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 Dow’s Theory is that it can be wrong. From Robert Rhea’s 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 Fed’s 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 economy’s 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:  Everyone’s talking about the incredible GDP number - but no one is talking about the awful import’s 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------------------------------------------------


- 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


Victor’s 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.  We’ve documented this extensively in previous Curmudgeon posts, like  Fed Chair Sets New Record: 180 Degree Flip Flop in 15 Days! (01/06) and Fed’s 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

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.

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