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The Case For A Bull Or Bear Market In Two Charts
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Which appears more likely--a straight-line extension of the past two years' rise in stocks, or another "impossible" decline to complete the megaphone pattern?
There are dozens of charts and data points supporting the case for a continuation of the Bull market in stocks or a reversal into a Bear market. For the sake of brevity I've distilled the two arguments into two charts, one for the Bull case and one for the Bear case.
The Bull case is easy: the economy has reached self-sustaining expansion, a.k.a. escape velocity; hotel occupancy rates are high, home valuations are rising, stocks are fairly valued based on forward earnings, debt has been paid down/written off, and the Fed has tapered its quantitative easing (QE) bond and mortgage buying with no ill effect.
Looking ahead, there is no fundamental or technical reason for stocks to drop significantly; stocks always go up in years ending in 5, and there is nothing magical about 2016 in terms of a decline, either. The market could advance for years.
Bottom line: the advance since early 2012 is founded on solid fundamentals and there's no reason the advance can't continue along with strengthening fundamentals such as corporate profits, rising tax revenues, etc.
The Bear case is based on sentiment, but this reliance on extremes of bullish sentiment is misplaced; the fact that everyone is talking about a bubble in stocks and expecting a correction just goes to show there is no bubble and a correction will simply offer another opportunity to buy the dip, a strategy that has been richly rewarded.
The Fed (and other central banks) have our back: any decline in risk assets will be washed away with another tsunami of near-zero-interest money, liquidity and credit.
The Bear Case is also simple: the supposedly solid fundamentals of earnings, stock buybacks, etc. are all based on an unprecedented expansion of debt, central bank monetary easing, leverage and systemic risk.
Finance trumps economic data, and financial risk has reached a tipping point:shadow banking is unraveling in China, the Fed already owns most of the new home mortgages that have been issued and has to taper lest it own the entire mortgage/Treasury markets, junk bonds have been bid to the moon, etc.
Debt, leverage and risk have reached bubble heights, and simple cause and effect means the stock market has also reached bubble heights.
Faith in the central banks' ability and willingness to push stock markets higher has reached extremes. Volatility and complacency have both reached levels that historically correspond to major highs.
Take away massive buybacks funded by cheap credit and the market's dependence on financial one-offs will be revealed: the Bull market was never about earnings; it was always about cheap credit, central banks pushing investors into risk assets like stocks and corporate buybacks. Bulls claiming hotel bookings, auto sales and profits are "proof" of a self-sustaining economy are looking at the effects, not the causes.
To understand the cycle of credit addiction, please read Are We Addicted to Failure?
Bulls and Bears alike tend to marry their convictions. As we all know, the human mind is uncomfortable with uncertainty, and so once a person chooses the Bull case, recency bias and confirmation bias kick in and the Bull selects recent data that confirms his conviction.
The same tropism toward certainty takes hold of Bears, and those of us without the conviction of marriage watch from the sidelines.
I have long been skeptical of the Bull case based on the unprecedented scale of central bank/state intervention, support and manipulation. If everything's so great, then why does the Fed need to buy trillions of dollars in assets and manipulate markets with reverse repos, etc. and direct purchases via proxies? If a market only rises as a result of such outlandish one-off intervention, how can anyone claim it has any fundamental foundation?
Which appears more likely--a straight-line extension of the past two years' rise in stocks, or another "impossible" decline to complete the megaphone pattern? If stocks continue climbing once the Fed ends its bond-buying in and stock buybacks drop to less frenzied levels, that will be evidence the Bulls are right about the economy's escape velocity.
If the market tanks as soon as the monetary heroin is withdrawn, that will support the Bear's case that financial legerdemain trumps economic data.
Two things favor the Bear case in my view: if volume is the weapon of the Bull (i.e. rising volume drives Bull markets), then the fact that volume has been declining for years is not supportive of the Bulls.
Secondly, I don't see how the economy can reach escape velocity with household income declining in real terms: Five Decades of Middle Class Wages (Doug Short).
