The Stock Market

     

 

 

The Future and the Past

Securities and Exchange Commission Rule 156 requires financial institutions to advise investors to not be idiots. Hence, the disclosure pages of nearly every financial instrument in the U.S. are embedded with the following admission or variant thereof:

 

“Past Performance Is Not Indicative of Future Results”

 

“Buy and hold”… “The market goes always up”… “No-one can time the market”… “Buy the dip” “With what? You said not to sell anything”… “Simple, mortgage the farm…”  The image above shows roughly what happens right after everybody feels the warm & fuzzies due to the fact that the market has been going up without a hitch for quite some time. Once the  conviction that it can only rise further is widespread and firmly embedded in investor psyches (who cares about valuations?), this is often what the next scene looks like… [PT]

 

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Listless Nikkei

On 24 July 2020 the Olympic Summer Games will begin in Tokyo, the capital of Japan. Olympic Games and Soccer World Cups are among the largest sporting events in the world.  Do you perhaps also think that these events may affect the performance of local stock markets?

 

Olympic Summer Games 2020 – official logo (left), and a fan-made logo (right) by designer Daren Newman [PT]

 

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Bad Hair Days Are Back

We recently discussed the many divergences between major US indexes, which led us to expect that a downturn in the stock market was close (see The Calm Before the Storm for details). Here is an update of the comparison chart we showed at the time:

 

The divergences between various indexes seem to be resolving as expected.

 

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A Global Pattern

You are no doubt aware of the saying “sell in May and go away”. It is one of the best-known and oldest stock market truisms.

 

Mark Twain’s famous saying about stock market speculation (the other one was “There are two times in a man’s life when he should not speculate – when he cannot afford it, and when he can”).  From a seasonal perspective he was definitely right about September and October. [PT]

 

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Do You Hear a Bell Ringing?

The sun shines brightest across the North American continent as we enter summer’s dog days.  Cold sweet lemonade is the refreshment of choice at ballparks and swimming holes alike.  Many people drink it after cutting the grass, or whenever else a respite from the heat and some thirst quenching satisfaction is needed.

 

Regardless of whether companies were able to “beat estimates” (which as often happens, were revised lower just before the reporting season started), their actual Q2 results didn’t look very encouraging so far. The manufacturing sector in particular looks a bit frayed around the edges as the saying goes. [PT]

 

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A Pleasant Surprise

You can probably imagine that I am convinced of the merits of seasonality. However, even I was surprised that an investment strategy based on seasonality is apparently leaving numerous far more popular strategies in the dust. And yet, this is exactly what a recent comprehensive scientific study asserts – a study that probably considers a longer time span than most: it examines up to 217 years of market history!

 

A chart of nominal commodity prices since the mid 12th century. A little aside to this: Estimates for some commodity prices date as far back as 3000 BC. The oldest price records permitting construction of a price index are from the time of the Babylonian empire, the Middle Kingdom of Egypt and the Minoan civilization (which blossomed during a time of global warming) from approx. 1840 BC to 1620 BC. One of the most intense periods of nominal commodity price inflation occurred in the roughly 130 years following the death of Emperor Severus Alexander in AD 235 (which marked the beginning of the Roman Empire’s “crisis of the third century”) until the reign of Julian the Apostate from 361 AD to 363 AD. Price information after Diocletian’s attempt to impose price controls in 301 AD (“edict on maximum prices”) is too spotty to permit index construction, but it is known that inflation accelerated even more after the edict failed. Rome’s history of monetary debasement started with Nero’s reign from 54 AD – 68 AD – Nero reduced the silver content of the Denarius by 10% to 90%. By the time Diocletian’s edict was promulgated in 301 AD, the silver content of the Denarius was a mere 0.02%. The worst offender among the third century emperors was Aurelian, who in the five years of his reign from 270 AD to 275 AD reduced the coin’s silver content from 50% to just 5%. Not surprisingly, he  tried his hand at price controls as well (at least he won the wars he funded through debasing the realm’s coinage). It took until the 20th century and the adoption of a “scientific monetary policy” by central planning agencies for prices to increase almost as rapidly and strongly as in the chaotic third century. [PT]

 

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Intra-Market Divergences Galore 

US big cap stocks have rallied to new highs in recent months, but just as in the rally from the low of the February 2018 mini-panic to the September/October 2018 peak, sizable divergences between different indexes have emerged in the process. New highs in the big cap indexes (DJIA, SPX, NDX) are once again not confirmed by small caps (RUT), the broad market (NYA) and a number of sub-sectors (such as the DJTA which is included in the chart below; according to Dow Theory, the DJTA must confirm moves in the DJIA to validate its trend).

 

From the top: weekly charts of DJIA, SPX, NDX, RUT, NYA and DJTA. The recent new highs in the three large cap indexes have not been confirmed by small caps and the broad market. Note also the sizable RSI/price divergence in the DJIA (which is mirrored by SPX and NDX) – this is a sign of faltering momentum that is often seen ahead of trend changes.

 

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Maurice Jackson Interviews Rick Rule

Rick Rule is a renowned investor in junior resource stocks. He is currently working for Sprott USA. Recently Maurice Jackson of Proven and Probable sat down with him for an extensive interview which you can watch below.

 

Rick Rule, legendary resource stock investor

 

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The “Greatest Economy in History” Stumbles

“This is the greatest economy in the history of our country”, Donald Trump opined just a few months ago.

Alas, recently there is growing evidence of an economic slowdown.

