Market Update For Early September 2016

For the past two months, excitement in the stock market has been hard to come by.  On August 15^th the Dow Jones saw its last all-time high, and it made seven new all-time highs in a row in mid-July.  But these new highs only nudged the Dow Jones into record territory a bit at a time.  Since the beginning of July, the Dow Jones has never strayed more than a 1.5% from a BEV Zero in the chart below, and that seems to be the story of the stock market for the past two months.

This won’t last forever.  The question is:  When will things become exciting again…and will the change be positive or negative for the market?  The stock market has been going up for the past seven and a half years.  It’s easier believing the next big move, something like 20% or more, will be down.

It’s not just the Dow Jones staying close to its last all-time high (#12: Table below).  Two of the major market indexes I keep an eye on made new all-time highs at the close of the week, and the next eleven in the table are within 1% of theirs.  But note the Dow Jones Transports at #22, its down 14% from its last all-time high.  That’s a bearish signal according to the Dow Jones Theory.  Now the Dow Theorists are waiting for the Dow Jones (Industrials  #12) to take the hint from the Transports and follow it down.

And then there’s Tail-End Charlie; the NYSE Financials ending the week 35.79% from its last all-time high, a high that dates back before the 2007-09 credit-crisis bear market.

Well you are what you eat, and the big banks have been dining on financial garbage for the past two decades.  If it weren’t for the “policy makers” monetizing Wall Street’s garbage reserves, and re-injecting the resulting effluent back into their balance sheets to keep the banks liquid enough to stay in operation, they would have failed years ago.  The “policy makes” are just buying time.  A day of judgement is coming; but exactly when is a question I don’t have an answer for.

Not that anyone today is pressing to know when doomsday will arrive.  The DJTMG saw seventeen new 52Wk Highs this week and no new 52Wk Lows.  Coal, Non-Ferrous Metals and Gold Mining remain in the top three positions, as they have since last spring.  However it’s been awhile since we’ve seen them make a new 52Wk High.  But coal and the gold miners are within 10% of doing so.  The Banks have moved up in the past month, ending the week at #54.

The NYSE 52Wk H-L Ratio (chart below) has remained in positive territory since the market decline of last January / February.  To refresh your memory; last December the Federal Reserve increased its Fed Funds Rate by a pathetic twenty five basis points, sending the NYSE into a bit of a panic.  With the Presidential Elections only two months away, do you believe the FOMC would raise rates again before November?  I don’t.  Still every month some FOMC “policy maker” informs the financial media that they almost certainly may do so.  Who believes these people anymore?  Well, the financial media of course.

Before Alan Greenspan became Fed Chairman, the Fed made it a point not to say anything to anyone about whatever they may think, do, or say at FOMC meetings.  Like the mafia, total silence was the Federal Reserve’s public relations policy for decades.  It wasn’t until Paul Volcker increased his Fed Funds Rate to 20% in the late 1970s, that the media began covering the Federal Reserve.

Today, that’s all the financial media talks about; how the Fed is going to do this, that, or the other thing to “support the market” or “stimulate the economy.”  It’s not a sign of economic health that the only thing that seems to keep the economy, and the financial markets on an even keel are regular “injections of liquidity” from the FOMC, and most market commentators are fine with that.

The Dow Jones Total Market Groups (DJTMG) made seven new all-time highs this week.  But the chart below shows how the best of the post credit-crisis advance is now behind it.  It was from the March 2009 bottom to the end of 2014 that the broad market was surging upward.  But then came 2015, and with it came the necessity of being in the right groups to make any money.

Next is the DJTMG’s Top 20, or the number of groups within 20% of their all-time highs.  At the end of the week the Top 20 was at 47, but that isn’t bullish.

If you were looking for a market oscillator to time your exit and entry points for the stock market, market history would tell you to exit the stock market when the Top 20 was at a high value, and not return until it once again registered single digits. 

Unfortunately for retail investors, when the Top 20 is at high valuations, the stock market feels like a safe place to keep one’s money, so they don’t sell when they should; like today.  When it’s in the single digits, and people should be buying stocks, the stock market is in a panic, so fear keeps them out when they should be coming in.  Making money in the stock market isn’t easy, because to be successful one has to struggle with human nature.

Here’s the frequency distribution table I use to construct the Top 20 plot above, as well as how many new all-time highs the DJTMG sees weekly (two charts up).  Except for the mini-panic the Yellen Fed began last December, which took the Top 20 down to 26 from 45 in the chart above, the Top 20 has been above 35 for the past three and a half years.  Sometime in our uncertain future, there will come a time when the market will once again become a real bargain, but September 2016 isn’t that time.

Moving on to gold and its step sum, it’s still holding above $1300, while its step sum (market sentiment) has yet to become a believer that the August 2011 to December 2015 correction is over.  History shows that the price trend is a more reliable predictor of future market trends than is the step sum.  In fact, when the price trend is at odds with its step sum, as it currently is, that lends credence to the price trend; which in this case is bullish.

Give gold some time.  One of these weeks we’ll see the price of gold take off, dragging its step sum along for the ride.

This week gold and silver saw their 15 counts end at -1.  But two days ago they were a -5.  That by itself isn’t necessarily impressive.  If the price of gold and silver were higher by only a penny than the day before, two days in a row, we’d see their 15 counts do the same.  The thing to observe is whether gold and silver, in the aggregate, are going up more on the advancing days than they are going down on the declining days.  Since the middle of August, that’s what they seem to be doing, if not in a spectacular fashion. 

The current advance for gold and silver began just last December.  You can see gold’s bottom in the chart above (Blue Plot).  They have a long way to go before they become a sell; that’s how I see it.

Next is a table listing the monthly closing prices for the three precious metal mining indexes I follow along with gold and silver for the past year.  On its bottom I have the monthly percentage changes.  I also included this week’s data, the first week of September.  So keep in mind the last row is only for a week, not an entire month.

Looking at the miners at bottom portion of the table (the percentages), the big double digit declines stopped after January.  February was an amazing month, and April, June and July, with their double-digit gains weren’t bad either.  Then in August the miners saw a bit of a correction, but not much of one.  The market action for gold and silver of the past year is very similar, but their moves were not as extreme as for the miners, as expected. 

All and all, this is what a bull market looks like in its early stages.  Heads up; eventually the miners will once again see a double-digit monthly percentage decline, as happened in November and January.  But if this is a bull market in gold, silver and their miners, for every double-digit percentage monthly decline, we’ll see two or three double-digit monthly advances.

Mark J. Lundeen

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