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I have profound doubts about technical analysis, but I do know two astute investors who use it with apparent success.
Nontheless, the recent highs do indeed look very high.
EDIT:
The spike of new IPO LOCO also makes me cautious.
Strong buy at 500.
strong buy at infinity.
Dump your savings and sell your owned assets. Buy STAWKS.
What's the case that we have a market?
Actually you get a higher yield on stocks than cash.
It's not like Wisconsin Energy is an "out there" investment and it's been hitting one record high after another for over three years now. "So your balance has tripled while your interest on said balance is higher than cash." Only an idiot says "the answer to all this is gold." (Unless you're in Europe which is now entering a full blown depression.)
The hard part is being contrarian...to NOT be long equities, the dollar, real estate, etc. all of these assets have moonshot since 2008 which says to me the only non correlated asset remains treasuries.
And I've stuck with that play.
I'm not an economist but I read a lot of their material...they've basically been wrong on the recovery thesis with probably one exception (Steve Hansen.) mid cycle corrections are normative...we're in one now, leverage is extreme, the Fed does NOT have your back. Stick with the treasury play.
Should that "imbalance" your portfolio (suddenly you have 70% treasury, 20% equity, 5 % cash, 5% precious metals) then start looking at equities again.
I've been 100% treasuries for over a year and loving it now. Now it's time to start thinking of putting risk on the table again in my view.
Real estate is the worst (other than as a tax write off) as with the carrying costs...especially with the ACA which has crushed the "ownership society"...are off the charts.
The crash never comes from the first high, so you're safe for now. Will only crash if it cannot take out the prior high. A week or two more of bliss. imho.
Depends on how much longer the Fed banksters want to prop it up to get more suckers in before they pull the rug out and profit again.
The "trend is your friend"? Which trend exactly? Details matter. Should the trend of increasing costs in food, energy, housing, and healthcare continue ....
fuckers. I don't think these "analysts" understand how the death of fiat has played out in the past.
yellen is decomissioning the printers - for now - so watch the markets slide
tracking the Fed printers - the new technical analysis
I disagree. Still printing 45 billion per month, still very much printing. In addition, she is still calling in some favors in the E.Z.
And why should anyone believe the Fed is 'tapering back' at all? How does anyone verify that, who is the watchdog? Just as likely they're piling in 120 billion a month. I don't believe the narrative.
All along I have had my doubts about that too. I keep wondering in which secretive ways they are still injecting liquidity in the system to make up for the official tapering bit.
They keep PROVING to themselves and new recruits in congress that they can FOOL 80% of US Voters OR Workers
1) WMD in Iraq
2) Derivatives don't need to be regulated
3) Private Banking & Shadow banking is okay and not risky
4) DHS is good for us, so is TSA, FEMA, & Obama
5) Janet Reno & Bill Clinton caused the Sub-Prime Crisis not the 2ndary Mortgage market where they were immediately repackaged and sole
6) We don't need Glass Steagal, FDIC Insurance, or Investigation of the 2008 Financial Crisis
7) No damage to US Reputation from the 2008 Financial Crisis
8) No worries about loss of Middle Class, Pensions, 401Ks, or the under funding of Pension Funds
9) All Cleaned up after 2008, no other municipalities or institutions have toxic assets or are in danger
10) Small Businesses are fine, they are not disappearing
11) US Workers are unskilled & Uneducated, we need H1B VISAs
12) Our Borders are Secure, we fight terrorism, but immigrants crossing illegally are not a problem
13) There is no Disease, Rape, Murder among illegals seeking to cross the US Border
14) The government doesn't cause the illegal drug market, prohibition does not cause drug wars that tear apart Mexico or other countries
15) We are spying on US People to protect them better, there is no risk of politicians and congressmen and US Presidents being blackmailed
16) The Fed is needed to ensure that Federal Budgets don't get so large that they become "Credit Risks" and become down graded by Foreign Countries
Bankers can say anything too. "We are doing God's Work".
