Interesting chart via Zero Hedge.
Archive for the ‘Cycles’ Category
We have reviewed scenarios in the past where the S&P 500 could drop below 950 and then 850, which is similar to Dow 8,000. These scenarios are still possible, but so far money printing has stemmed the tide. We have noted on numerous occasions how light volume has been in recent months. From Bloomberg:
Joseph Granville, whose “sell everything” call in 1981 sparked a decline in U.S. stocks, said the Dow Jones Industrial Average (INDU) will drop toward 8,000 this year because of waning momentum and volume. “Volume precedes prices,” Granville, 88, a technical analyst who has been publishing the Granville Market Letter from Kansas City, Missouri for about 50 years, said in an interview on “Street Smart” on Bloomberg Television. “You are seeing much lower volume. That tells you that prices are going to go much lower, much lower than most people think possible and very few people have projected.”
From where we sit, we need to see what the next correction looks like. If we are starting a wave 3 down, it should be a vertical move lower. It is possible wave 3 would be deferred until later in the spring. It is also possible we are in wave 1 of a 5 wave move higher. We will just have to see how things unfold to get a better read on wave counts.
We tend to agree with the basic concepts presented in this Bloomberg video relative to (a) Europe, (b) weak growth, and (c) impact of QE:
Despite “easy money” policies, credit growth in Europe came in well below expectations. From Reuters via Zero Hedge:
Loans to private sector firms in the euro zone fell in November while growth in lending to households slowed, European Central Bank data showed on Thursday, adding to the case for an interest rate cut. The drop in funding to companies increased fears that the region faces a looming credit crunch, an issue of growing concern for the ECB as the worsening sovereign crisis makes firms and households increasingly wary about taking on debt, weighing on the economic outlook.
In an attempt to kick-start loan activity, the 17-country bloc’s central bank conducted last week its first-ever three-year funding operation, which saw banks take up almost half a trillion euros.
In November, loans to the private sector grew at a rate of 1.7 percent year on year, Thursday’s data showed, coming in well below analysts’ expectations of 2.6 percent and the 2.7 percent growth seen in October.
“They are a very soft set of numbers, Societe Generale economist James Nixon said. “If banks were to start to seriously shrink their balance sheets, that would be quite a significant negative for economic activity. The good news is we don’t see that - yet.”
The flow of loans to firms dropped by 7 billion euros after growing by a similar amount in October. The flow of mortgage loans rose by 8 billion euros after an 18 billion drop in October. The annual growth rate of mortgage loans remained at 3.0 percent.
Euro zone M3 money supply — a more general measure of cash in the economy — grew at an annual 2.0 percent in November, down from 2.6 in October and below expectations of 2.5 percent. Decreasing to 2.5 percent, the three-month moving average of M3 growth remains well below the ECB’s reference rate of 4.5 percent, above which the bank sees dangers to medium-term price stability. Economists said the figures made it more likely the ECB would look to offer the struggling economy more support by cutting interest rates further from their current record low of 1.0 percent.
“The sharp slowdown in euro zone money supply growth in November reinforces belief that underlying euro zone inflationary pressures are easing and that the ECB has ample scope to cut interest rates again in the early months of 2012,” IHS Global Insight economist Howard Archer said in a note to investors.
The Independent reported:
AN unprecedented €40bn of deposits was withdrawn from Irish banks in December, dwarfing the flight in deposits earlier in 2010. December’s massive deposit exodus means a total of almost €110bn has been taken out of Ireland’s 15 retail banks since the start of 2010.
Using 112 years of stock market data, we explore the questions: (a) How long do bear markets typically last?, and (b) How far do stocks typically fall? Some of the data used in the video came from Robert Colby’s site: robertwcolby.com.
After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.
Money can be made in this market – this bear market most likely has a long way to go. The first priority is to protect your current assets. You still have time to take defensive action.
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Market prices are set by the actions of human beings. Human beings tend to act in similar ways when faced with similar situations and under similar circumstances regarding fear and hope. It is interesting to note the similarities between the market in 2010 and 1994 in terms of the:
- Technical profile
- Decennial cycle
- Presidential cycle
Friday’s CCM BMSI came in at 1,173, keeping it in neutral territory. The market still has a negative bias in the short-term, but the bias longer-term remains favorable, especially given where we are in the current economic cycle. Similar BMSI scores to what we have today occurred in 1994, which means the market’s technical profile was similar in 1994. In the research piece, The double-edged sword of financial fear, Clif Droke also notes similarities between today’s market and 1994, when examining decennial and presidential market cycles.
Ned Davis Research did a study which analyzed the combined decennial cycle and presidential cycle with the stock market’s seasonal tendencies. The resulting pattern has so far described the year 2010 almost perfectly. The low for the year was projected for late June/early July based on past decennial patterns and thus far the market has held true to this form. What’s interesting is that this is the second year of presidential cycle, i.e. the second year of a new presidential administration. The first year of an incoming president tends to witness a stock market rally; the second year tends to be the “hangover” which often sees a wide trading range marked with exceptional volatility. As Ned Davis Research points out, starting around the commencement of the second half of the second presidential year is when the market tends to show strength after a major low has been made. The year 1994 is a good analog to this decennial pattern.
CCM research points to a market low in 2010 either having already occurred or occurring sometime in the next ninety-days. Regardless of what happens in the next ninety days, odds still point to higher prices by year-end. This outlook aligns well with the study by Ned Davis Research and the work by Clif Droke.
The median biweekly CCM BMSI score between April and December 1994 was 1,181. Friday’s score (07/09/2010) was 1,173. Investors who were patient in 1994, and withstood quite a bit of volatility between February and year-end, were rewarded in 1995. We are not suggesting the gains in 2011 will approach the levels seen in 1995, but the bias in late 2010 and in 2011 still remains to the upside given what we know today; just as it did in 1994.
The state of the markets in 2010 remains concerning, but the bull/bear line of demarcation has not been crossed yet. As long as the longer-term odds continue to point to favorable outcomes over the next six-to-twelve months, we should err on the side of holding the majority of our positions. We must also be prepared for further weakness while having detailed principal protection plans in place. The markets remain fragile and need to be monitored with an open mind, but given the facts in hand, both fundamental and technical, selling out prematurely could prove to be very frustrating over the next year.