Fear? Error? Manipulation? Economic Terrorism?

I’m simply shocked at today’s trading fiasco.

To gain some perspective let’s remember that although stocks were down all day, the “glitch” drove the S&P down over 8%, nearly the greatest percentage loss seen since the crash of 1987.

In fact, there were only three other down days since 1987 with losses greater than today’s intraday debacle all of which were logged during the worst portion of the 2008 housing/credit unwind.

So, it took the subpime slide, the housing crash, the fall of Bear Sterns and the near simultaneous collapse of Fannie, Freddie, and Lehman (not to mention Citi, Wachovia, Indymac etc.) and the flurry of unprecedented government bailouts (and the associated loss of confidence) just to see an equivalent violent downward slide as we saw today.

I’ll say it again… something is amiss.

Although there are some very serious macro issues (weak retail, long term unemployment, continued housing weakness) and global issues (Greece tumult, Euro slide, China slowing) I can’t help thinking that there is much more to this story.

The VIX had been climbing for the last week or so, clearly there was some heightened concerns regarding China, Greece and Europe but did this anxiety come anywhere near the level seen at the height of the 2008 unwind?

While it’s obviously plausible that this is some sort of cascading trading error (one of the citied causes of the 1987 crash), why wouldn’t we have seen similar incidents during the massively volatile days of 2008, or the tech wreck for that matter? There was not a single 8% down day for the S&P 500 during the entirety of the early 2000s tech wreck.

Stocks have traded up very technically since March 2009, we have more program trading today that at any time in the past, could this be a live by the sword die by the sword?

Finally, not to get too deeply conspiratorial, but could this be some form of manipulation? Even a form of terrorism?

Two Great Bounces!

The rally has been powerful lately…

It seems that stock speculators are not just pricing in future recovery, they are weighing in on the past and concluding that the tumult of the fall of 2008 was an overreaction.

The “green shoots” now visible, why not make a bet that the financial panic of 2008 was a temporary and overblown phenomena and scoop up stocks on the cheap?

That question and the current rally define the problem itself.

There is too much faith and speculation in rising stock markets and too little respect for risk.

In a lot of ways this rally is reminiscent of the great run-up of 2006 and most of 2007… the writing was on the wall… most any observer could see that there was significant trouble ahead but the collective wisdom yielded only more conviction that stocks were headed higher.

We know differently now… stock seriously crashed and the discount mechanism that is the public stock markets again showed itself to be a myth.

As I have said before, I believe that what we have been experiencing since early-2000 is NOT the typical boom-bust pattern the business cycle established in the decades following WWII but rather a generational unwind whereby all the mistakes (… especially those that were “managed” or mitigated through the actions of our strong central government including the Federal Reserve) of prior decades crescendo and morph into a prolonged period of decline.

The stock markets peaked in 2000 (in real terms)… the job market peaked in 2000 (in ratio terms)… the massive commercial paper market has now contracted to a point well below the lows of 2002… What followed in the wake of the dot-com bust is now generally know to have been a fraudulent economic “recovery” without the jobs and now without all the paper wealth.

But the speculation drum beats on… there are more ways to get in on some form of stock action today than ever before and everyone is doing it.

So, the rally is strong… the same participants that were clueless in 2006 and 2007 and broke in 2008 suddenly seem like moguls again… financial geniuses… going long and salivating form more.

But this collective delusion is exactly what will be punished in time.

True capitulation is not a one day, week or month trading event… it will take some time to beat the speculative spirits out of market participants after so many years of distorted economic times.

But beat Mr. Market will.

The following is a comparison between the massive stock bounce that occurred in the wake of the great crash of 1929 and our current great rally.

The Almost Daily 2¢ - Twin Peaks!

Subtitle: Let the Losers Lose!

Hmm… this run has some legs.

Could I be wrong about a retest of the March lows? Sure… Should I be wrong? No.

Cheats, frauds and the unwitting should never succeed. I would prefer that all losers lose.

Our system, in principle, is simple ... if you make a serious financial mistake … a homeowner that buys too much house, a stock speculator that gets comfortable with perpetually increasing stock prices, a firm that over-debts itself and fluffs up its income, a bank or broker dealer that makes junk loans without due diligence, a government that creates programs that can never be properly funded or that create longstanding distortions... you lose.

It’s that simple.

That's the invisible hand at work… eventually all mistakes are corrected and not without pain... that’s what (… theoretically of course) makes our system so good... losers are obvious and their experience serves both as a form of creative destruction creating new opportunities for those that are more capable and also as an important lesson to those that are equally incapable.