Right on. Every software company i've worked for abuses the H1B Visa deal. Last company paid 15-20k for visa's brings them over, then they work as a programmer making 40k and are happy to get it, Displacing americans who made 90k.
It's all a big fuckin lie.
Thanks. Foreign Programers displace people with Pensions too probably. oops no more pension, but maybe you can roll over the 401K. Just the Manufacturing Plant Layoffs of the 1980s-1990s at CAT, Navistar/International Harvester, John Deer Maybe, Cummings, White Motor, Peterbuilt maybe, MAC Trucks maybe, Big Three Auto companies.
We can pick on Lawyers too as they get paid to twist politics and the truth. But you can't separate:
Lawyers from Bankers from Politicians. Same Breed. And they all are suckling on Uncle Sugar & Tax Dollars.
Systemic Corruption. Institutional Corruption.
I tend to consider their incentives. They know it and we know it that inflation is high and the dollar is being killed via their printing and geopolitical pressure. They don't win if the dollar dies. They put themselves out of a job and the U.S. gets its tits ripped off. I think they realized Bernanke was wrong so lets stop before things get really bad. However, they can't just say that they were wrong and we change course, if they did that markets would crash and they would be wrong and everyone would know it. They have to slip out the back door and ease this economy down to stand on it's own feet.
Federal reserve was wrong and they fuked a lot of people in the process. The fed needs some oversight and the nanke should be water boarded.
Right, tapering is not a problem. Belgium will buy magically buy everything!
It is important to look for 1 or the other.. or both:
1. a repeal of SOX
2. a repeal of Dodd-Frank
The Indisputable Connection Between Outsourcing Projects And Stock Markets:
http://enronnext101.wordpress.com/
r
The dollar is dying Charles and the illusion of prosperity must be maintained as long as possible in order to keep the masses at bay.
^^ The credo of the PTB.
They can try hiding the economic decline but it's not working. There's a new poll out today that says 55% of the American people says we would be better off if we had elected Romney. Not that I believe that to be the case, but the point is that the American people aren't buying what TPTB are selling.
100% Certain would be better under Romney. Tired of Chicago Thugs.
They, whoever that is , would have gotten to him as well. But he might have tried to let the economy normalize, whatever that is.
Congress and pensions: Highway to hell | The Economist
SO THE US Congress has agreed on a way of funding the highway trust fund, the scheme that fixes the potholes and the bridges (and should be funded by a tax on petrol, but Congress refuses to increase that tax). The "money" is to come from a technique known as pension smoothing companies will have longer to repair their pension deficits. Since companies' pensions contributions are tax-deductible, lower contributions means more tax revenue for the government; this will fund the highways.
Yes, yes, more "cheaper" debt...
doubleplus good.
Either
Cannibalism
Fascism
Neoliberal Economics
Plot to destroy the Middle Class
Proof of Money's Corrupting Powers
Proof Big Corporations have more power than Countries
IMHO he stock market will most likely feel the effects of gravity sometime after the fall elections.
ZIRP of course is one reason volume is lower given reduced float. Another thought is stock prices are so high as to reduce buying shares for the same dollar.
Just a couple of thoughts.
'John Kerry is an alien, an ongoing embarrassment': what Israel thinks of US secretary of state - Telegraph
What this really shows is that everything above 1500 or so on this trip has been extraordinarily artificial (above and beyond normal bubbliciousness). It probably should have reversed at the point where the fluctuations diminish.
Why?
The timing is not yet correct for those who are managing things. They must be coordinated and so we a currently in an unpward slanting holding pattern until timely.
Everything above 1500? WTF? Try everything above S&P 666. If it weren't for Tarp, back door bail outs, and mark to fantasy accounting, we would have dead institutions all over the place instead of the putrid rotting zombie banks we have now.
