Subtitle: Charade Finally Over?So, here is how the story goes…
America spends the better part of 20 years in an unprecedented speculative frenzy… dot-com boom, housing boom, consumption boom, commercial real estate boom, finance boom, government boom… anything that was levered to credit and financial engineering and had an unrealistic speculative story BOOMED!
Then, as all great manias do, the party abruptly ended leaving “greater fools” strewn about every market and every corner of the economy from housing, autos and retail to banking and finance, commercial real estate, manufacturing, technology, energy and materials… on and on wreaking havoc from Wall Street to Main Street and state, local and federal government.
The cat was fully out of the bag… the mania was now obvious and over and the long deserved bust was firmly in place with broad stock markets selling off 40-55%.
But then… in just six short weeks…
“it’s a turn-around!” say the bulls on Wall Street… “The bottom is in!” … “Buy Buy Buy!” say the charlatans and cheerleaders.
The same folks who couldn’t perceive the decline in the first place were now calling the bottom and Americans, including retail and institutional investors as well as outright speculators, gamblers and other nitwits, were listening.
“The retail investor is back!” stated one enthusiastic floor trader on CNBC.
After the largest credit boom and bust in the post-Great Depression era, a 17 month long -55% deep bear market was all that was needed to put things right again… or so it seemed to the unwitting.
Nope.
That’s not the “real” story.
It appears that this unrealistic era will fade from our collective consciousness very slowly and painfully.
Make no mistake… we are in the midst of a generational decline.
A long unwind of massive debt and delusion that even the federal government cannot prevent.
2009 will be a year of somber awakening to the harsh reality that our economic troubles are more complex and intractable than is now expected.
In fact, recent trends in the job market (the continued jobless claims series specifically) clearly indicate that this economic decline is putting our primarily services-based economy to its first major test.
As the declining economic circumstances continues to drag on, a large and growing population of highly specialized service workers, particularly college educated professional business service workers, are finding out that their labor is either much less valuable or simply no longer needed.
This leaves our economic model in a bit of a predicament.
How do these workers retrain in order to become productive again… change careers… go back to college?
While many pundits still believe that a significant component of the decline to date is attributable to sentiment and psychology, it’s clear now that something truly fundamental is afoot.
Our prior bubble-laden speculative economy didn’t only bring over-consumption… the over-consumption resulted in an over-production of specialized labor skills particularly in the business services sector.
This fundamental unwind is resulting and will continue to result in serious economy-wide vicious cycle effects for the foreseeable future.
As regular readers know, I have been following along the stock market decline for well over a year now with this 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.
I will continue to post the comparison to the “dot-com” era bear market for posterity but now that we have broken well through the 2002 lows all technical similarities going forward have ceased… we are firmly in uncharted territory as the two bust eras have now become one.
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).
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.
What follows below is now just maintained for old times’ sake… the second peak was obviously real and this series of posts identified it roughly a year ahead of time.Now that we have entered effectively into uncharted territory, we are at a loss for historical comparison.
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)
NOW (Today’s Top)
- 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)
- H. Down Down we GO! (Uncharted Death)
- I. Bh Bye! (Fodder for the Sucker-Grinder)
