Ever since the 2000 stock market top, the natural deflationary cyclical
forces have been bearing down on not only the stock market, but the
underlying economy. It has been these natural deflationary cyclical forces in
which the Money Masters have been fighting with their massive liquidity and
intervention campaign. As a result of the unprecedented efforts to re-liquify
the economy, the stock market has been the tool of choice to paint the
illusion that everything is okay. As a result of the unprecedented efforts to
re-inflate, this cycle has become the most extreme ever and as a result I
believe the current market environment is the most dangerous since the inception
of the Dow Jones Industrial Average in 1896.
As the market rallied out of the 2002 4-year cycle low, the liquidity
infusion fueled the natural cyclical advance to new highs and ultimately
resulted in the longest 4-year cycle advance in history as of that time. I
warned all throughout that rally that the extension of this cycle was only
making matters worse and that extension did, in fact, result in the worst
financial disaster since The Great Depression. Then, as the market rally out
of the 2009 4-year cycle low began, so did the most aggressive liquidity,
intervention and propaganda campaign in history. As a result, this 4-year
cycle advance has been stretched beyond any historical norm. Throwing money
at a problem, does not always fix the problem. In fact, throwing money at the
problem following the 2002 low and into the 2007 top only served to make
matters worse. What we have seen since 2009, in my opinion, makes for an even
worse financial disaster. Think about it. The fix for the problem that created
the worst financial crisis since The Great Depression has been more of the
same thing that created the worst financial crisis since The Great
Depression. How logical is that? This massive liquidity, intervention and
propaganda campaign has not fixed the underlying economic issues. Once again,
it has only created a worse problem.
In reality and in spite of what every one thinks, the advance out of the
2002 and the 2009 low have occurred within a secular bear market and the
rallies out of these lows have been extended and fueled to new highs only as
a result of the massive liquidity and intervention and not as a result of a
recovering economy or within the context of a secular bull market. I realize
that this may sound crazy, but I have evidence to support this statement as
well as examples of this having occurred in the past. People have been
trained to think that a market at a new high has to be in a bull market. Not
true! As an example, the Industrials actually moved to a new high in late
1972 and into January 1973 amidst the 1966 to 1974 secular bear market. Note
on the chart below that the rally into the 1973 high was followed by a 46%
decline into the final secular bear market low in late 1974.
In Technical Analysis of Stock Trends, Edwards and Magee write:
"Volume goes with the trend- Those words, which you may often hear
spoken with ritual solemnity but little understanding, are the colloquial
expression for the general truth that trading activity tends to expand as
price moves in the direction of the prevailing Primary Trend. Thus, in a Bull
Market, volume increases when prices rise and dwindles as prices decline; in
Bear Markets, turnover increases when prices drop and dries up as they
recover."
Now, I want to walk you through the chart below of the S&P 500 with
volume bars at the bottom in blue. Starting back in 1982, look how volume
expanded with price, per the green trend lines above the volume bars, as the
secular bull market pushed into the 1987 top. As the 1987 price top was being
made, there was a non-confirmation by volume, per the small red trend line
above the volume bars, which lead to the decline into the 1987 low. As the
advance out of the 1987 low began, volume was a little light, but by 1989
volume began expanding once again and it continued to do so all the way into
mid-1999. There was a brief
non-confirmation in conjunction with the 1998 4-year cycle top, which
again is noted in red. Nonetheless, this was bullish behavior and following
the decline into the 1998 4-year cycle low, volume again expanded into
mid-1999. Then, once again, as price moved into the 2000 top, the contraction
in volume created another non-confirmation, noted in red, which lead to the
2000 secular bull market top.
I want to stress the point as to how the relatively short-term volume
non-confirmations that were seen in conjunction with the 1987, 1998 and 2000
tops lead to the declines into the 4-year cycle lows that followed. Please
also note that the volume characteristics from 1982 into the 2000 top were
consistent with TRUE bull markets, per the Edwards and Magee quote above.
Now note how the volume behavior changed following the 2000 top, it
clearly shifted from bullish, to bearish behavior. As price declined into the
2002 4-year cycle low, volume moved up in conjunction with that decline, as
is noted by the green trend line above the volume bars. Then, note the
further characteristic change in that the advance into the 2007 high occurred
on decreased volume and that volume increased, per the green trend line, as
price moved into the 2009 low. Remember what Edwards and Magee said about
volume. ".....in Bear Markets, turnover increases when prices drop
and dries up as they recover." But wait, it gets worse. Much
worse. Look how the entire advance out of the 2009 low has occurred on
increasingly less and less volume and the only expansions in volume, per the
green trend lines, have occurred in conjunction with price declines.
