A Noteworthy Warning

Obviously, during a bubble one cannot get timing advice from John Hussman, and certainly not from us either (our guest author Frank Roellinger and his strict trend-following system are probably far more useful for this purpose- see 'The Modified Davis Method' for details). We can only provide some background information on money supply growth trends and the occasional update on technical conditions. Apart from that, we are frequently wont to pointing out that risk in the market seems quite large – but there is no telling when this risk will manifest itself. What we feel fairly certain about is that when it does manifest itself, it will catch many people unawares, and a lot of the gains that have been made will be given back in a lot less time than it took to attain them.

However, there is another man who is probably worth heeding regarding timing questions, namely Jim Stack. We say this because Stack turned very bullish early on in the recent bull market, and correctly stayed bullish even when the euro-land debt crisis made it appear in 2011 as though the market was on its way back down. We therefore noted with interest that according to a recent press report, Stack is very cautious at the moment:

 

“One of the first independent advisers to call the current bull market is now raising a cautionary flag. James Stack, president of Stack Investment Research, warns subscribers to his newsletter, InvesTech Research, that the 5-year-old bull is aging rapidly. Although he hasn’t recommended selling stocks just yet, he says risk is rising and has one eye on the exits.

Attention must be paid. Early in his career, Stack, along with the late, great Marty Zweig, predicted the 1987 stock market crash. Twenty years later, in August 2007, he wrote: “We are taking steps to reduce exposure as warning flags increase.”

But unlike some perma-bears who never know when to quit, Stack turned bullish again in early 2009. I remember a conversation at a conference in Orlando that February in which he made the case for a new bull market while I was still very doom-and-gloom.

[…]

In a telephone interview from his headquarters in idyllic Whitefish, Mont., last week, Stack pointed out that 2013’s nearly 30% gain in the S&P was the 10th largest in the last 85 years. “I don’t think anyone who was positive on the outlook for 2013 could have expected the size of the advance we’ve seen…,” he told me. Meanwhile, he said, economic trends are “all entering 2014 in strong fashion,” presenting “little probability of a recession in the first half or three quarters of the year.”

But, he wrote in his most recent newsletter, “a strong economic outlook doesn’t negate the possibility of a bear market. The stock market leads the economy, and market peaks precede the start of recession by 5.5 months on average.”

All in all, he told me, “both macroeconomic and technical [indicators] still support more bull market highs in 2014.” But he’s getting worried. “Technically we’re about 15% above long-term historical valuations,” he said. The S&P 500 trades at 19x trailing-12-month earnings, vs. an average of 17x trailing earnings. And then there’s the calendar, particularly the four-year presidential cycle, which is of great interest to technicians and market historians. “The middle two quarters of a midterm election year are historically the weakest,” he said.”

 

(emphasis added)

Given that Jim Stack is a veteran of the markets and has made a number of quite prescient calls in the course of his career, we certainly agree that 'attention should be paid' to what he is saying. Interestingly he mentions the presidential cycle – we recently showed a chart of the average performance of the US stock market during mid term election years as well (i.e., the second year of the president's term). As a reminder, here it is again:

 


 

PresCycle

The average mid term election performance of the SPX from 1928 to today (blue line) vs. the 'average of all years' (red line), via Mike Burk – click to enlarge.

 


 

Below is a weekly chart of the SPX over the past three years. What is noteworthy is the wedge-like shape of the advance, as well as the recent multi-month divergence of the NYSE McClellan oscillator. Similar divergences were in evidence at previous market peaks.

As an aside, Stack may be right when he states that there is still time, as the market has a tendency to retest its highs or even make a new high in April in mid-term election years. Note also that a fairly weak January performance is apparently normal. Keep in mind though that it is not likely that the market will follow the template precisely.

One very notable historical market peak actually occurred in January, namely in early January 1973. This is worth mentioning because at the time the market had also just broken out to new highs and sentiment was almost as unanimously bullish as it is today (we say 'almost' because it was probably not quite as extreme as nowadays. At the end of 2013, new record highs in bullish sentiment were recorded in several indicators, but many of these indicators didn't exist in 1973, so a direct comparison is not possible). Even Alan Greenspan said two day before the 1973 peak that “there is no reason to be anything but bullish”.  :)

 


 

SPX, weeklySPX weekly over the past three years: a large wedge-like advance, accompanied by a notable breadth divergence since the middle of last year – click to enlarge.

