The following is part of Pivotal Events that was published for our subscribers April 14, 2016.
Signs of The Times
"Bankruptcy Debacle: Why a Wave Of Big-Name Retailers Are Filing Chapter 11"
- FN, April 6.
"The 'Mood Swings of a QE World' forced one trader to give up on fundamentals, and become a technician."
- Zero Hedge, April 7.
"I wouldn't describe this as a bubble economy."
- Janet Yellen, April 7.
"The [liquidity] problem is compounded by regulations that have severely curtailed credit trading."
- Financial Times, April 11.
"Manhattan's Real Estate Woes Get Worse: No Demand in Building Where Ackman Splurged $90 million"
- Zero Hedge, April 12.
Also reported was that William Ackman bought the condo in April last year. That's when Valeant stock was trading at 225. It was as low as 26 a few weeks ago.
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.
Link to April 15, 2016 Bob Hoye interview on TalkDigitalNetwork.com: https://www.youtube.com/watch?v=jMPPQstxzog&feature=youtu.be&noredirect=1
Listen to the Bob Hoye Podcast every Friday afternoon at TalkDigitalNetwork.com