If you believe that the system of bailouts and government meddling is OK... if you are now relieved and believe that the worst is over and anyone who suggests otherwise is just a perma-bear looking for trouble, you are likely simply benefiting (…or believe that you are benefiting) from all the bailouts and fraudulent dealings.

If the stock bounce has brought you a measure of confidence and worked to allay your fears of the future, you are taking too short a view of things… you should be far more fearful of strong central planners (… the Federal Government and the Federal Reserve) thoroughly manipulating your economic system from stocks to housing to banking and finance and beyond.

***

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)
• J. S&P 500 Blasts through the 50 and 200 day SMAs (The Cross of Life?)

The Almost Daily 2¢ - Twin Peaks!

Subtitle: Hope Springs Eternal… Until it Doesn’t!

The Bulls are getting very ballsy lately… some would event say reckless… pushing the S&P 500 back up over the 200 simple day moving average and nearly taking the 50 day SMA with it…

But wait…

Is that a freight train I hear?

Like an 8000 hp Union Pacific steaming down the tracks the second half of 2009 (H2) is fast drawing neigh and with it a reemergence of uncertainty and a much needed dose of reality and of course… lower stock values.

“Why?!” you say… “I thought the decline was over… taken care of handily by those tremendous stewards of our great economy (the world’s greatest you know!)… the elites of the Federal Government and the Federal Reserve System…”

You go on... “What we experienced last fall was just a simple financial panic… the ripple effects of the collapse of Lehman… it’s over… there is nothing more to see here… so!… now is the time to bargain shop!... pick up some deals!... roll like Warren Buffet!”

Ahh… such simple thinking doth rule the minions… yes… that’s right everyone… It’s time to take action… please do jump in now… the water is fine… go right ahead… if you act now you can brag later and isn’t that what it’s all about anyhow?

If the decline in stocks started in October 2007 and ended at the low set in March 2009 it would be one of the shortest and most typical bear market declines on record.

This would sort of seem anti-climactic given that categorical record of the decline across a domain of virtually every macro-data series showing historic levels of decline and stress.

Yet… from another point of view… one that takes as fact that the decline started NOT in October of 2007 but way back in 2000 with the commencement of the “dot-com” bust (probably more aptly termed the “unwind of the 90s collective delusion”) we are fully embroiled in our own “lost decade… or two”.

So it really comes down to how you choose to look at things… If you think the “recovery” that “occurred” between 2002 – 2007 was real and not simply manufactured on the back of probably the most unusual credit cycle in history… double down!

Maybe you think the Feds can manufacture another phony boom… that’s always possible… yet with no basic asset class to target (like housing….) , no fire-hose of consumer credit and the economic base falling farther and farther… pretty soon these attempts at faux expansions will lose effectives… just fluff the populace from miserable to malaise… but no farther.

So... we are headed back to the lows…

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)
• J. S&P 500 Breaks through 200 day SMA... decline over?!... fat chance!
  

The Almost Daily 2¢ - The Elderly in Stocks? … I Hope They Get Crushed!

Heartless I know… but let me give you the back-story.

Standing in line at the bank a few days ago I was warmly greeted by an older woman (probably in her 70s) standing in front of me seeming bright and peppy and actively soliciting my attention.

When I finally relented, she proudly (and with an overt and exaggerated savvy air about her) went on to detail the particulars of a recent stock transaction and how happy she was to have made it.

Back in March, apparently, she rolled over her 401K simultaneously converting it to an IRA and as she put it “put it all in the DOW 30”.

“It’s gone up over 30%!” she nearly shouted.

She was so excited, I had to remind her that the teller was looking for another customer.

So, I quickly wished her luck on her good fortune and we parted ways.

Things are not at all as they should be.

We (folks interested in finance) know some basic rules of thumb… one of them being that when you are near or in active retirement, you should generally not be in stocks… certainly not actively speculating with your retirement funds.

This simple rule is for good reason.

Replacing lost wealth in your 70s has got to be much harder and physically (likely mentally) costlier than replacing it in your 30s and 40s when most folks are typically fully engaged in the process of creating wealth.

What is the real cost of re-earning a dollar at 70? … I would think it’s a fair amount more than a dollar.

So what’s going on here?

Why would a person who has spent a lifetime acquiring wealth take such risk even if it were just a portion of her life savings?

One word… Bernanke.

We live in a world in which savers and the prudent are penalized while bold speculators are held up as the gold standard.

That’s why this woman was so proud of herself.

The days are long gone since cautious saving and careful investing made any sense or, more accurately, earned any respect... interest rates are at rock bottom and everyone knows it… you would be a fool to squirrel away your money in any form of basic fixed income account.

