10+ Year Bull
Market Continues Dow Theory Bear Call was a FALSE SIGNAL!
By Victor
Sperandeo with the Curmudgeon
In October 2018 the markets declined into what historically
seemed to be the start of a Bear Market.
Several factors were in sync to corroborate this: market price action
(down) + volume (up), monetary policy (rates were rising), and world-wide
economic weakness (with little political actions/fiscal policies to stop
economic declines). These factors were
all acting in an integrated fashion to make this the end of the longest U.S.
stock bull market and second longest economic recovery in American history. (It
will become the longest recovery beyond this June and into July 2019 = 121
months).
A bear market and recession usually continue for more than
one year and has gone three years a few times.
Also, an additional important item should be noted: the
Fed raised interest rates four times in 2018. For a total of 1%, which was the
largest increase since 2005.
The way to accurately view the current status of the equity
markets is that the Dow Theory bear
market call was a false signal.
Indeed, a primary tenet of Dows Theory is that it can be wrong. From
Robert Rheas The Dow Theory book:
The Theory is Not Infallible - The Dow Theory is not an
infallible system for beating the market. Its successful use as an aid in
speculation requires serious study, and the summing up of evidence must be
impartial.
Several analysts (e.g. Aden Forecast) have said that a NEW
BULL MARKET started this April (with a reversal of the Dow Theory Bear
signal). In my opinion, that is
impossible as we did not have a recession and this process has
to be integrated to be valid.
Historically, there have been sharp stock market declines that did not
turn out to be classic bear markets and/or recessions -- 1962, 1966, and 1987
to name a few.
To classify the movement from early April a new bull market
is highly misleading and important from the point of view of making future
forecasts using the market action to dictate what is occurring, and where we
are in a stock market and business cycle.
The conclusions I draw are based on over five decades of
experience. As the great patriot Patrick Henry observed:
"I have but one lamp by which my feet are guided, and
that is the lamp of experience. I know no way of judging of the future but by
the past." -Speech to the Virginia Convention at St. John's Church,
Richmond, Virginia, March 25, 1775.
The reality is the Fed and the U.S. government have become
the supreme power behind everything in the market place. The fact is when the
Fed is raising rates the market will start to top and decline. If the Fed
wishes the economy to continue to grow the market will go up. This has ALWAYS been
the case, but when more people see this correlation they act as a unit to
embellish the trends. Also, the Fed has gotten so involved in even the daily
fluctuations that they have a part in the preventing even minor declines.
CURMUDGEON Comment: This is primarily
through speeches by Fed governors, but possibly also by encouraging their
dealer banks to buy stock index ETFs or stock index futures.
.
It also should be noted that on March 1, 2019 the Atlanta Fed projected a 1st
quarter GDP growth rate of 0.3%. They update this forecast often, based on the
release of economic data. Since that
date, the Atlanta Fed had 17 GDP updates, with all except one (March 11th
projecting 0.2% for the first quarter) increasing their GDP estimate. Atlanta Feds 1st quarter GDP
estimate rose to 2.7% on April 25th. One
day later (this past Friday April 26th), the first official Advance
Estimate of 1st quarter GDP by the BEA came in at 3.2% annualized
much higher than economist forecasts. It
was 966.7% higher than the Atlanta Fed first forecast!
Many of the components were moved up to have incredible
positive effects on 1st quarter GDP. This is part of the game. However. It is what the markets believes to
be true, not what is true that counts in this game of creating illusions. It is one reason why this rally has moved
straight up with only a minor 2.2% decline in the Dow Industrials since the
beginning of the year.
.
CURMUDGEON: 1st
Quarter GDP Advance Estimate was Incredibly Misleading:
1. NY Times-April 27th lead front
page story:
The most important components of the economy consumer
spending and business investment were both weak in the first quarter, and the
housing market contracted for the fifth quarter in a row. The strength in
G.D.P. was partly the result of a surge in inventories and a drop
in imports, both of which are likely to reverse in the second quarter.
For a better gauge of the economys health, analysts
recommend focusing on a different number, which strips out trade and inventory
effects as well as the impact of government spending. That measure, known as
final private sales, came in at 1.3 percent, down from 2.6 percent in the
fourth quarter of 2018 and the weakest showing since 2013.
