market history


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I’m not sure if you can actually read the individual events, but very interesting if you can. Again just looking at the 1960 – 1980 period, a period of volatility and little capital appreciation. This rather compares to the current period of 2000 – 2016.

The message from the chart, is hang on long. If you are not in the market, then despite all the evidence to the contrary, the current pullback may be an entry point.

 

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Totally ignoring all of the media stories, fundamentals, anything other than the 3 charts, the charts would suggest that for a long while since 2000, the market has gone essentially nowhere until the current breakout.

The charts would suggest that the breakout has a long way to run yet. In fact, it is just getting started.

I’ve blogged about the eventual breakout previously and recommended hanging on, which I still would advocate, purely on a chart basis.

The important thing is that the ‘news’ around the breakout, as it was historically, is usually bad. There are all manner of problems. Hang on, somehow.

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The Dow Jones Index has broken 20,000. Pretty impressive. Historic. Will it hold? Typically there is a bit of a pull-back and then the market moves forward.

 

 

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The whole problem with the world is that fools and fanatics are always so sure of themselves, and wiser people are full of doubts”

–Bertrand Russell

I always have admired the writings of British philosopher Bertrand Russell, who died in 1970, 14 years before the Russell 2000 Index was created and compiled.

The Russell Index, his “namesake,” now may be priced to perfection.

Nothing moves in a straight line, especially in the markets.

Fade the Trump small-cap rally, as hope seems to be triumphing over experience.

In “Donald Trump, You Are No Ronald Reagan (Part One)” and “Yell and Roar … and Sell Some More,” I struck a cautionary tone about economic and market cycles, political partisanship leading to delays or more modest tax reductions, and the leadership skills and avowed policies of President-elect Trump compared to those of President Reagan. I also compared the current market advance with the honeymoon the markets delivered 35 years ago. (I will be expanding on my thesis and concerns this week).

This morning, in “How Long Will We Ignore the Negatives of This New Presidency, ” Jim “El Capitan” Cramer voices and adds to many of my concerns.

While respecting the strength of the last month’s stunning and almost parabolic move (see Bertrand Russell’s quote above) and recognizing that the only certainty is the lack of certainty, the markets to this observer are overvalued on almost every basis and the reward versus risk is substantially tilted toward the downside.

My pal David Rosenberg, chief economist and strategist with Gluskin Sheff, shares my view that the market is being over optimistic:

“If you were to do a fair-value estimate of the multiple against where it is today, you could actually then back out what the implicit earnings forecast is. And right now, it’s 30%. That is the implicit earnings increase that is priced in. So if you’re buying the equity market today, just know that you’re buying an asset class writ large that is expecting a V-shaped +30% bounce in earnings growth over the course of the coming year. Trouble is, that it is a 1-in-20 event — and normally that 1 in 20 happens early in the cycle, not late in the cycle …. Actually, six quarters of negative comparisons. I mean, if the earnings recession is behind us and if there are Trump tax cuts ahead of us — even if I allow for the full brunt of corporate tax cuts — and if I allow for whatever nominal GDP growth is going to be, I still can’t get earnings growth much above 10%. 15% is a stretch, but you might still get there. But even that doesn’t get you to a 30% earnings expectation.”

–Welling on Wall Street: An Interview with David Rosenberg

So, what is the best short? Perhaps it’s the Russell Index.

“When all the forecasters and experts agree, something else is going to happen.”

–Bob Farrell’s Rule #9

In keeping with my negative market outlook for 2017, I am making Direxion Daily Small-Cap Bear 3x ETF (TZA) , at $18.78, my Trade of the Week. Here’s why:

* Over the last year the Russell Index has materially outperformed the broader indices: Since mid-December 2015, the Russell Index has doubled the performance of the S&P Index (up 24% compared to 12%). As Bertrand Russell noted, “extreme hopes are born from extreme misery” — at least if you have been short iShares Russell 2000 ETFIWM! (Note: In its history, the Russell Index never has been as extended relative to the Bollinger Bands.)

* The recent widening in relative performance (Russell vs. S&P) may be a function of the president-elect’s policies toward protectionism and against globalization; the timeliness and extent of impact might be overestimated.

* The Russell Index is more richly valued than the broader indices. The 2016 price/earnings multiple for the Russell Index is 32x and 25x 2017 estimates (before any new effective tax rate) on non-GAAP earnings. The S&P Index is trading at 19x 2016 non-GAAP and 17.5x 2017 estimates. However, the S&P multiple of GAAP is 26x — there is no currently available GAAP multiple of the Russell.

* As interest rates gap higher, the cost of capital is rising for small and medium-size companies: This is occurring at a speed far faster than many previously thought. Large, multinational companies have better and cheaper access to capital through the markets and/or on their cash-rich balance sheets. (Note: This morning’s move in the 10-year U.S. note yield to more than 2.50% may be a tipping point).

* The rate of growth in the cost of commodities and services is starting to accelerate. This hurts smaller domestic companies that are less diversified compared to the larger companies. Remember, mono-line smaller companies often have less pricing power than their larger brethren. (Note: This morning’s $2.35 rise in the price of crude oil to nearly $54 also may be a tipping point).

