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Pulling Together Three Bearish Stock Themes

Summary

I have three not-so-bullish stock-market themes at work at the moment: a scary October, the possibility of a major failing rally, accompanied by approaching electoral chaos. Here's a brief update that helps pull the three together.

The following table helps put the three themes into a statistical perspective, using my seven-measure tracking group as a proxy.

SELECTED STOCK-MARKET RETURNS TO 10/22/04
FROM KEY DATES (Excluding Dividends,
Ranked In Order From 09/30/04)
  To Close on 10/22/04 From:
  10/06
2004
Close
09/30
2004
Close
Aug.
2004
Low
Close
2004
High
Close
12/31
2003
Close
NASDAQ 100 -2.4% +1.8% +10.3% -7.5% -2.0%
NYSE Comp. -2.9% -0.7% +4.9% -3.8% +1.3%
Russ. 2000 -4.2% -0.9% +9.9% -6.3% +2.0%
Value Line -4.1% -1.1% +6.6% -8.3% -2.0%
Wil. 5000 -3.7% -1.3% +4.4% -5.0% -0.5%
S&P 500 -4.0% -1.7% +3.1% -5.4% -1.5%
DJIA -4.7% -3.2% -0.6% -9.1% -6.7%
Average -3.7% -1.0% +5.5% -6.5% -1.3%
Median -4.0% -1.1% +4.9% -6.3% -1.5%

A Scary October

The missive dated 10/12 ("Stocks: A Scary October?") observed the following:

"Some Octobers have been particularly rough sledding for the stock market. So far (on balance), October 2004 has not been. But investors should not breath the proverbial sigh of relief quite yet.

"For October so far, my seven-measure stock-market tracking group was up an average 0.9% through yesterday's close. All seven components were up in price, in a range of 1.8% for the NASDAQ 100, to less than 0.1% for the DJIA. There is nothing too scary about that -- so far ... However, I still detect storm clouds gathering on the horizon."

As the above table indicates, the tracking group's average 0.9% gain when the 10/12 missive was written has slipped to a 1.0% decline (through last Friday's close). Nevertheless, this reversal still lacks the gusto necessary to award it a "scary." classification.

The results from the close on 10/6 through last Friday are a different deal. Maybe they, too, lack scary proportions, but they certainly are not pleasant. Let's place them within the context of another recent research piece.

A Major Failing Rally

The missive dated 10/6 ("The Mother of All 2004 Failing Stock-Market Rallies?") had the following to say. This is an extensive excerpt, which will make it a more effective segue into theme number three -- electoral chaos.

"Unto itself, yesterday's [10/5's] modest stock sell-off was not a big deal ... unless it were to follow through on the downside. Then it could become a bigger deal, giving the appearance of yet another failed rally. And I think a decent case can be made for a volatile, troubled period immediately ahead.

"There's the continuing threat of domestic terrorism, of course, heightened materially by the rapidly approaching national election. Considering where the major sentiment measures are at present, the stock market is ill-prepared for such an event. It would get creamed!

"But is it possible the ingredients for another kind of terrorism of sorts are beginning to coalesce. Suppose, for instance, the Presidential election segued into out-and-out chaos? I sense this as a growing possibility.

"Something is up with the huge quantity of new voter registration throughout the country. Where I suspect this is leading is massive voter fraud throughout the country on 11/2, or at least what will appear as such -- something akin to what Florida-2000 spawned, but on a much, much grander scale!

"Taken to an extreme -- something not to be ruled out, in my view -- it could leave the United States in political chaos on the morning of 11/3. I believe the initial foreign reaction would be very harsh, hitting the dollar hard, which would spill over quickly to higher interest rates [yes, higher interest rates], significantly lower stock prices and a major spike in the price of physical gold. In the case of the latter, new highs in gold's bull market."

As matters have turned out, recent highs on most bellwether equity-market measures were made on 10/6, so my suspicion that something was up around that time was on target.

As far as I'm concerned, this entire year has been nothing but a series of failing rallies. Some might want to describe the process as a giant distribution top. Go right ahead; you get no argument from me!

On this score, let's go back to the earlier table. It includes returns through last Friday from 2004's respective high closes. Not included are the dates on which those highs occurred, which I think is very germane, vis-a-vis failing rallies and/or a big distribution top.

The NASDAQ 100 set its high close way back on 1/26. Then came those for the DJIA and the S&P 500, set on 2/11. Next were the NYSE Composite and the Wilshire 5000, which made theirs on 3/5. Finally came the 2004 highs for the Russell 2000 and the Value Line (geometric), set on 4/5.

Think about this chronology. The most recent of the 2004 highs were made going on seven months ago. Then juxtapose this to the wild optimism of early this year, which included the admonition from the CNBC crowd that went something like: "It's a Presidential election year, stocks can't miss!"

