Subtitle: Look out below?The current “rally” has been puny to date and in spite of the Oracle of Omaha’s very public appeal, it looks like more and significant weakness lies ahead.
It seems no amount of cheerleading can breathe the bullish sentiment back into this failing scheme… the cat is out of the bag… earnings look dismal, housing looks to be heading for even deeper lows, unemployment is on the rise, industrial production is in serious decline, retail consumption is experiencing a historic slump, the economy is clearly in recession.
At this point you hear very few reputable analysts calling for a “Soft Landing” for the “Goldilocks Economy”.
Instead, I think it’s fairly clear that we should all be hoping only for the best of “Crash Landings” for an economy fraught with distortion and imbalances and a stock market woefully behind in recognizing the new reality.
Again, I think it is possible that we are seeing a “GM-ization” of the broader stock market whereby thousands of stocks are essentially marked down to truly unsettling levels in the face of a historic weakness, recession and loss of confidence.
As regular readers know, I have been following along with the recurring “Twin Peaks” post whereby I simply charted some very basic technical analytics (somewhat ala the amazing Louise Yamada mixed with a couple of my own inventions) which compared the underlying average movement of the current S&P/500 index to its performance during the unwind of the “dot-com” collapse.
Be sure to study the charts well as they present several different ways of capturing market volatility and together compare past market performance to what we are seeing today.
The “Percentage Up-Down” chart clearly shows that we have just entered a period of REAL volatility BUT also leads one to believe that we may have a long way to go in this market shakeout.
The “Up-Down Daily Closings” chart seems to indicate that although we have seen increased volatility and significant declines, we have yet to match the distribution of daily up closings and down closings (inverted red line).
There are also host of very interesting technical similarities (which are noted below) that indicates that we have fully transcended into another severe bear market.
Study the following image (click for very large and clear version) of the S&P 500 index from 1995 to today then read below for the technical blow by blow.
Notice also, that I’ve added both the “effective” federal funds rate (light grey line) and an overlay indicating the period of the last recession.
As you can see, entering the last bear market, the Fed cut rate significantly taking it from 6.5% at the start of the bear market to 1.00% in the trough.
It’s important to note that although the Federal Reserve’s response was dramatic, the market still resulted in an over 48% decline.
THEN (1998 – 2000 Top)
- A. October 1998 – S&P 500 gives early warning sign by crossing its 400 day simple moving average (SMA). Notice also that the 50 day SMA breached the 200 day SMA.
- B. October 1999 – S&P 500 gives a second signal by crossing its 200 day SMA after a solid twelve month expansion. 50 day SMA touches the 200 day SMA.
- C. Three prominent but decelerating peaks set up the top.
- D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
- E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
- F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
- G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)
- A. June 2006 – S&P 500 gives early warning sign by crossing its 400 day SMA. Notice also that the 50 day SMA breached the 200 day SMA.
- B. March 2007 – S&P 500 gives a second signal by falling near its 200 day SMA after a solid nine month expansion. 50 day SMA similarly depressed.
- C. Three prominent but decelerating peaks set up the top.
- D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
- E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
- F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
- G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)