* Smaller capitalized, domestically based companies are not beneficiaries of possible repatriation of overseas capital. As Russell wrote, “Sin is geographical!”

* The president-elect’s infrastructure plans likely will be slow to advance. There will be some opposition from both parties, members of which will be looking for a revenue-neutral and not “budget-busting” fiscal jump-start. At best, this is a 2018-2019 event. Moreover, the build-out could benefit some of our larger companies (e.g., Caterpillar(CAT) and United Rentals (URI) ) over smaller companies. In the broadest sense, however, infrastructure build-outs rarely contribute to sustained prosperity; just look at the sophisticated and state-of-the-art infrastructure in Japan.
That build-out has failed to bring sustainable economic growth to that country. The same can be said for Canada, which is mired in a 1% Real GDP growth backdrop despite Prime Minister Trudeau’s large infrastructure spending of years ago.

* The president-elect’s immigration policy — building a wall, limiting in-migration and exporting those who are in our country illegally — are not pro-domestic growth and could hurt small to medium-size companies.

* The president-elect’s China policy and broader protectionism policy could end up hurting the sourcing (impacting availability and cost) of many smaller companies, potentially squeezing profits by lowering margins and reducing sales.

Bottom Line

“All movements go too far.”

–Bertrand Russell

My view is that the Russell may soon stop crowing and I am moving toward a more aggressive short of that Index.

 

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I’ve highlighted that the 2 bond Kings are less than impressed with the move in stocks. The majority of articles however are very bullish for stocks moving forward. They are also bullish on the economy generally.

I haven’t really had time to sit down and really think my way through the issues, so I’m just reading the articles at the moment.

From a purely historical/technical perspective, this current market resembles somewhat the market of the 1970’s into the early 1980’s. The obvious difference however is that the interest rate environment is inverted.

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Ignoring the headlines, as headlines are headlines, the prolonged ‘nowhere’ finally broke out into a massive bull market. This coincided with a fall [for 30 years] of interest rates.

We have the massive ‘nowhere’ pattern. We don’t have an interest rate environment that can fall any lower. The only new direction is up, or a continuance of low interest rates.

‘Low’ would be anything up to 7%. As long as interest rates gradually move up to, and do not exceed that sort of number, we could have another bull market leg.

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One metric has accurately predicted the outcome of every presidential election since 1984 — the strength of the S&P 500 Index.

And right now, the S&P 500 is pointing to a Donald Trump victory on Election Day.

Bloomberg and CNBC noted this week that the stock market’s decline does not bode well for Hillary Clinton, the nominee for the incumbent Democratic party.

“Going back to World War II, the S&P 500 performance between July 31 and October 31 has accurately predicted a challenger victory 86% of the time when the stock market performance has been negative,” Sam Stovall, chief investment strategist at CFRA, told CNBC.

When stocks are going up, the incumbent party tends to win the White House. But the S&P 500 is down 2.2% since the last trading day of July.

Still, this election has hardly abided by historical standards. And the downturn in the stock market could actually be a result of election anxiety.

“This time around if the Democrats retain the White House, I will come up with two responses,” Stovall told CNBC. “One is that history is a guide but never gospel, and two, the negative performance by the market could be a reflection of the worry of domination that a Democratic sweep would bring.”

As Business Insider’s Elena Holodny noted this week, when it comes to markets, the past does not predict the future.

Daniel Clifton at Strategas Research Partners gave Business Insider additional context about this indicator earlier this year:

“Intuitively, this trend makes sense. If the economy is weakening, stocks should be declining and the incumbent party will likely suffer. Moreover, should it look like a new party is to take control of the White House, the change in control could add uncertainty to investors until the new President gets his or her rhythm.”

“In fact, we have found that ‘open’ election years, a year in which no incumbent is up for re-election have been tougher for stocks than presidential reelection and non-presidential election years. Interestingly, stocks have rallied in the past two (and rare) instances when a political party has received a 3rd term.”

“The S&P 500 increased 30 and 27% respectively in the year after Harry Truman won in 1948 and George H.W. Bush won in 1988. Sometimes the devil you know is better than the devil you don’t know.”

Other unconventional indicators have also indicated a Trump win on November 8.

An artificial intelligence system that has correctly predicted the past three presidential elections as well as the Democratic and Republican primaries said Trump will likely win, and a professor who has accurately predicted the outcome of every presidential election since 1984 came to the same conclusion last month based on a model he developed that uses a series of true/false statements to determine who is best positioned to take the White House.

And after the FBI announced that it’s reopening its investigation related to Clinton’s use of a private email server during her time at the State Department, the polls started tightening, putting Trump within striking distance of Clinton.

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Always difficult to predict consistently the market. Generally, due to inflation being constant, the nominal value of the market moves higher. There will still be crashes, bear markets etc and the real value may take extended breathers, but, ultimately, it’s better to be a bull than a bear.

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