Top Advisors Corner

Alan Newman: Crosscurrents - November 3, 2014

Alan Newman

Alan Newman


Rationales & Targets

Our “Initial Support” level of Dow 16,587 was taken out on Friday, October 10th.  Our “Important Support” level of Dow 16,333 was taken out on Monday, October 13th.  We interpret the breakdown below important support immediately after breaking initial support as a further confirmation that our analysis of vulnerability is correct.  At the October 15th print low of Dow 15,855 stocks were oversold but we’ve seen far worse in the past.  By comparison, this was pretty tame.  The surge in the Volatility Index (VIX) was too brief to suggest any real capitulation has yet to take place.  


The action of the last two days looks like a blowoff, not a rally based on fundamentals.  Is the economy really as good as the “official” stats suggest?  No way.  Consumer debt at another new all time high of $3.2 trillion says otherwise.  Clearly, between a leveraged stock market with another new all time high in margin debt and the consumer tapped to such an extent, we are standing on the precipice staring into an awesome chasm.  Can central banks save us all by continuing the endless charade of buying assets forever?  Like 2000 and 2007, bubbles risk a worst case scenario and we expect no less this time around.  Looking at Dow charts only, we see 13 positive, 6 neutral and 11 negative.  There are entirely too few leaders for bulls to have confidence here.  The market’s leadership has suffered a significant contraction and it does not bode well!    

The Bubble Returns With A Vengeance

One of the salient themes of our analysis is the bizarre nature of the stock market, driven principally by extreme leverage and short term speculation leading to what will likely become the worst liquidity in decades.  Despite the Federal Reserve’s overreaching attempts to convince the investing public to plunge into stocks and build wealth, it is clear that the experience of the two prior manias and subsequent collapses were sufficient to keep investors wary.  Clearly, the huge generational inflows into funds that hallmarked the super bull market are still being unwound.  Domestic mutual funds have been in a significant liquidation phase since the broad market peaked in 2007.  There have been negative inflows for 66 of the past 88 months totaling $609 billion.  Our featured chart measures inflows over each rolling ten-week period, which we believe is a fair representation of the intermediate term.  Similarly, net inflows have been negative for 74.5% of all periods shown.

Nevertheless, prices have risen in a constant manner, with a few brief exceptions.  Despite the fact that three of every four periods suffered outflows averaging more than $2.5 billion, the Dow Industrials nevertheless defied the gravity of slack demand and averaged 1.7% gains when ten-week flows were negative.  This is probably the most stunning development of this new era of central bank sponsored and induced manipulations.  What makes the strategy all the more scary is that to date, it has worked.  Indeed, the entire world seems to have taken notice of what the printing press can accomplish and to date, at least 14 central bankers have taken an additional step, actively buying shares of stock (see http://bit.ly/1FQ6w1c).   The Bank of Japan holds the second largest reserves of any country and said back in April they will more than double investments in stock to the equivalent of over $35 billion.  Thus far, their efforts have taken the Nikkei Index from a range of  8000-11000 during the period after the 2008 bust to a range of 14,000-16,000 beginning in the spring of 2013.  Sounds great until you realize that the Nikkei traded near 40,000 in 1989 and has never since even remotely approached that peak.  At 16,413, the Nikkei today is still 18% below the 20,000 mark reached when the tech mania ended in the U.S. fourteen-and-a-half years ago.        

The excuses put forth by central banks to buy stocks are diversification of assets and the favorable comparative yield of stock dividends to Treasury bonds.  However, the last time we looked, stocks were still a speculative investment, particularly when prices are elevated to valuations that clearly portray a bubble.  We believe this new era is creating great danger. 

For more information, please contact us:

Alan M. Newman,
Editor, Crosscurrents
www.cross-currents.net