Tuesday Dec 23 2014
An Echo of the Year 2000 and 2008
Volatility has soared this fall and particularly so this December. For new readers let’s step back and examine the larger picture of what is happening.
We believe the stock market is in a recurring eighteen-year cycle of highs and lows. This cycle began in Year 2000 and will likely extend until 2018. Highs were recorded in 2000,2007, and again December 6, 2014. That date is precisely forty years from the last important low recorded December 6, 1974 at DOW 577. On December 8 this year the Dow and other indexes immediately turned down.
Crude oil prices completed a bull market stretching from their late 1990s low of $12 to $140 by June, 2008. Prices then plunged to $35 by Christmas, 2008. Prices have spent the last six years recovering. Lower price highs have been set, the highest being about $115. This suggests prices are simply rebounding before another move lower. We have suggested that in this space for the last year. This fall that plunge began again, with a vengeance. Prices fell from $105 to $53, about 50% depending on the market or closing prices.
Sock prices measured by the Dow 30 Industrials have experienced extreme volatility. Just Thursday that index soared some 420 points after plunging hundreds of points since December 8. Is there any precedent, a blueprint, a previous period that could serve as a clue? Indeed there is, let’s go back to the topping process in stocks in Year 2000.
The Dow DJIA topped in January, 2000 around 11,750. Recall that this high was the culmination of an 18-year bull market that began below Dow 1,000 in 1982. And so the forces of bull and bear underwent a tremendous shake out for the next eighteen months. Four more lower highs were recorded. The DJIA from the initial high that January, plunged some 2,000 points by March, then reversed 1,500 to the upside by the end of April. This kind of extreme volatility continued until a fourth high was recorded in May, 2001. By that point the weekly moving averages had converged suggesting a new direction. That new direction came by August 2001 as prices quickly fell from 10,250 to 8,500 (another 1,750 points) in a mere three weeks. The bear market had truly begun.
Our point here is that we are witnessing the culmination of a long period of price advances. One advisory group that we follow suggests this is in fact a culmination of American progress from the last Battle of the Revolutionary War, setting a new nation on the way to over take the world’s existing power, Britain. That would be the culmination of a 233 year advance. This theory is worth remembering. In a few years China, not the US, will likely be the world’s largest economy. Already several trading centers in the Far East dwarf our own Wall Street in terms of Initial Public Offerings. Our point is that the tremendous volatility at never before seen price levels is typical of a momentous turn of events. This was true forty years ago in 1974 as the US had abandoned the Bretton Woods agreement. A fiat money system was adopted abandoning the gold back standard since 1944. The result was huge inflation (Dow 577-17,993) in stock and oil ($2 - $140) prices. That inflation is now being unwound right before our eyes. The battle of bull and bear as Central Banks desperately try to inflate their economies will likely last for several months, just as it did in 2000-2001. (And forty years prior to that the markets were recovering from the Dow Crash Low of 32 in 1931).
Russia has already become a case study in massive deflation. The ruble has collapsed to over 60 to the US dollar. The RSX ETF for Russia has lost 50% of its value since June this year. Apple closed its on line Russian Store, unable to hedge for the ruble volatility. Over half of Russian export income is oil based. Russia’s Central Bank raised interest rates to 17% in an attempt to stem the fall of the ruble.
Meanwhile, the energy service index XES, which is representative of the Permian Basin Economy, has lost half its value, falling from 50 to a low of 26. It bounced a couple of points with the stock and oil rebound the last two days. This is an index of service companies such as Halliburton. Major oil stocks bounced after a 30% decline for most. Natural gas has settled in around $3.70.
At best crude oil prices traded sideways this week around $55. But there is no evidence of a bottom yet nor a reversal to the upside. As we have suggested, desperate countries with nothing else to sell but oil are liable to increase production to sustain cash flow amid falling prices. And that is where the market is now.
Follow Professor Elam on markets at http://themarketperspective.com
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