Turning back to Edwards and Magee, they talk about the three phases of
bull and bear markets and the related volume characteristics. In regard to
bull markets they write, "Finally, comes the third phase when the
market boils with activity as the 'public' flocks to the boardrooms. All
the financial news is good, price advances are spectacular and frequently
'make the front page' of the daily papers, and new issues are brought out in
increasing numbers. ..... In the last stages of this phase, with
speculation rampant, volume continues to rise, but 'air pockets'
appear with increasing frequency; the 'cats and dogs' (low-priced
stocks of no investment value) are whirled up, but more and more of the
top-grade issues refuse to follow." While the recent advance
exhibited some of these characteristics, this quote is descriptive of the
advance between 1997 and 2000. The key here is volume continues to rise.
Obviously volume is not and has not been rising with the current price
advance. There was an indisputable change in volume behavior from bullish to
bearish in conjunction with the 2000 top. In spite of the fact that price
moved to a new high in 2007 and now to yet another new high in conjunction
with the longest 4-year cycle advance in stock market history, these rallies
have absolutely NOT occurred within the context of a secular bull market.
Now I want to tie this in with a couple of other charts that have been
discussed in various articles on the internet in the last few months. The
first is the chart of the Velocity of M2, which can be found below. I feel
this chart goes a long way in explaining our current economic woes as well as
why the correlations and conclusions about specific levels cannot always be
drawn. The velocity of money is basically the rate at which money is
exchanged from one transaction to another. M2 is a category within the money
supply that includes M1 in addition to all time-related deposits, savings
deposits, and non-institutional money-market funds. Let's start with the
contraction in the late 1990's. The Velocity of M2 peaked in July 1997, which
was followed by the 1998 4-year cycle top in equities. Now notice that the
Velocity of M2 never moved above its 1997 high in association with the stock
market's advance into the 2000 top. In other words, there was a
non-confirmation if you will by M2. Then, as the contraction continued, the
market moved down into the 2002 4-year cycle low. I downloaded the raw data
so I could look at the details of this closely and the rebound in M2 Velocity
that followed the 2002 low peaked in April 2007. In case you have forgotten,
the last 4-year cycle top in equities occurred in October 2007. M2 Velocity
continued to contract into July 2009, but then peaked again in July 2010. The
ongoing contraction that has followed, combined with the underpinning of this
stretched 4-year cycle, makes for a very dangerous setup.
When you stand back and look at this chart, it should be obvious that what
the money masters have been fighting since 1997 is a contraction in the
velocity of money and consequently a contracting economy. It should also be
obvious that it is just not likely that we are operating within a secular
bullish environment with such a contraction in the velocity of money.
Really! Stop and think about that a minute. It's just illogical and it
defies basic common sense that you can have a secular bullish period on the
back of such a contraction. Rather, this is telling us that the economy
peaked out in the late 1990's to early 2000 period, just as the secular bull
market in stocks did. It fits! This tells us that we have had a tightening
economy ever since and the Money Makers have been trying to overcome this
contraction with various stimulus methods. In the process, they managed to
create the housing bubble that popped back in 2005, the commodity bubble that
popped back in 2008 and now the stock bubble, all of which have occurred on
the back of a bad underlying economy and a secular bear market. At the time,
their efforts to reinflate following the 1998 top, made the decline following
the 2000 top worse. I again said during the advance out of the 2002 low and
into the 2007 top that the phony manufactured reinflation efforts would once
again only make matters worse, which proved correct in association with the
decline into the 2009 low. I fail to see why the even more desperate
manufactured reinflation efforts, on the back of a continued contraction in
the velocity of money, along with this extended cycle, all within the
underlying secular bear market, should prove to be any different.
The next chart I have included here is of the Labor Force Participation
rate. This chart peaked in early 2000, which is consistent with the peak in
the velocity of money, what I believe was the 2000 secular bull market top
and peak in the underlying economy. Does it really compute that we have a
recovering economy with a contracting velocity of money and a contracting
labor participation rate? Rather, these contractions, are consistent with the
secular bearish characteristics seen in equities as well as the contraction
in the Velocity of Money.
The talking heads, the economists, politicians and anyone else can try to
ignore, gloss over or explain away these facts all they want. Ignoring the
facts does not change the facts. The hard data discussed above cannot be
disputed. When the rally out of the 2009 low began I said that this rally
would continue until the DNA Markers associated with all other 4-cycle tops
is seen. Once these pieces fall into place, all the King's Money Masters and
King's men will not be able to put Humpty Dumpty back together again. There
is a massive unwinding coming and we certainly have the ingredients for it to
be the worst financial disaster ever. You have been warned! If you would like
to know more about the DNA Markers and the assessment of the current market developments,
that research is available in the monthly research letters at cyclesman.com.