 


 

 

 

Charts by: Mike Burk, StockCharts


 

 
 

Emigrate While You Can... Learn More

 
 

 
 

Dear Readers!

It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

5 Responses to “US Stock Market – Jim Stack Grows Cautious”

  • Aka77:

    Dear Pater,

    Thanks for your excellent work.
    I have two questions about money supply growth and the stock market.
    Firstly,you mentioned in many of your articles that currently bank credit growth is almost non existent and that most of the inflation comes from the Fed QE program, via banks creating deposits to buy treasuries that they then pass over to the Fed. I recall reading Rothbard say that the business cycle can occur only if credit is expanded to businesses, otherwise credit to consumers/gov cannot create the business cycle (as it finances consumption and does not distort the production structure). Can you help me reconcile these two facts? Maybe banks do indeed create money to buy treasuries, but then this money finds a way to drift into the business sector (maybe through record bond issuance etc.)?
    Secondly, I get your point that in order to have a bust a slowdown in money supply growth is necessary and yet if I look at a chart that compares TMS YoY growth to the SPX, I see that this relationship seems to have worked only since the 2000 bust: http://research.stlouisfed.org/fred2/graph/?g=r74
    As an example the huge slowdown that occurred in the mid 90s did not bring about any meaningful stock market crash. Am I missing something or is there another way to look at this that confirms your point(which I find theoretically very sound)?
    Thanks!

    • Aka77:

      I’ ve been looking into this a bit more and maybe my initial suspicion is right.Maybe the apparent breakdown in the relationship between TMS growth rates and the stock market is due to the fact that sweeps were introduced in the 90s and if I am not mistaken the formula you generally use to calculate TMS (which is the one I used in the above chart) does not account for this fact.

  • roger:

    While the record is undeniably excellent, it’s strange he could time the market so well by while holding the contemporary falsehood that is “the stock market leads the economy”. This is one of the falsehood that was refuted convincingly a while ago in one of your articles.

  • Hans:

    I am looking to short the market, gold and oil in the next sixty days.

  • No6:

