Signs of The Times
Perspective
Janet Yellen's statement is the public servant speaking but it does make a
point. Despite the biggest injection of credit in history, the economy is not
booming. The description is appropriate, but the condition is confounding interventionist
theories and those who impose them.
Why is the economy not booming?
Basically there are two reasons. One is that financial history is in a post-bubble
contraction when pricing powers and growth would be weak. This is natural and
the other reason is not. Striving for an impossible perfection, governments
have imposed a lot of regulations. This constrains whatever growth that has
been possible in the first expansion out of the 2008 Crash.
As in the 1920s, Fed injection of credit went into financial speculation.
And the degree of financial speculation can be measured.
As to the trader who became frustrated and turned from fundamental to technical
research; it has happened before.
One should read and make notes on Barron's weekly summaries during the 1920s.
During the latter stages of the bubble the common share theory of investing
was regularly reviewed. For example, most commodities were firm and rail car
loadings were positive. Dividends were good, etc. In the face of speculative
fury, none of this really mattered and it took some time for the establishment
to give up on the expectation that conditions would soon take a turn for the
better.
Fundamental researchers still have problems with technical analysis, but in
times of great volatility it's been a comfort to go from oversold to overbought.
And back again.
During the early 1930s, Baron's increased its coverage of technical research.
Mainly because the establishments view was becoming more widely seen as unreliable.
Of economists and bankers in Wall Street during the late 1920s, Benjamin Anderson
at Chase got the market right. That was before the peak. He also wrote some
papers that profoundly criticized the "progressive" political movement that
was so popular amongst intellectuals.
Kind of guy one would enjoy having a drink with.
Stock Markets
There are a number of ways of measuring overbought, or its counterpart. The
ChartWorks has refined some and developed some that have been tested against
significant change and found to be practical. This looks after near-term and
intermediate swings.
The next step is the understanding that all of the great bubbles have been
methodical in the climax and in the consequent contraction. They are not "Black
Swans". Changes in the yield curve and credit spreads have also been methodical
in triggering the contractions.
This advises on the longer trends.
The ChartWorks "Springboard" model provides buy signals on the dips in a rising
market. The last key one was in October 2014. Then in February we noted that
the old Dow Theory was becoming interesting, and in May it indicated that the
bull market was likely over. The opposite to the Springboard Buy is the Inverse
Springboard, which is a sell in a declining market.
Last week, the rally since January became dynamic enough to register Inverse
Springboards on the senior indexes. A "sell" in a declining market. The action
is now precarious and the overall market could rollover within a week or so.
Today's rise in the dollar and rollover in precious and base metals sectors
marks the possibility of change. The change following the excesses (Springboard
Sell) noted in the S&P is likely to be significant.
Even the action in the NYA was enough to clock a Springboard Sell.
This represents the NYSE Comp, which has been struggling with our target at
the 50-Week ma. The moving average is at 10312 and the index is at 10371. Falling
below would follow a similar struggle with the 50-Week in May 2008. Taking
out the moving average in July was a struggle as well. We noted the similarity
with the failure at the 50-Day in late 2007.
It was one of the moves that prompted the conclusion that the bear had begun.
On the different sectors, this year's "Rotation" worked out very well and
we have advised taking money off the tables in base metals, oils and the precious
metals. Two days with a firmer dollar and the "materials" running out of momentum
can't be called a trend change.
But it is a heads up on the possibility that the best is in for the hot sectors.
On the duller sectors, the BKX has been flat at the 165 level for three weeks.
That's despite favourable action in the curve, spreads and crude oil.
Overall, earnings have been declining, but through the miracle of financial
engineering (buybacks) earnings per share are much better than reality. Buybacks
should not be confused with a sinking fund, whereby a company will purchase
its own bonds out of the market. This saves paying them all off, at once, as
they mature.
Prudent.
A buyback operation borrows money to buy the stock to boost the market and
to contrive a better EPS.
Not prudent.
Oh well, every contraction involves remorse.
Reminds of the Tech Bubble in 1999 when the promotion involved touting an
earnings number which was "whispered". Inevitably, the actual report would
be "one-cent above the estimate" and the stock would jump. At the time, we
thought that they had learned to whisper in a sawmill.
Contraction? Late Confirmations
S&P Returns
- The last key break was in June 2008.
- On two prior occasions this occurred as the contraction became obvious.
- This item does not have a long history and another occurred in May 2001.
Buyback Binge?
- The bear market began in October 2007 and Buybacks failed in January 2008.
- The latest post is dated March 31st and it looks interesting.
