The Stock Market

 

A Big Dow Theory Divergence

We briefly want to show a few charts that have caught our eye recently. This is by no means a comprehensive market update (we plan to provide one soon). Here is something though one doesn’t see all too often: the Dow Industrials and Transportation averages have diverged from each other for about six months running. To be sure, no valid Dow theory sell signal has been given yet. For that to happen both averages need to break their previous reaction lows in concert. However, divergences at peaks are a “heads up” signal. Charles Dow would probably at least raise one eyebrow and frown a little.

 

IA_0314_ETFAdvisor_MI600Image via cnbc.com

 

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The Longest, Deepest Depression in US History

Yesterday’s good news was that there will be no 25-year recession. “We should be so lucky,” is the way a New Yorker might react. Because the bad news is much worse. The logic of the “long depression” is simple. Aging populations, debt, zombification – all of which slow growth.

How many old people and zombies do you need before an economy comes to a halt? Nobody knows. But the drag from debt is observable and calculable. Over the last three decades, approximately $33 trillion in excess debt has been contracted – above and beyond the traditional ratio to income – in America alone. And growth rates have fallen in half.

That’s because dollars that would otherwise support current spending are instead used to pay for past spending. Our old debts have to be retired with current income. The money doesn’t disappear, of course. Some goes to creditors who spend it. Some comes back as capital investment, which is a form of spending. But as credit shrinks, generally, so does the economy.

 

Thomas_Nast_Peoples_Money_slideshowHowling, whining and finger-pointing are well-worn traditions. Especially when the question is where the money disappeared to and whodunnit.

Cartoon by Thomas Nast

 

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Extreme Value

Today, everyone is on vacation here. It’s May Day – the international worker’s holiday. But our labors continue. Fortunately, our vocation is also our avocation. “Love and need is one,” as Robert Frost put it.

So even on this holiday, we continue trying to understand what is going on not only on the ranch, but also in the economy. First, we recall with some satisfaction that we told readers in the March 20 Diary to “Sell the US; Buy Russia.”

Naturally, this annoyed some readers, who saw something unpatriotic in investing in Russia. But the idea proved to be a good one. Since then, the big Russian ETF, Market Vector Russia ETF Trust (NYSE:RSX), is up 21%. US stocks are more or less flat. The S&P 500 is down about 0.5% over the same period.

 

original

 

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Stocks and Interest Rates

How important are macro-economic fundamental data and valuations in deciding on whether or not to buy stocks, and how does this influence long term returns? Are there any universally valid rules that can be applied? At the very least we can state that there is plenty of empirical evidence that supports certain conclusions.

Mish has just posted a review of a recent weekly market comment by John Hussman, who probably writes more about market valuations than anyone else we know of. One of the most interesting aspects Mr. Hussman’s discusses in his missives on the topic in our opinion concerns the connection between stock market trends and interest rates, or what we might term his “empirical debunking of the Fed model”.

 

400Photo credit: Issei Kato / Reuters

 

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Insider Buying by Gold Mining Executives Increases Further

In spite of the gold price weakening once again this week and coming dangerously close to breaking an important support zone, gold investors have actually reason to take heart. Readers may recall what we wrote in our most recent update on gold about gold mining margins:

 

“The market has not yet really given any credit to the fact that mining margins are improving due to strength in the real price of gold. Management boards of gold companies may be coming around to a different view though – after all, they are acutely aware that the real gold price is the only thing that counts with respect to their margins.”

 

 rocco fazzariImage credit: Rocco Fazzari

 

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Nonsensical Reasoning is Concocted to “Explain” Day-to-Day Market Moves

We were wondering what could have triggered today’s move in the stock market that so promptly negated Friday’s sell-off. On Friday traders were allegedly worried about a) Greece (what, only now?) and b) China – where it was decided to limit margin trading somewhat and expand stock lending for short sellers in a vain attempt to slow the expansion of the world’s latest and currently strongest stock market bubble.

Neither explanation made any sense. If investors were really worried about Greece, they would have been worrying non-stop since late December at a minimum. Instead European stocks ex-Greece have experienced a near parabolic blow-off move to the upside, pushing them to the highest trailing P/E in history.

 

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Corporate Insiders Jump Ship

Corporate insiders are selling 22 times more stock than they are buying. From Fox Business:

 

“What we’re seeing now is a dramatic reversal in that sentiment,” says David Coleman, editor of Vickers Weekly Insider Report, whose firm tracks buying and selling of all publicly traded companies. “The trend has reversed from what had been historically high levels of buying relative to selling.” […]

TrimTabs Investment Research reports that insiders at public companies have sold $2.6 billion worth of shares so far in June. That’s 22 times more than the $120 million in stock they have bought. […] TrimTabs’s 60-day total of insider buying has fallen to the lowest level since December 2004.”

 

What do corporate insiders see coming?

 

Delusional-42614754718

 

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When Will Bad News Cease to be Good News for Stocks?

It is quite amazing to watch this. Even as one economic datum after another indicates that a major slowdown is underway that could well turn into a recession (keep in mind that this is not a certainty – at similar junctures in recent years, aggregate economic data recovered just in the nick of time), the US stock market continues to take everything in stride.

The most recent example was the enormous “miss” of the payrolls report on Friday. The cash market was closed on Friday, but US stock futures still traded briefly after the release and declined sharply. Whatever concerns futures traders had were evidently forgotten by Monday. After all, weak jobs data mean more free money from the central bank for longer, as the much talked about rate hike will likely be put off further.

 

Elnur Amikishiyev - Getty Images

Image credit: Elnur Amikishiyev | Getty Images

 

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“Oh”, or Aiming for a Career on Wall Street

Fátima, our new 10-year-old English-language student, is a stranger to modern economics… as well as to vernacular English.

“What do you think of central bank policies?” we asked.

“What’s a central bank?”

“It’s the bank that provides money to the other banks.”

“Where do they get the money?”

“They create it out of nothing.”

“Oh.”

“Would you like some money from the central bank?”

“I guess so.”

Fátima must be aiming for a career on Wall Street.

 

yellen teaching draghi how to print money funny photoRecent developments indicate he’s got it …

Cartoon via tradingblog.nl

 

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Stock Market Volatility in the 1950s vs. Today

Market volatility has been of concern for many market participants for several years. There are ways to exploit volatility for profit, but it generally is the bane of long-term trend followers. Implicit in concerns about volatility is the notion that it has been unusually high recently, and that in past years was not a major concern.

Some may be tempted to imagine that things were nearly ideal in the sleepy, tortoise-paced years of the 1950s, including the stock market, when scary volatility must have been virtually nonexistent.

I decided to illustrate a few facts about volatility via the accompanying chart. It plots the S&P 500 over two periods, both a little over two years in length. These are plots of the weekly close, and this is my first point: If one can ignore all market activity except the weekly closing prices, most scary volatility all but vanishes.

 

Slot-Machine-Winner

Image credit: Mircea Maties

 

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