    I would not be surprised to see this crash in Feb.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Gold Price Skyrockets in India after Currency Ban – Part III
      When Money Dies In part-I of the dispatch we talked about what happened during the first two days after Indian Prime Minister, Narendra Modi banned Rs 500 and Rs 1000 banknotes, comprising of 88% of the monetary value of cash in circulation. In part-II, we talked about the scenes, chaos, desperation, and massive loss of productive capacity that this ban had led to over the next few days.   Indian prime minister Narendra Modi – another finger-wagger, as can be seen in this...
  • Gold Price Skyrockets in India after Currency Ban – Part IV
      A Market Gripped by Fear The Indian Prime Minister announced on 8th November 2016 that Rs 500 and Rs 1,000 banknotes would no longer be legal tender. Linked are Part-I, Part-II and Part-III updates on the rapidly encroaching police state. The economic and social mess that Modi has created is unprecedented. It will go down in history as an epitome of naivety and arrogance due to Modi’s self-centered desire to increase tax-collection at any cost.   Indian jewelry...
  • A Note on Gold and India – What is Driving the Gold Price?
      Hidden Motives It is well-known that India's government wants to coerce its population into “modernizing” its financial behavior and abandoning its traditions. The recent ban on large-denomination banknotes was not only meant to fight corruption.   Obviously, this very bad Indian has way too much cash. Just look at him, he looks suspicious! Photo via thenewsminute.com   In fact, as our friend Jayant Bhandari has pointed out, fresh avenues for corruption ...
  • Gold Price Skyrockets in India after Currency Ban – Part V
      A Brief Recap India's Prime Minister announced on 8th November 2016 that Rs 500 and Rs 1,000 banknotes will no longer be legal tender. Linked are Part-I, Part-II, Part-III, and Part-IV, which provide updates on the rapidly encroaching police state Expect a continuation of new social engineering notifications, each sabotaging wealth-creation, confiscating people’s wealth, and tyrannizing those who refuse to be a part of the herd, in the process destroying the very backbone of the...
  • Attaining Self-Destruct Velocity
      Bad Monday Some Monday mornings are better than others.  Others are worse than some.  For one Amazon employee, this past Monday morning was particularly bad. No doubt, the poor fellow would have been better off he’d called in sick to work.  Such a simple decision would have saved him from extreme agony.  But, unfortunately, he showed up at Amazon’s Seattle headquarters and put on a public and painful display of madness.   Good-bye cruel world! On this our planet,...
  • All Aboard! Trump’s Express Train to the Future
      Free Money! BALTIMORE – Last week, the Dow punched up above 19,000 – a new all-time record. And on Monday, the Dow, the S&P 500, the Nasdaq, and the small-cap Russell 2000 each hit new all-time highs. The last time that happened was on the last day of December 1999.   Ironically, two events that were almost universally expected to trigger large stock market declines were followed by quite rapid and strong gains. Would the market have fallen if Hillary Clinton had won...
  • India's Currency Debacle – An Interview with Jayant Bhandari
      A Major Crisis Last week Jayant Bhandari related the story of the overnight ban of certain banknotes in India under cover of “stamping out corruption” (see Gold Price Skyrockets In India after Currency Ban Part 1 and Part 2 for the details).   Banned 500 rupee banknotes   The problem is inter alia that the sudden ban of these banknotes has hit the Indian economy quite hard, given that 97% of all transactions in the country are cash-based. Not only that, it has...
  • Will the Swamp Swallow Trump?
      Permanently Skewed TRUMP HOTEL, New York – Trump’s rambling army – professionals, amateurs, camp followers, and profiteers – is marching south, down the I-95 corridor. There, on the banks of the Potomac, it will fight its next big battle.   Lieutenants in Trump's army: Bannon, Flynn & Sessions Photo credit: Drew Angerer / AFP   Here at the Diary, we do not like to get involved in politics. But this is a special time in the history of our planet – a...
  • There Are Two Types of Credit — One of Them Leads to Booms and Busts
      Stumped by the Bust In the slump of a cycle, businesses that were thriving begin to experience difficulties or go under. They do so not because of firm-specific entrepreneurial errors but rather in tandem with whole sectors of the economy. People who were wealthy yesterday have become poor today. Factories that were busy yesterday are shut down today, and workers are out of jobs.   What has caused the bust? The modern-day economic orthodoxy continues to be unable to provide...
  • Gold Bull Market Remains Intact – Long Term Fundamentals Outweigh Short Term Market Gyrations
      A Strong First Half of the Year, Followed by Another Retreat In early 2016 gold had a big bull run. The precious metal rose close to 25% this year, pushed higher in a summer rally that peaked on July 10th. Gold experienced a bumpy ride over the remainder of the summer though, as investors became increasingly concerned about a potential rate hike by the Federal Reserve. Uncertainty returned to gold market and has intensified further since then.   Initially, gold rallied sharply...
  • Too Early for “Inflation Bets”?
      The Trump Trade After 35 years of waiting... so many false signals... so often deceived... so often disappointed... bond bears gathered on rooftops as though awaiting the Second Coming. Many times, investors have said to themselves, “This is it! This is the end of the Great Bull Market in Bonds!”   The long bond's long cycle – red rectangles indicate when the post 1980 bull market was held to be “over” or “over for sure” or “100% over”, etc.  We have...
  • US True Money Supply Growth Jumps, Part 1: A Shift in Liabilities
      A Very Odd Growth Spurt in the True Money Supply The growth rates of various “Austrian” measures of the US money supply (such as TMS-2 and money AMS) have accelerated significantly in recent months.  That is quite surprising, as the Fed hasn't been engaged in QE for quite some time and year-on-year growth in commercial bank credit has actually slowed down rather than accelerating of late. The only exception to this is mortgage lending growth - at least until recently. Growth in...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com