Weekend June 22,2014
Crash Course in What is Likely to Happen This is linked from the Of Two Minds blog by CH Smith wich is a link to Chris Martensen's Peak Prosperity Weekly site. I will address this three Es a bit later.
As always Of Two Minds Has some interesting insights, many of which have been reported here. In particular he notes that the markets do not move on fundamentals, Proctor and Gamble after all does not radically change in a short time, but people's emotions about investing in a low beta stock like PG do, not to mention a high beta like RAX or LULU.
An alert reader points out that my 1973-74 analogy has broken down, In fact the markets have just roared to new heights. Here is the explanation.
Markets rarely do exactly the same thing two times in a row. This makes it all the more frustrating to attempt to learn from experience. If that worked we could all quit our jobs and get rich, or at least make a living trading the market. Notably those that claim they do this, brokerage firms, seem the most likely to go out of business (Goodbody, Spencer Trask in another era, Lehman, Bear Stearns in this era) or need to be taken over as Loeb Rhodes or White Weld were in the 1970s or Merrill recently by Bank of America. Amazingly have you noticed that Merrill now proudly claims to be a wealth manager after missing bankruptcy by an hour (Then CEO Thain sold it to Bank of AMerica an hour before Lehman went toes up). But Americans apparently buy the story in mass.
Anyway, the crisis in the Presidency has unfolded right on time. But there is no crisis on Wall Street, in fact it just hit new highs. So the principle of alternation is at work. Here are more examples alternation, then and now.
Nixon was Republican, Obama is Democrat.
The press loathed Nixon, they embrace Obama.
Tens of thousands of column inches were devoted to Watergate. A massive investigation was begun, and televised, before C Span. There were actually two crises, the Watergate break in, a third rate burglary in Nixon's words, and the collapse of Viet Nam after a horrendously long war. Now we have multiple domestic scandals, try telling the IRS you lost your expenses on your hard drive, Benghazzi, Fast and Furious, VA, border security, NSA spying, Obamacare, etc. and the US is throwing away whatever 'gains' it had in Iraq.
Now the press ignores all the domestic scandals but were fixated on Watergate back then.
Back then the market slowly melted from January 1973, DOW 1051, to December, 1974 at 577. NOw is soars every day putting CNBC back in Year 2000 cheerleader mode.
So the logical conclusion, yep, is that the final market high will be in, yes, December, 2014, a fitting climax to a bizare 40 year two generational market. And yes that is a prediction.
Another difference is that then the FED was not actively stimulating the stock market. Today that is the cornerstone of its strategy. This is the Economy of the three Es in the Crash Course referenced above. The FED merely creates the money from thin air.
Is this a Normal State of Affairs?
The markets have been buoyed by
- the creation of all sorts of leveraged instruments like stock index futures, options, derivatives which are unregulated and traded and created off exchanges
- ETFs making the traditional mutual fund a trading device rather than a long term commitment
- computerized trading on your own PC making you the equivalent of an NYSE specialist in the 1970s
- Oh I almost forgot, High Frequency Trading by computerized programs, no humans involved once the switch is flipped
- huge investing pools of hedge funds and 'banks' leading to the creation of 'whale traders' who put the entire Federally insured FDIC at risk
- Stock Options created from thin air to 'reward' dubiously talented CEOs and their minions for ratcheting stock prices higher, often on projections never met or inflated accounting earnings
- FED injections of money into the banking system which find their way into the stock and commodity rather than the job markets
Other than that things are perfectly normal. That was a sarcastic comment. Let's move in closer for a look at just how dangerous, well okay, how about stretched to the upper Bollinger Band, the current set up really is.
DOW with Bollinger Bands
Stock Charts tells us that Bollinger Bands can be used to identify market tops and bottoms. So I put that idea to a test. Here is the monthly chart of the DOW going back 18 years. This captures the last two important tops and bottoms. Presumably the next top is well along into the making now.
And then it caught my eye. After the Dow peaked in 2000 and 2007, the upper Band briefly exceeded the top rail of the expanding megaphone. Now that has happened, see third blue arrow, again. And
- MACD has topped 1,000 which it did in 2000. It was unable to do this in 2007 despite the leverage of the sub prime mortgages
- price has been hugging the upper band just as it did prior to the previous two tops, but now has pulled away, moving a bit lower
- price is about 6,000 points above the 200 month MA, that is just a casual eyeball estimate, but that equates to past market tops
- the shorter term MAs are moving up again, this supports the we are in 'a new bull market theory' which is now rather popular, or we are in a final wave up
Is Everyone On Board Yet?
In the blue rectangle,the market was moving in fits and starts, ups and downs, lots of hesitation especially given the recent memory of the crash. But since that last test of the 50 week MA in 2012, confidence has soared. Price has stayed well above all the MAs, hugging the upper Bollinger Band.
Bullish Percentage of Stocks
As confidence has soared, the sell offs are fewer and more shallow. Let's label this graph,
What Me Worry?
Nothing is Going to Change until this Line Turns Down
And it is going to take quite a jolt to do that.
So for now things are up up and away.
Okay at 1,000 words, that is enough for this post. And again please read the links at the start of this post. Economy, Energy, Environment coupled with an exponential population increase, Malthus may be his day at bat yet.
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