Domestic demand in the economy investment, consumer
spending that was weak, said Ellen Zentner, chief
United States economist for Morgan Stanley.
2. Twitter Feed:
John P Hussman: This GDP report is a
pretzel. 73% of the increase in private investment was inventory buildup, with
a tiny fraction representing real fixed investment, because, you know,
corporate tax cuts spur growth. Just 35% of the GDP gain was final sales to
private domestic purchasers.
Diane Swonk: Over half the whopping 3.2% GDP figure due to
surge in inventories and slower trade. Imports fell. Consumer spending and
business investment slowed to a crawl. Federal government flatlined in wake of
govt shutdown.
FTSEputs: Everyones talking
about the incredible GDP number - but no one is talking about the awful
imports and durable goods print.
Darwin Economy: But despite the upside surprise on gov. spending, final
domestic demand (#GDP excluding trade and #inventories) grew just 1.5%
annualized, the weakest since 2015.
---------Many more tweets like those
above------------------------------------------------
3. John Williams of ShadowStats: INITIAL FIRST-QUARTER 2019 GDP ESTIMATE WAS
NOT CREDIBLE
- Downturn Has Just Begun; Recession Remains in Play, With
FOMC-Generated Financial Stresses Still Diminishing Consumer Activity
- Consumer Controls 72% of GDP, but Generated Only 22% of GDP
Growth
- Advance First-Quarter Real GDP Gain of 3.17% Topped
Consensus Forecasts, Strengthened Against 2.17% in the Fourth-Quarter, Yet the
Numbers Were of Unusually Poor Quality
- Bureau of Economic Analysis Is Hamstrung by Data-Quality
Issues Tied to Underlying Government Shutdown Reporting Disruptions and Distortions
- Only Two Months of the First-Quarter Trade Deficit Were
Available, Where Initial Quarterly GDP Estimates Usually Are Based on Three
Months
- That Two-Month Quarterly Trade Deficit Narrowed Sharply, Signaling a Great Recession Style Collapse in Personal
Consumption; That Deficit Guess Was the Largest Single Positive Contribution to
First-Quarter GDP Growth
- Positive Impact of the Deficit Narrowing Should Have Been Offset
by an Even Greater Decline in Goods Consumption, Which Dropped Sharply, But Not
Enough
- Three Months of Likely Downside Revisions to First-Quarter
GDP Follow, Into the July 26th GDP Benchmarking
- Broad Money Supply Velocity Slowed in First-Quarter 2019,
Suggestive of a Slowing Economy
.
Victors Closing
Comment:
It also should be said that the Fed has done a 180 degree
turn in its monetary policy and talk the talk to keep stock market momentum at
a maximum peak. Weve documented this
extensively in previous Curmudgeon posts, like Fed
Chair Sets New Record: 180 Degree Flip Flop in 15 Days! (01/06) and Feds
Balance Sheet Runoff is All About Bank Reserves; Who Does the Fed Represent?
(01/28).
The bottom line is that the key to making forecasts is the
attached disclaimer all things being equal.
End Quote:
One of the greatest prognosticators explained it best:
Nothing in the world can one imagine beforehand, not the
least thing, everything is made up of so many unique particulars that cannot be
foreseen.
― Nostradamus,
El Talisman de los Sueos
Good luck and till next time
..
The Curmudgeon
ajwdct@gmail.com
Follow
the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has
been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974
bear market), became an SEC Registered Investment Advisor in 1995, and received
the Chartered Financial Analyst designation from AIMR (now CFA Institute) in
1996. He managed hedged equity and alternative (non-correlated)
investment accounts for clients from 1992-2005.
Victor
Sperandeo is a historian, economist and financial innovator who
has re-invented himself and the companies he's owned (since 1971) to profit in
the ever changing and arcane world of markets, economies and government
policies. Victor started his Wall Street
career in 1966 and began trading for a living in 1968. As President and CEO of
Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and
development platform, which is used to create innovative solutions for
different futures markets, risk parameters and other factors.
Copyright © 2019 by the Curmudgeon and
Marc Sexton. All rights reserved.
Readers are PROHIBITED from
duplicating, copying, or reproducing article(s) written
by The Curmudgeon and Victor Sperandeo without providing the URL of the
original posted article(s).