 

The Morgan Stanley MSBCI business conditions gauge plummets to its lowest level since 2008, as recent economic data releases ominously persist in disappointing. [PT]

 

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The Ugly End of Globalization

Sometime in the fall of 2018 a lowly gofer at the New York Stock Exchange was sweating  bullets.  He had made an honest mistake.  One that could forever tag him a buffoon.

 

Art Cashin the living hat-stand, going through a succession of DJIA milestone hats. He promised was going to crack a smile for the Dow 27,000 hat photo, alas, it was not to be. [PT]

 

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The Seeds of the Next Bust Are Closer to Sprouting

The price of gold was up this week, by $10 and that of silver by ¢6. Something is brewing in the fundamentals that we haven’t seen since… last year. We will show a picture of this, below.

There are many problems with assuming a rising stock market means a growing economy. We’ve written many times about the much-greater growth of debt, i.e., borrowing to consume, which adds to GDP.

 

S&P 500 Index, monthly – the huge rally since 2009 was accompanied by the weakest economic recovery of the post-WW2 era. Evidently, the stock market does not necessarily reflect economic growth. Very often numerous other factors prove to be far more important drivers of stock prices. A pertinent example is Venezuela’s soaring stock market, which is up by 88,500% in the past year alone (this is not a typo). Meanwhile, the country’s economy is contracting since 2014, with the slump accelerating to a stunning -16.5% y/y in both 2017 and 2018. The S&P 500 Index is an island of sanity by comparison, at least superficially (the ceteris are of course not paribus). [PT]

 

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Investors are Oblivious to the Market’s Downside Potential

This is a brief update on a number of sentiment/positioning indicators we have frequently discussed in these pages in the past. In this missive our focus is exclusively on indicators that are of medium to long-term relevance to prospective stock market returns. Such indicators are not really useful for the purpose of market timing –  instead they are telling us something about the likely duration and severity of the bust that will follow on the heels of the current market mania. The first chart is an update of the current situation in RYDEX funds. Despite their small size, these funds have always represented a quite accurate microcosm of general market sentiment.

 

A RYDEX overview: RYDEX money market fund assets have recently declined to new all time lows; the pure non-leveraged bull-bear fund ratio is back above 29 (i.e., bull funds assets are more then 29 times larger than bear fund assets). At the top of the tech mania in early March 2000, this ratio peaked at roughly 17. Lastly, the amount of assets in RYDEX bear funds demonstrates that bears remain extremely discouraged. It is fair to say that at this stage almost no-one expects that the market could suffer a serious slump.

 

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Most read in the last 20 days:

  • Repo Quake – A Primer
      Chaos in Overnight Funding Markets Most of our readers are probably aware that there were recently quite large spikes in repo rates. The events were inter alia chronicled at Zerohedge here and here. The issue is fairly complex, as there are many different drivers at play, but we will try to provide a brief explanation.   There have been two spikes in the overnight general collateral rate – one at the end of 2018, which was a first warning shot, and the one of last week,...
  • Curious Events in Risk-Free Collateral-Land - Precious Metals Supply and Demand
      Liquidity Shortage Last week the price of gold rose $28, and silver $0.53. But the prices of the metals was not the big news last week. The price of repo — a repurchase agreement, to sell and repurchase a treasuries — skyrocketed. Banks were thirsty for liquidity, and only cash can quench it.   Last week's “oops” moment in repo land as the overnight general collateral rate briefly soared to 10% (we will soon publish a detailed summary of the sequence of events that...
  • The Inexorable Final Collapse
      Groping in the Dark This week central planners pursued their primary mission with steadfast conviction. They planned. They prodded. They prearranged tomorrow to save us from ourselves. Some also grubbed a little graft for their trouble. Other central planners took to debasing the dollar to price fix the federal funds rate within a narrow band of tolerance.  What in the world do they think they are doing?   Central planning committee in the analysis and forecasting phase......
  • Elizabeth Warren’s Plans to MAGA
      21st Century Hooverville There are places in Los Angeles where, although the sun always shines, they haven’t seen a ray of light in over 100-years.  There’s a half square mile of urban decay centered on the Union Rescue Mission at 545 South San Pedro Street, where depravity, chaos, addiction, insanity and archaic diseases multiply and ricochet about like metastatic cancer.   One of LA's modern-day Hoovervilles in San Pedro Street...  In 2015 it was reported that Union...
  • The System Scrapes By - Precious Metals Supply and Demand
      An Accident in Waiting The price of gold dropped $20, and silver 43 cents. For reference, $20 was once worth just about an ounce of gold. Dollar was a unit of measure, a weight of gold equal to 1/20.67 ounce of fine gold.   A gold certificate from the time when the dollar still represented a fixed weight of gold [PT]   Today, it is an irredeemable currency, defined not as a unit of weight but as a unit of central bank liability which is backed by government debt,...
  • Zugzwang - Precious Metals Supply and Demand
      Respectable and Not so Respectable Assets The price of gold went up 8 bucks, and the price of silver went up a penny last week. These were not among the capital assets that could be liquidated for greater quantities of consumer goods last week. Nor were equities.   A respectable, mother-in-law-proof speculation: the 10-year US treasury note. [PT]   However, the consumer goods stockpile stored in treasury bonds (to extend our half sarcastic, half tongue-in-cheek...
  • Fed Chair Powell’s Inescapable Contradiction
      Under the Influence   “This feels very sustainable.”  – Federal Reserve Chairman Jerome Powell, October 8, 2019   Understandable confusion... [PT]   Conflict and contradiction.  These were two of the main themes reverberating around the world of centralized monetary planning this week. On Tuesday, for instance, a novel and contradictory central banker parlance – “reserve management purposes” – was birthed into existence by Fed Chair Jay...

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