Further, it wasn’t enough for her that her “investments” increased notably in some fluke bear market zig-zag, she had to let to world know…. She was some sort of financial genius!

Think of that!

You just dump a pile of your dough into the DOW (“or whatever they call that thing”) and next thing you know, it grows by 30%... isn’t life grand?

Why… if we all did that, what fortunes would befall our land… what wealth… what good tidings!

Sorry folks… this is a bear market rally and if you don’t get that fact you not paying close enough attention.

The Almost Daily 2¢ - Five “Real” Bad Bears

Obviously this is a knock-off on the excellent charts posted at dshort.com but with the slight twist of adjusting for inflation (CPI for all except the Nikkie for which I used Japans general inflation index).

So the Great Depression era bear market took 360 months (30 years) to resolve while the early 70s bear took less than half that time at a mere 176 months (14.6 years).

Notice also that even 232 months (19.3 years) into the decline and the NIKKIE is still making new lows.

As for our current U.S. bears, they look grim but still young and spry… full of life… probably getting ahead of themselves as they wish that some day they too will grow down to be seriously big bears!

The Almost Daily 2¢ - Land of the Lost

So much is made of Japan's “Lost Decade” yet only in America (only during this era I suppose) could it go almost totally unrecognized that we have already experienced a lost decade of our own.

Nearly 10 years of both “real” and nominal stock market losses and comparably long trending weakness in our job markets and yet the assumption of recovery is has never been so fervent.

It could be the speculative energy or maybe we continue to fool ourselves into believing we have real wealth and not just debt and obligations, steadily depreciating “assets” and wishful thinking.

It’s hard to accept a trend that’s turned against you though as the decline continues many will likely find the good times of the past continuously fading to a more humble and fundamental current reality.

In the wake of the “dot-com” bust we conditioned ourselves to accept notions like a “jobless recovery” yet in light of the now more obvious fact that the “recovery” of 2003-2007 was a total fraud we still have yet to admit that that the economy never truly recovered.

Without all the easy lending, financial arbitrage schemes and “feel good” consumer spending the “jobless recovery” would have been simply been a “recovery-less recovery”.

Yet the Bulls suppose that they know better… “We can recover without the jobs…” and “the stock market is way undervalued” they say as if they are aware of a new paradigm within which the economy simultaneously shrinks and grows.

“The banking sector and housing will lead the recovery” says another trader on CNBC.

Yet another trader not only declares the worst to be behind us but that the broad stock markets will continue to rise for the entirety of 2009.

Fat chance.

Below is a simple reminder that our “jobless recovery”, our mega-double-crash stock markets and our massive deflating debt bubble are not independent events playing out simultaneously through happenstance but the organic trend of a topped-out late cycle generational unwind.

The Almost Daily 2¢ - Twin Peaks!

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)

The Almost Daily 2¢ - Twin Peaks?

Subtitle: Sell Into the Rally?

It appears we have reached another critical juncture in the economic crisis.

Yesterday the S&P 500 broke through its 50-day simple moving average but whether it will defy the recent bear market “sell into the rally” trend and head notably higher or collapse to a new strikingly lower low is likely one of the most important Wall Street outcomes in generations.

Although the breaking of the “dot-com” bear market low was an important precedent, it was clearly definable… it was a completely logical level to retest given the assumption that the rally from October 2002 onward was without fundamental merit.

But that level having been breached by a good 20+ points we find ourselves in a bit of a predicament.

What was so fundamental about a level of 752 (741 intraday) on the S&P?

Buyers raced in to scoop up shares on the assumption that they were cheap but who’s to say… there was (and still is) significant turmoil ahead and the S&P 500 P/E ratio was still in the double digits.

More importantly, if 752 was the capitulation low, it seems to have come too easily and its pain was inflicted too briefly for the current economic realities.

For example, Citigroup’s $306 billion backstop bailout was announced after the 752 low… could the market have seen that coming? Could they have priced that in? If so, what did they price in?

We have yet to determine if the backstop will really hold and there is significant evidence to suggest that it won’t.

Also, what of the Feds inability to restore lasting confidence…

The Fed has quickly reached the end of the line in their rate cutting campaign and try as they might to insinuate additional control by suggesting that they will “employ all available tools”, we all know that they are down to creating money and attempting to engineer targeted inflation… hardly a convincing outcome.

Yet we are to believe that these and other significant oncoming traumas (double digit unemployment, inevitable auto industry collapse, 15-20% further decline in home prices, alt-a, jumbo ARM, prime jumbo and prime conforming mortgage default tsunami, record personal and corporate bankruptcies, elevated bank failures) are all priced in at a fundamental base of 752.

