A Dismal Beginning

From December 30 to the end of the first week trading week of January, the DJIA has declined by roughly 7.7% (approx. 1,370 points) and the SPX by roughly 7.6% (approx. 160 points). This was nothing compared to the mini-crash suffered by China’s stock market early this year, which continued this morning with the Shanghai Composite (SSEC) declining by another 5.33%. The SSEC has put in an interim peak at approx. 3684 on December 23 and has since then fallen by slightly less than 670 points, or about 18%. Most of the decline occurred in the first week of January.

 

1-SPX nowS&P 500 Index, daily. The year has begun with a big sell-off in stock markets around the world – click to enlarge.

 

Although the sell-off in the US stock market was comparatively mild, it still ended up as the worst first trading week of January in history. Had January started out on a positive note, the mainstream financial media would have been full of reminders of how bullish a strong showing in the first week of January was, and what a good omen it represented for the rest of the year. Instead they felt compelled to tell us why a weak start to the year should be ignored.

The contortions went as far as one analyst informing us last week that the sell-off was actually happening “in a parallel universe”. As our friend Michael Pollaro has pointed out to us, central planning worshiper Steve Liesman told CNBC viewers last week that the terrible trade numbers (both imports and exports kept declining) were actually a positive, because they would “subtract less from GDP” – as imports have declined at an even faster pace than exports. Such unvarnished nonsense can only spring from the fevered minds of Keynesians and Mercantilists.

 

2-US exports and importsAs US imports are falling even faster than exports, the trade balance is held to be “improving” – which bolsters GDP (as we have often pointed out, GDP is a nonsensical number in many respects – this is one of them). However, a rapid decline in both imports and exports is actually not a sign of economic strength, but the exact opposite (leaving aside the fact that the balance of trade is definitely not an important yardstick of a nation’s prosperity).

 

Liesman apparently also argued that the weakness in assorted economic data releases should be ignored because employment is so strong. Apart from the fact that it isn’t really – it is easy to report improvements in the unemployment rate when labor force participation collapses to levels last seen 40 years ago and people hold multiple jobs that end up being double-counted – employment is a lagging indicator. If anything, this is the data point that should be “ignored”.

It was also widely recommended that one shouldn’t worry about China’s troubles, although everybody has insisted for years that China represents the “world’s economic locomotive”. Mr. Liesman also asserted that the 0.3% decline in wholesale inventories argued for “further economic strength” – evidently not considering that sales fell by an unexpectedly large 1% at the same time, widening the inventory-to-sales ratio further, which argues for the opposite.

Naturally, viewers were told that manufacturing should be ignored as well, since the services sector remains strong. However, as we have often stressed, this is a mistake, given the large share of gross economic output represented by manufacturing. The recent weakness in manufacturing data is by itself not yet a “recession guarantee”, but it is definitely not something that should simply be ignored.

Let us get back to that dismal first trading week though – how meaningful is it?

 

Past Examples of Early January Weakness

Normally both the end of December and early January are seasonally strong time periods in the US stock market. The market’s behavior late last year and early this year was definitely out of character in terms of the seasonal patterns observed over the past 30-40 years.

In that sense, the action in the first week of January is meaningful: strength would have been normal, and therefore information neutral. Weakness isn’t, and therefore represents a warning sign – this is presumably all the more relevant the more pronounced the weakness is, and this year a new record was established.

Thinking back, we recalled two past examples of notable weakness in early January off the cuff, one more famous than the other, but both showing patterns that could turn out to be helpful as rough guidelines for what to expect. The first example is the US stock market in 1962. There are several parallels to today’s situation from a technical perspective. Here is the chart of the DJIA from September 1961 to January 1963 (h/t to our friend BC who supplied us with the data):

 

3-DJIA-1962-annDow Jones Industrial Average, Sept. 1961 to Jan. 1963. it is worth noting that similar to 2015, the market went sideways in a consolidation near what was then record high territory during most of 1961. After pulling back sharply in early January of 1962, the market recovered a bit and rallied into a secondary peak in March of 1962. Then disaster struck, and the market fell sharply into a low in late June 1962. The March 15 peak was at 724 points, the June 26 low at 536 points – a swift decline of 26% in slightly over three months. The weakness in early January clearly was a warning sign. Today an equivalent percentage decline from the 29 December interim high in the DJIA would amount to approx. 4,600 points – click to enlarge.

 

The important part of the pattern we wanted to point out in the context of the 1962 chart is the somewhat weakish rebound from the January low to the March high that preceded the strongest part of the overall decline.

