extreme breadth that continues to this day. This is no accident. In the chart above, look at the number of days of extreme breadth during the Greenspan Fed (1988-2006). There were no positive 70% A-D days and only a few negative days of extreme breadth during the entire High Tech Bubble. In fact, during Greenspan's entire bubble market (1988-2000), the NYSE had never before seen so FEW days of extreme breadth since the beginning of my data in 1924. Look at the chart above.
Our most recent omen of coming disaster (the current monster cluster of 70% A-D days) didn't begin until February 2007, when the first rumors of problems in the mortgage markets began to leak out to the press. This problem of trillions of dollars of mortgage defaults, and trillions more in tenuous mortgages (still being serviced) on properties that are "under water" (in imminent danger of default due to negative home equity) is far from being resolved. The current stop-gap solution of monetizing abandoned mortgages is no solution at all.
Now we move on to the Dow Jones' Days of Extreme Volatility, using a 200 day count, or examining the number of days the Dow Jones has moved +/- 2% (or more) during a running count of 200 trading days on the NYSE. With the exception of our #3 bear market bottom seen in the table above, all other Dow Jones 40% bear market bottoms can be identified in the chart below by spikes in the 200 day count. If there are more spikes than 40% bear markets, it's because not all bear market bottoms in the Dow Jones decline a full 40% from their bull market highs; for instance, last August's the Dow Jones declined 24.32%, which produced a spike in the chart below. The best way to interpret these spikes in the 200 day count is to understand that when the stock market is under distress, the Dow Jones experiences frequent daily volatility in excess of 2%.
Why didn't the 1942 Dow Jones bear market bottom, at the time the second worst bear market since 1885, produce a spike in the chart? After the depressing 1930s, the public and a significant portion of Wall Street's professional class had moved on to greener pastures. Look at trading volume for 1942; business for Wall Street had dried up.
This, plus the United States had entered World War 2 just four months earlier. After thirteen years of horrible bear markets, what little was left of New York's financial community took this bear market in stride.
These Dow Jones Days of Extreme Volatility (+/- 2%) are also rare market events. Since January 1900 (112 years) there have only been 1,789 such days for the Dow Jones out of 30,580 total trading sessions at the NYSE since 1900. Study this chart closely, there is a lot of market history recorded in it.
- We can see the pre-Federal Reserve era (which I include up to 1925), were bull and bear markets came and went in rapid succession.
- The Great Depression era where the Dow Jones' 200 day count wasn't free of 2% days from 1925 to the start of World War 2 (16 years).
- The post War era (1942 - 70), where the traders were mostly institutional. This was a time when companies purchased full page ads in Barron's to publish their balance sheets with scant comments. And we can be sure that the stock-market survivors of the 1930s studied these ads too!
- The post Bretton Woods era Dow Jones (1971 to today), where out of control money creation by the Federal Reserve produced increased market volatility, if not profits in the stock market for the "long-term investors."
Today, the Dow Jones' running 200 day count hasn't been free of Dow Jones 2% days since 26 February 2007, over five years now. And note that this is precisely when the current cluster of NYSE 70% A-D days began! You can come to your own conclusions. However the "Message of the Market" I get from studying these many decades of NYSE Advance Decline data, and greater than 2% daily moves in the Dow Jones (days of extreme breadth and volatility) tells me that we have yet to see the worst of what Mr Bear has planned for the stock market. Gold and silver have been in a bull market for over a decade now, one which I expect to continue for a long time to come.
Market Update
Let's now look at gold, silver and the Dow Jones' step sum charts, starting with gold. The near term future of the gold market looks constructive! Its price may still be range bound, but market sentiment (its step sum) is declining. So, what happens from here? Well we should note that since early May (two months) we see gold forming a pattern of rising bottoms. This means that for all the huffing and puffing the "policy makers" have done in the past two months, they haven't blown the gold bulls' house down - yet. Maybe they won't either, as since late June, gold's step sum has begun to decline (more down days than up). That may sound bad, but actually it's a very good sign to see the price of gold standing up to this selling by playing "rope-a-dope" with the bears.
Looking at gold Bear's Eye View (BEV) chart, it's obvious that something is due for a change. Seeing any investment range bound for over two months is a clue that it won't be two months from now. The "policy makers" have tried their best to get gold to break down below its lows of late December 2011; in fact they succeeded for one day in May, not that you could notice their success in the BEV chart below, and that is a big problem - for them.
All in all, new all-time highs for gold as a Christmas gift to the bulls is still a distinct possibility.
Here are silver's charts; and its step sum is not as constructive as gold's. It's always best to see the price trend move (up or down) with authority before its step sum, and that isn't what we see below. Silver's price trend is still range bound, and until it begins to move up with some enthusiasm, I don't care what its step sum (market sentiment) does. Well that is not exactly true, I'd much prefer to see silver's step sum continue its collapse as silver continues to be range bound, like the gold chart above.
Now for the Dow Jones (blue plot below), where I used a BEV plot with the Dow's step sum. The Dow Jones is having a real problem staying above its BEV -10% line. Since April of 2011, it's tried to achieve and maintain a single digit BEV value, but then fell down to the BEV -25% line last August. After succeeding in breaking above the -10% line for the first five months of this year, the Dow Jones then made a first attempt for its BEV -5% line, and failed. After a retreat back to its BEV -15%, the Dow now seems to be having difficulty with its BEV -10% line. The question to be asked now is whether the Dow Jones' next move is a second attempt for the -5%, or admit failure and decline back to its -15% BEV line?
At today's close, it did manage to end up above the -10% line (a single digit BEV -9.80%), but grandpa Dow Jones is having difficulties that a True bull market would not be having. It's telling that in the last fifteen months, the Dow Jones has had many opportunities to break above its highs of October 2007, and has failed to do so every time. Look at all the up days for the NYSE 52Wk highs and lows in the table below. The NYSE 52Wk H-L Nets saw only one down day in the past month, and yet a month later the best the Dow Jones could make of this string of 52Wk highs was a 126 point gain?
One doesn't have to look too deep to see that stock market has some unresolved issues that's giving it acrophobia every time it gets within 5% to 10% of its October 2007 highs. Look at trading volume for the Dow Jones; it stinks.
Financial assets, like the Dow Jones, all have the same problem; thanks to twenty years of central bank interference, they all are grossly overvalued - worldwide. Back in the days when companies would save money on advertising by publishing their balance sheets with full page ads in Barron's, seldom was the Federal Reserve even mentioned in the financial media. A significant proportion of the population in the 1950s didn't even know it existed. Today, the financial media can't shut-up about how market valuations are supported by these inflationary maniacs. Nowadays, reassuring investors that the Federal Reserve cares about your babies is accepted as the status quo, but it's actually a nefarious thing, something that will end in an ocean of tears before Mr Bear is ultimately finished with you, me, and the "policy makers." Take care of yourself, and your family, by exchange your bogus bucks for some real money, (like gold and silver) while you still can.
14 July 2012
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