Electoral Chaos

I've been thinking about the potential chaos aspects of the coming election for many weeks. I probably should have gotten my feelings on the table earlier than on 10/6, as mentioned above, but everyone knows the "better later than never" shtick. Simply stated, Gillespie has bad, bad karma about what is coming on the chaos front.

From the missive dated 10/13 ("Stocks and the Coming Electoral Chaos"):

"The chaotic events surrounding the year-2000 Presidential election certainly contributed to a shaky stock market behaving in an even shakier way. Are stocks on a course for a similar outcome this time around?

"...The ingredients are now very much in place for a high level of either actual or perceived election fraud. And to stay out of the partisan fray, ... fraud of the perceived variety can and is likely to work in both directions. To wit: Republicans alleging it against Democrats as well as the other way around.

"I can envision, and quite realistically, wholesale allegations coming from both sides leading to numerous petitions to federal judges in more than one state for extensions of voting hours, thousands of impounded voting machines, cries heard 'round the globe of "disenfranchised voters" in huge numbers, ad infinitum, ad nauseam."

The 10/13 missive contained a table relating to the year-2000 affair. It is definitely worth repeating.

THE STOCK MARKET'S BEHAVIOR AROUND KEY DATES
DURING THE YEAR-2000 PRESIDENTIAL ELECTION*
  11/07
2000
Close
12/12
2000
Close
Low Close
Between
11/07 and
12/12/Date
% Change
11/07 to
12/12 Low
DJIA 10952 10768 10374 12/01 -1.7 -5.3
S&P 500 1432 1371 1315 11/30 -4.3 -8.2
NAS 100 3280 2863 2507 11/30 -12.7 -23.6
*Dates: 11/7 = year-2000 election day. Hours after the stock-market close on 12/12, the US Supreme Court brought in its ruling favorable to Bush in Bush V. Gore. On 12/13, Gore conceded the election.

To be sure, the secular bear market still in progress today was well underway by election day 2000. Therefore, with stocks already in a general downtrend, you cannot say for sure how much damage the unexpected political chaos inflicted. But you can get a pretty good handle on the fact it was relatively substantial.

As the above numbers show, the post-election sell-off through the immediately subsequent closing lows in the three proxies I've used were significant. But there is additional statistical information that helps put the declines in a better perspective. The DJIA, S&P 500 and NASDAQ 100 declines for all of 2000 were 6.2%, 10.1% and 36.8%, respectively. Thus, the declines in the period immediately following the election were equal to a very large amount of 2000's total red ink.

With all the ingredients for significant electoral chaos falling neatly into place well before the fact, it is difficult to envision the markets waiting to be completely blind sided by the event. So perhaps this explains at least part of the stock market's recent weakness.

And one place you certainly would expect to see some expression of concern would be the currency markets. Is it possible this already is in progress, too? The next table might be providing a clue, considering the dollar's performance during the first three weeks of the current quarter.

THE DOLLAR'S 4Q-2004 AND YEAR-TO-DATE
PERFORMANCE AGAINST SELECTED CURRENCIES
(Ranked by Fourth-Quarter Returns)
Currency/Index 10/22
2004
Close
09/30
2004
Close
12/31
2003
Close
% Change
Q4 YTD
Swiss Franc 1.2121 1.2452 1.2404 -2.7 -2.3
Japanese Yen 107.24 110.01 107.37 -2.5 -0.1
Canadian Dol. 1.2338 1.2614 1.2963 -2.2 -4.8
Euro 0.7890 0.8041 0.7950 -1.9 -0.8
Australian Dol. 1.3523 1.3738 1.3282 -1.6 1.8
British Pound 0.5474 0.5518 0.5599 -0.8 -2.2
Mexican Peso 11.505 11.383 11.202 1.1 2.7
Brazilian Real 2.8686 2.8580 2.8918 0.4 -0.8
FRB $ Index 85.87 87.36 86.92 -1.7 -1.2

Of course, maybe there will be no election-related event(s) of the variety I am contemplating. There is one client of mine in particular, a very market-savvy young man at that, who has chided me a few times for thinking this will be a cause celebre for the markets. So far, though, he has not dissuaded me.

In defense of my position, I was going to provide some representative examples of what is now beginning to sweep through the country in the way of news stories. But when I Googled the subject, the response was simply too voluminous to edit.

Therefore, for those who are interested and have some time to spend, I suggest the following. Go to the Google home page and click the "News" link. Then, in the search box, type in "potential U.S. presidential election fraud" and click the "Search News" option. Then, after the several hundred entries appear, click the "Sort by Date" option.

There are other search possibilities, but the one I used provided lots and lots of reading material. They may not convince you I am correct, of course, but you surely will not lack for food for thought.

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