The Stock Market

     

 

 

Japanese Market About to Break Out

The Japanese stock market is quite unique: it would need to rally by approximately 80% to reach its former historical peak. What’s more, said peak was attained on the final trading day of 1989, more than 25 years ago. In short, Japanese stocks have been anything but a good investment in recent years.

Conversely this means that the market has a lot of potential if it were to return to its former heights. It also means that the Japanese market hasn’t mirrored the excesses evident in many other stock markets.  The chart below shows the Nikkei 225 since its late 1989 peak.

 

Nikkei 225, 1989 – 2017. Japanese stocks have entered a new uptrend. Japanese stocks are actually still quite cheap compared to current global standards. The advance looks quite good so far from a technical perspective, but unfortunately the same could be said of the 2003 to 2007 rally, which eventually fell prey to the bursting of the mortgage credit bubble in the US. While Japan’s market decoupled from foreign markets in the 1990s and remained mired in a secular bear market, it has shown no ability to decouple in the other direction since the 1970s (in the global bear market decade of the 1970s, it outperformed the DJIA roughly by a factor of 7.5). Since the BoJ is currently the biggest major currency molester in the world, a decoupling of the Japanese market in the event of a bear market taking hold elsewhere can probably not be ruled out – but we would expect that the market would at least be dragged down initially as well. This caveat has to be kept in mind when contemplating the (otherwise powerful) seasonal tendencies of the Nikkei discussed below. [PT] – click to enlarge.

 

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Pro-Growth Occurrences

An endearing quality of a late stage bull market is that it expands the universe of what’s possible.  Somehow, rising stock prices make the impossible, possible.  They also push the limits of the normal into the paranormal.

 

This happens almost every time Bigfoot is in front of a camera. [PT]

Cartoon by Gary Larson

 

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Divine Powers

The Dow’s march onward and upward toward 30,000 continues without a pause.  New all-time highs are notched practically every day.  Despite Thursday’s 31-point pullback, the Dow is up over 15.5 percent year-to-date.  What a remarkable time to be alive.

 

The DJIA keeps surging… but it is running on fumes (US money supply growth is disappearing rapidly). The president loves this and has decided to “own” the market by gushing about its record run. During his campaign he professed to worry about the “giant bubble”. We happen to think that it is probably best for a president not to talk about the stock market at all, but the Donald evidently couldn’t resist. One thing that continues to be quite satisfying is this quote by Paul Krugman on election night, when stock market futures plunged after it became clear that the Donald would beat Hillary: It really does now look like President Donald J. Trump, and markets are plunging. […]  I guess people want an answer: If the question is when markets will recover, a first-pass answer is never.” Krugman’s predictions are often devastatingly wrong, but rarely this fast. [PT] – click to enlarge.

 

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Bad Reputation

Years ending in 7, such as the current year 2017, have a bad reputation among stock market participants. Large price declines tend to occur quite frequently in these years.

 

Sliding down the steep slope of the cursed year. [PT]

 

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Where the Good Things Go

Many gold bugs make an implicit assumption. Gold is good, therefore it will go up. This is tempting but wrong (ignoring that gold does not go anywhere, it’s the dollar that goes down). One error is in thinking that now you have discovered a truth, everyone else will see it quickly. And there is a subtler error. The error is to think good things must go up. Sometimes they do, but why?

 

Since putting in a secular low at the turn of the millennium, gold is still the by far best performing major asset class, despite suffering a big correction from its 2011 peak. There is good reason to expect that the secular bull market isn’t over yet, regardless of the fact that the market is testing the patience of bulls. This is probably a case of “it will go wherever it needs to go, just not when you think it should”. [PT] – click to enlarge.

 

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October is the Most Dangerous Month

The prospect of steep market declines worries investors – and the month of October has a particularly bad reputation in this respect.

 

Bad juju month: Statistically, October is actually not the worst month on average – but it is home to several of history’s most memorable crashes, including the largest ever one-day decline on Wall Street. A few things worth noting about 1987: 1. the crash did not presage a recession. 2. its extraordinary size was the result of a structural change in the market, as new technology, new trading methods and new hedging strategies were deployed. 3. Bernie (whoever he was/is) got six months.