The somewhat more famous example we remembered was Japan’s Nikkei Average in 1990, when the bubble of the late 1980s burst. Once again we can observe a very similar pattern: a very weak showing in early January, followed by a weak rebound/ consolidation, and a strong decline thereafter:

 

4-Nikkei 1989-1990The Nikkei Average from October 1989 to late December 1990. In this case the rebound, resp. consolidation after the early January decline was even weaker and didn’t last as long as that in the DJIA in 1962. The subsequent decline was of the same size as the 1962 decline (slightly over 25% in the Nikkei’s case), but even more fast-paced. Moreover, after the initial decline the market suffered a second down leg into an even lower low in October. It fell from a secondary high of 37,500 in mid February to 28,000 points on April 1 (losing the same percentage twice as fast as the DJIA in 1962), recovered to 33,000 points by May, and tumbled to 20,000 points between mid July and early October. At the October low, the Nikkei had lost slightly less than 19,000 points from its peak at the very last trading day of 1989, or approx. 48.5% – click to enlarge.

 

While we have only looked more closely at these two precedents (early January declines are actually fairly rare), they do suggest that one needs to carefully watch how the initial rebound out of a January low develops. To this one needs to keep in mind that the seasonally strong period actually continues until mid July, and is especially strong between January and May. Below is the 37-year seasonal chart of the SPX from our friend Dimitri Speck, an expert on seasonality:

 

5-SPX seasonalA 37 year seasonal chart of the S&P 500 – the market should advance strongly between January and May.

 

In this sense, the weakness in the first week of January is less important than what happens from here on out. If the market doesn’t manage to rally convincingly from the January low, but instead just delivers a weak consolidation that ends at another lower high, one should probably expect to see significant weakness developing from an interim peak that could be put in sometime between February and April.

Market internals remain weak, complacency is very pronounced (see also the latest Barron’s Roundtable which had not a single Wall Street strategist making even a mildly bearish forecast), and money supply growth, while still strong by historical standards, is less than half of what it was at the peak of the Bernanke inflation.

All of this is happening against the background of growing economic weakness and a budding currency crisis in emerging markets. Overnight the South African rand (ZAR) was clobbered for 10%, falling to a new record low (it has since then recovered much of this loss). The rand is the preferred hedging vehicle of investors exposed to emerging market currency risk, as it is one of the most liquid EM FX markets.

As a result of this, EM volatility is often especially noticeable in ZAR. It also makes it a leading indicator of the entire EM currency class. Given that the currency is severely oversold by now, it may well recover in coming weeks, which could go hand in hand with a recovery in stocks from the recent sell-off. If such a recovery eventuates, its quality and character needs to be closely watched.

 

6-RandThe South African rand (ZAR) against the USD. At the time of writing it was trading at 16.86, down from an overnight record of 17.83 – but still well above the previous days close – click to enlarge.

 

Conclusion

We have chronicled the stock market’s internal weakness and numerous warning signs such as the decline in margin leverage from a record high and the extreme complacency evident in long term sentiment measures in great detail in Q4 of last year. Now that the market has declined from a secondary lower high following the recovery after the warning shot of late August 2015, the question is whether this can provide an additional edge.

We believe it can, mainly because it is contrary to the usual seasonal pattern. To this one must keep in mind that deviations from bullish seasonal patterns are a typical beginning bear market trait. Note in this context also (h/t to Mitch Zacks for the info) that only four of the last 22 election years were bearish for the stock market (1932, 1940, 2000 and 2008). Normally it is the year after the election that turns out to be the weakest for the market.

However, as you can see, the pattern has been notably different in times we would regard as secular bear market periods. The wild ups and down in the stock market since the peak of the last secular bull market in 2000 have been accompanied by the US money supply growing by about a factor of four. This huge amount of monetary inflation since 2000 explains why the market has streaked to new nominal highs in every iteration of the cycle since 2000 (from 2008 to today, the broad US money supply TMS-2 has grown by 116%, since 2000 by 309%).

This does not mean that the secular bear market phase is over. One ingredient that has so far been sorely missing is extreme undervaluation, which the market has never reached since the 2000 peak. However, every previous secular bear market in history – regardless of whether it was accompanied by low or high interest rates – has eventually ended with market valuations at an extreme low (read: with average trailing P/E ratios in single digits). This year could therefore turn out to be yet another disappointing election year for the stock market.

 

Charts by: StockCharts, Acting Man, TradingEconomics, Dimitri Speck

 

 
 