I’m skeptical.

My sense is that given the enormity of the economic crisis, a 70-80% peak decline in the S&P 500 with a historical low P/E (single digit) would not be a surprising outcome and further, it would be fitting.

As regular readers know, I have been following along the stock market decline for about 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 through the 2002 lows all technical similarities going forward have ceased… we are firmly in uncharted territory as the two bust eras are now 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. It’s over Johnny… OVER! (Uncharted Territory)

Question(s) of The Day - In Recession ... Now How Long?

The NBER today announced that the recession is official… it started in December 2007 and by all accounts we are fully entrenched and sliding still lower.

Anyone surprised?

Why was there ever a debate?

Now though I suppose the Bear-Bull squabbling will shift to how long… How long will this recession run?

Video of The Day - Twin Peaks!

Super stock market technician Louise Yamada breaks down the current market turmoil and presents a far less than optimistic outlook.

And note the "twin peaks" reference... hmmm....

The Almost Daily 2¢ - Twin Peaks?

Subtitle: Capitulation is Not a One Day Trading Event!

It finally happened…

We have significantly broken through the “dot-com” lows and soon, I believe, there will be a wider realization that the two bust periods (2000 to today) are actually one… one long secular bear market fraught with delusion and systemic speculation that will inevitably grind down to a much more humble yet fundamental level.

Yet, as the subtitle alludes, some will feel we have reached capitulation.

But, capitulation is NOT a one day trading event... Anyone who studies the charts below can plainly see that to be fact.

So one might ask, “Why is it that consensus on Wall Street still accepts phony simplistic notions?”

The answer, in my opinion, can best be expressed with more questions…

Why did it take Wall Street, the Fed and Treasury two years to (barely) accept the obvious severity of the uncontained housing decline?

Why did it take over a year for consensus to accept that we might be experiencing a significant economic contraction?

Why did Wall Street not see that the emerging markets, whose bread and butter was exporting cheap junk to U.S. consumers (who consumed on credit), would plunge along with us?

Why were there streams of charlatans (Kudlow, Ben Stein, Brian Wesbury, Jerry Bowyer, Don Luskin, Abby Joseph Cohen) spinning endlessly in the business media about the “Goldilocks Economy”, “Soft Landings” and S&P 1600 by year end?

Why, as late as March 2008, did Barney Frank not see that Fannie and Freddie would collapse this year?

America is currently a leaderless land of competitive mass delusion.

We take something as dry and certain as collected macroeconomic data (home sales, home prices, retail sales, unemployment claims and industrial production) and breathe fiery partisan ideology into it.

It’s not enough to interpret the data in order to extrapolate curves and forecast likely economic trends… no… forget the data… we need to determine, based on your reading of the data, if you are pro-growth and pro-America… a pessimist (code words for lefty) or an optimist (code for righty)?

Worse yet, when we begin to finally see that the “writing on the wall”, another delusion takes over… we turn to government as if stimulus checks, bailouts, housing rescue bills and nationalization of our finance industry is the answer to all of our troubles.

It’s just disgraceful.

As a result, this decline will likely run much longer than many think as these delusions wind down and we collectively accept that we are in a very difficult position.

To date, I believe we have merely lowed some of our expectations … not yet have we truly acknowledge the depth of this decline and how long and hard it will be to “right the ship” and rebuild both economically and politically.

As regular readers know, I have been following along the stock market decline for about 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 through the 2002 lows all technical similarities going forward have ceased… we are firmly in uncharted territory as the two bust eras are now 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.





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. It’s over Johnny… OVER! (Uncharted Territory)

Question(s) of The Day - What's Obama Got Cooking?

What’s Obama got cooked up?

Obviously there will soon (very likely today) be some announcements coming out of the Obama pre-administration targeted towards shoring up confidence with Wall Street and Main Street… what’s coming?

Treasury Secretary announcement? Actual proposed policy announcements?

Will it work?

The Almost Daily 2¢ - Twin Peaks?

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)

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)

Question of The Day - GM-ization of America?

Are we seeing the “GM-ization” of America whereby the stock market plunges to shocking lows and scores of macro-economic data (housing starts, consumer confidence, real home prices, etc.) head to the lowest readings in 60 years?

Question(s) of The Day - Suckers Rally?

Isn’t a re-test of the dot-com bust lows just inevitable?

Aren’t all market rallies until then just Suckers Rallies?