 

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Past the Point of No Return

Adventures in depravity are nearly always confronted with the unpleasant reality that stopping the degeneracy is much more difficult than starting it.  This realization, and the unsettling feeling that comes with it, usually surfaces just after passing the point of no return.  That’s when the cucumber has pickled over and the prospect of turning back is no longer an option.

 

Depravity and bedlam through the ages. The blue barge of perdition in the lower middle ferries the depraved and degenerate to their final destination, a small slice of which can be glimpsed above… [PT]

 

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Anecdotal Flags are Waved

 

“If a shoeshine boy can predict where this market is going to go, then it’s no place for a man with a lot of money to lose.”

– Joseph Kennedy

 

It is actually a true story as far as we know – Joseph Kennedy, by all accounts an extremely shrewd businessman and investor (despite the fact that he had graduated in economics*), really did get his shoes shined on Wall Street one fine morning, and the shoe-shine boy, one Pat Bologna, asked him if he wanted a few stock tips. Kennedy was amused and intrigued and encouraged him to go ahead. Bologna wrote a few ticker symbols on a piece of paper, and when Kennedy later that day compared the list to the ticker tape, he realized that all the stocks on Bologna’s list had made strong gains. This happened a few months before the crash of 1929.

 

Joseph Kennedy in 1914, at age 25 – at the time reportedly “the youngest ever bank president in the US”

Photo credit: John F. Kennedy Presidential Library and Museum, Boston.

 

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Introductory Remarks by PT

Below we present a recent article by the Mole discussing a number of technical statistics on the behavior of AAPL over time. Since the company has the largest market cap in the US stock market (~ USD 850 billion – a valuation that exceeds that of entire industries), it is the biggest component of capitalization-weighted big cap indexes and the ETFs based on them. It is also a component of the price-weighted DJIA. It is fair to say that the performance of AAPL is not unimportant for the broad market.

 

AAPL, weekly over the past 5 years. The stock has recently hit new highs. In a way this is  quite funny, as it happens just as the company enters maturity; its revenue and earnings growth rates are fated to enter a long term phase of decline from here on out no matter what – this is a mathematical certainty. Many of the darlings of the late 1990s tech bubble eventually faced a similar problem (in early 2000 we patiently explained to a fellow investor why Cisco could not possibly maintain an annual revenue growth rate of 50% for another decade, or even for another few years). This is beside the fact that the company hasn’t introduced any particularly successful innovative products since the iPhone, which remains its biggest revenue generator by far (the times when new generations of the iPhone offered genuine advances in terms of design and technological capability are but a distant memory as well; these days updated versions at best tend to offer a handful of tweaks). We don’t want to detract from the company’s undeniable entrepreneurial success and well-deserved reputation for quality, reliability and cool design. We merely question its current stock market valuation and the sense of timing of those buying the stock here and now. Admittedly, given the market’s effortless climb up the rungs of the greater fools ladder hitherto, recent buyers may well make a profit. We only know that someone will eventually end up holding the proverbial bag. A side note: the blue dotted lines on the chart serve to highlight a typical momentum divergence between RSI and price. The divergence is even more glaring on a daily chart. Sometimes  such divergences turn out not to mean anything, but more often than not they are a short term warning sign worth heeding – click to enlarge.

 

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Recurring Phenomena

Many market participants believe simple phenomena in the stock market are purely random events and cannot recur consistently. Indeed, there is probably no stock market “rule” that will remain valid forever.

However, there continue to be certain statistical phenomena in the stock market – even quite simple ones – that have shown a tendency to persist for very long time periods.

 

This chart illustrates a “rule that changed” – for eight decades (actually longer, but on this chart we can see the final eight decades during which the rule applied) the dividend yield on the S&P 500 Index would never fall much below 3%. Whenever that level was reached, everybody knew a correction or a bear market was imminent. This changed profoundly in the mid 1990s. The culprit: massive monetary inflation. [PT] – click to enlarge.

 

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Suspicion Asleep

You have probably noticed it already: stock market volatility has recently all but disappeared. This raises an important question for every investor: Has the market established a permanent plateau of low volatility, or is the current period of low volatility just the calm before the storm?

 

All quiet on the VIX front… what can possibly happen? [PT] – click to enlarge.

 

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Better than Goldilocks”

“Markets make opinions,” goes the old Wall Street adage.  Indeed, this sounds like a nifty thing to say.  But what does it really mean?

 

The bears discover Mrs. Locks in their bed and it seems they are less than happy. [PT]

 

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