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

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Perfect-InvestmentInsanity, Oddities and Dark Clouds in Credit-Land
      Insanity Rules Bond markets are certainly displaying a lot of enthusiasm at the moment – and it doesn't matter which bonds one looks at, as the famous “hunt for yield” continues to obliterate interest returns across the board like a steamroller. Corporate and government debt have been soaring for years, but investor appetite for such debt has evidently grown even more.   The perfect investment for modern times: interest-free risk! Illuustration by Howard...
  • Factories, new vs oldUS Economy – Something is not Right
      Another Strong Payrolls Report – is it Meaningful? This morning the punters in the casino were cheered up by yet another strong payrolls report, the second in a row. Leaving aside the fact that it will be revised out of all recognition when all is said and done, does it actually mean the economy is strong?   Quo vadis, economy? Image credit: Paul Raphaelson   As we usually point out at this juncture: apart from the problem that US labor force participation has...
  • TurmoilInvesting in Gold in 2016: Global Paradigm Shifts in Politics and Markets
      Crumbling Stability In the past few months, we have witnessed a series of defining events in modern political history, with Britain’s vote to exit the EU, (several) terror attacks in France and Germany, as well as the recent attempted military coup in Europe’s backyard, Turkey.   Global stability continues to be undermined   Uncertainty over Europe’s political stability and the future of the EU keeps growing. These worries are quite valid, as geopolitical...
  • CorporateMediacontrolTrump's Tax Plan, Clinton Corruption and Mainstream Media Propaganda
      Fake Money, Fake Capital OUZILLY, France – Little change in the markets on Monday. We are in the middle of vacation season. Who wants to think too much about the stock market? Not us! Yesterday, Republican presidential candidate Donald Trump promised to reform the U.S. tax system.   This should actually even appeal to supporters of Bernie Sanders: the lowest income groups will be completely exempt from income and capital gains taxes under Trump's plan. We expect to hear...
  • mania1The Great Stock Market Swindle
      Short Circuited Feedback Loops Finding and filling gaps in the market is one avenue for entrepreneurial success.  Obviously, the first to tap into an unmet consumer demand can unlock massive profits.  But unless there’s some comparative advantage, competition will quickly commoditize the market and profit margins will decline to just above breakeven.   Example of a “commoditized” market – hard-drive storage costs per GB. This is actually the essence of economic...
  • Mark Carney starts work as Bank of England governor in Dave Simonds cartoonBank of England QE and the Imaginary “Brexit Shock”
      Mark Carney, Wrecking Ball For reasons we cannot even begin to fathom, Mark Carney is considered a “superstar” among central bankers. Presumably this was one of the reasons why the British government helped him to execute a well-timed exit from the Bank of Canada by hiring him to head the Bank of England (well-timed because he disappeared from Canada with its bubble economy seemingly still intact, leaving his successor to take the blame).   This is how Mark Carney is seen by...
  • kids-2Why Americans Get Poorer
      Secular Stagnation OUZILLY, France – Both our daughters have now arrived at our place in the French countryside. One brought a grandson, James, now 14 months old. He walks along unsteadily, big blue eyes studying everything around him.   Put to sleep by monetary lullaby! This is what children look like approximately five minutes into a rant on the Fed's policy mistakes. It never fails! Photo credit: Jack Weid   He adjusted quickly to the change in time zones. And...
  • old friendsAn Old Friend Returns
      A Rare Apparition An old friend suddenly showed up out of the blue yesterday and I’m not talking about a contributor who had washed out and, after years of ‘working for the man’, decided to return for another whack at beating the market. Instead I am delighted to report that I am looking at a bona fide confirmed VIX sell signal which we haven’t seen for ages here.   Hello, old friend. Professor X and Magneto staring each other down in the plastic...
  • tortoiseThe Fabian Society and the Gradual Rise of Statist Socialism
      The “Third Way”   “Stealth, intrigue, subversion, and the deception of never calling socialism by its right name” – George Bernard Shaw   An emblem of the Fabian Society: a wolf in sheep's clothing   The Brexit referendum has revealed the existence of a deep polarization in British politics. Apart from the public faces of the opposing campaigns, there were however also undisclosed parties with a vested interest which few people have heard about. And...
  • storming the storeRetail Snails
      Second Half Recovery Dented by “Resurgent Consumer” We normally don't comment in real time on individual economic data releases. Generally we believe it makes more sense to occasionally look at a bigger picture overview, once at least some of the inevitable revisions have been made. The update we posted last week (“US Economy, Something is Not Right”) is an example.   Eager consumers storming a store Photo credit: Daniel Acker / Bloomberg   We'll make an...
  • The CongressThe Fed’s “Waterloo” Moment
      Corrupt and Unsustainable James has been a big help. Trying to get him to sleep at night, we have been telling him fantastic and unbelievable bedtime stories – full of grotesque monsters... evil maniacs... and events that couldn’t possibly be true (catch up here and here).   He turned his head until his gaze came to rest on the barred windows of the main building. Finally, he spoke; as far as I was aware these were the first words he had uttered in more than five years....
  • Zimbabwe_$100_trillion_2009_ObverseGood Money and Bad Money
      Confidence Gets a Boost OUZILLY, France – Last week’s U.S. jobs report came in better than expected. Stocks rose to new records. As we laid out recently, a better jobs picture should lead the Fed to raise rates. This should cause canny investors to dump stocks.   Canny investors at work (an old, but good one...) Cartoon via Pension Pulse   But the stock market paid no attention. It follows logic of its own. Headlines told us that last Friday’s report “boosted...

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