For the past twelve months ALL market rallies have inevitably failed giving way to new and significantly lower lows why would now be any different?

Follow The Leader: Index of Leading Economic Indicators August 2008

Today’s results of the Conference Board’s Leading Economic Indicators continue to indicate troubled times ahead decreasing 0.5% from July and declining 2.70% compared to August 2007, leaving the index at 100.8.

It’s important to note that a year-over-year decline greater than 1.5% has ONLY preceded EVERY recession that has occurred in the last 59 years so the 11 consecutive and significant year-over-year declines strongly suggests that overall the components of the index are indicating that recession is upon us.

Mid-Cycle Meltdown?: Jobless Claims September 18 2008

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims increased 10,000 to 455,000 from last week’s 445,000 claims while “continued” claims declined 55,000 resulting in an “insured” unemployment rate of 2.6%.

It’s very important to understand that today’s report continues to reflect employment weakness that is strongly consistent with past recessionary episodes and that this signal is now so strong and sustained that a contraction in the economy is fundamentally certain.

Historically, unemployment claims both “initial” and “continued” (ongoing claims) are a good leading indicator of the unemployment rate and inevitably the overall state of the economy.

I have added a chart to the lineup which shows “population adjusted” continued claims (ratio of unemployment claims to the non-institutional population) and the unemployment rate since 1967.

Adjusting for the general increase in population tames the continued claims spike down a bit but as you can see (the reddish presumed recession band), the pattern is still indicating that recession has arrived.

The following chart (click for larger version) shows “initial” and “continued” claims, averaged monthly, overlaid with U.S. recessions since 1967 and from 2000.

NOTE: The charts below plot a “monthly” average NOT a 4 week moving average so the latest monthly results should be considered preliminary until the complete monthly results are settled by the fourth week of each following month.

As you can see, acceleration to claims generally precedes recessions.


Also, acceleration and deceleration of unemployment claims has generally preceded comparable movements to the unemployment rate by 3 – 8 months (click for larger version).


In the above charts you can see, especially for the last three post-recession periods, that there has generally been a steep decline in unemployment claims and the unemployment rate followed by a “flattening” period of employment and subsequently followed by even further declines to unemployment as growth accelerated.

This flattening period demarks the “mid-cycle slowdown” where for various reasons growth has generally slowed but then resumed with even stronger growth.

So, looking at the post-“dot com” recession period we can see the telltale signs of a potential “mid-cycle” slowdown and if we were to simply reflect on the history of employment as an indicator of the health and potential outlook for the wider economy, it would not be irrational to conclude that times may be brighter in the very near future.

But, adding a little more data I think shows that we may in fact be experiencing a period of economic growth unlike the past several post-recession periods.

Look at the following chart (click for larger version) showing “initial” and “continued” unemployment claims, the ratio of non-farm payrolls to non-institutional population and single family building permits since 1967.

One notable feature of the post-“dot com” recession era that is, unlike other recent post-recession eras, job growth has been very weak, not succeeding to reach trend growth as had minimally accomplished in the past.

Another feature is that housing was apparently buffeted by the response to the last recession, preventing it from fully correcting thus postponing the full and far more severe downturn to today.

I think there is enough evidence to suggest that our potential “mid-cycle” slowdown, having been traded for a less severe downturn in the aftermath of the “dot-com” recession, may now be turning into a mid-cycle meltdown.

Bonus Question of The Day!

Is this the big one?

The selloff in the stock market has been pretty orderly until now… Are we headed for a massive and immediate correction?

We’re all coming Elizabeth!

The Almost Daily 2¢ - Bear Attack!

This is truly exhilarating!

The stock market is melting down and it was entirely predictable… in fact, almost totally mechanical!

Simply a “textbook” bear market slide that was completely perceptible (to those NOT blinded by Bull$hit) over six months ago with just a little technical analysis.

I am stunned, but not really surprised.

As regular readers know, I have been following along since last December 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.

There are a host of very interesting technical similarities (which are noted below) that indicates that we have fully entered into another bear market where on average the S&P 500 index retraces 20 – 30% from its prior peak.

It’s important to keep in mind that, at best, a bear market can be viewed as a transition into an period where there is a prolonged bias to sell into strength resulting in a successive series of lower highs yielding a clear downward trend.

At worst, there are periods (days or weeks) where particular stocks and the index as a whole will crash hard.

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)

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)

Although the recent, highly optimistic, Wall Street rally appeared strong, it’s collapse indicates that the prospects of a protracted bear market selloff is very real especially given the steady flow of poor macroeconomic, housing, consumer, retail sales and employment data that will continue to flow throughout 2008.