St Thomas Aquinas - Summa Theologica
"Shape is not a principle of natural action. Men attend to all these observances, not as causes but as signs of future events, good or evil. Nor do they observe them as signs given by God, since these signs are brought forward, not on divine authority, but rather by human vanity with the cooperation of the malice of the demons, who strive to entangle men's minds with such like trifles. Accordingly it is evident that all these observances are superstitious and unlawful: they are apparently remains of idolatry, which authorized the observance of auguries, of lucky and unlucky days which is allied to divination by the stars, in respect of which one day differentiated from another: except that these observances are devoid of reason and art, wherefore they are yet more vain and superstitious."
http://dhspriory.org/thomas/english/summa/SS/SS096.html
"The Bear case is based on sentiment, but this reliance on extremes of bullish sentiment is misplaced; the fact that everyone is talking about a bubble in stocks and expecting a correction just goes to show there is no bubble"
Bubble after bubble after bubble. Everyone is talking about bubbles because after so many, everyone knows what they look like.
it's a bubble- again.
When the derivative bubble pops the indicies will take a quick ride to that bottom tren line.
I call that Horn pattern the Jaws of Death.
the third option is the nothing market. the so-called market goes nowhere fast for the next decade or two while the currency languishes in hell.
Yeah, Stagflation with flattish stock markets.
Jim Rogers seems to think Finance has to cool off for a while if we can believe what he says.
We need like 5.3% annual GDP Growth to keep up with Expanding Federal Budget. But Nominal GDP Growth seems to typically be about .6% a quarter. And we already lost half a year.
Now with Inversion of Corporations, moving tax base to foreign countries... would think US Financial Credit Rating should be more scrutiny & US Dollar Value. Who's to says our Big Banks will not reincorporate or merge with businesses in Singapore, Hong Kong, Brazil, or Europe (I'm not a banker).
"stocks always go up in years ending in 5"
Until they don't.
that was pre-algo. Now, stocks cannot go down on days ending in 'y', months containing a vowel or years expressed as an integer. i hear the R&D guys are busy working on something that will also prevent stocks from going down during decades that are 10 years long.
Priced for sub 1% returns to infinity. That's FAIR VALUE for fedtards it seems.
My $0.02: The underlying of the market looks weak. However, past experience suggests that after a bit of weakness to pull the shorts in, we will see a blow off top pulling in more retail momo and the exit of the sharks. Then we will see a meaningful down leg.
Of course, no one can predict the future. Even if they turn out to be right, they were lying. :-)
You have to love the megaphone pattern they are drawing. It looks just like the ones you saw last year and the year before. The only difference is the writer moved up the top bar as the market kept going higher and invalidated the prior megaphone top chart.
Raise the student loan rate. Let the kids have all the debt.
"If a market only rises as a result of such outlandish one-off intervention, how can anyone claim it has any fundamental foundation?"
Priceless.
Scientific explanations are not evidence of anything when the results are rigged. An economist would, no doubt, resort to some organic metephor to say the government's got to nurture and grow the economy, but nothing at all is proved until that outside support is pulled away, and then we still don't know whether the economy would have rebounded on its own.
The Bulls are the ones with the explaining to do, they're the ones who spent all this money. The price of stocks is NOT a justification, nor is it evidence of anything.
One case for equities is this: ...unlike China, for instance, US Corporations control the foreign exchange of the country.
In China all foreign revenues are turned over to the state in very short order. The state owns $2Tr of foreign exchange, diversified to some extent.
The US as a political entity holds about $161mm including some gold. And it has some swap lines now that Geithner put into place. But swaps have a term. they are borrowed foreign currency. It's not like America doesn't earn foreign currency. It's that it sits on the books of IBM and GE, NIKE and FB. And on the books of the Harvard Corporation and the Stanford endowment and Calpers.
So if the Dollar is seriously mismanaged vis a vis EUR or GBP or CNY, US corporates win big on their diversified currency holdings. Companies who bring funds immediately back into Dollars...even if they hold those Dollars offshore in ireland or Cayman or Singapore....not so much. But they are still in a position to rewrite contracts to get paid in foreign. So, what would you rather own, a claim on Dollars only or a claim on a diversified basket?
The market is a joke. The only 'why' you need to know is that algos feel like it.
So if we Split the difference between the two lines we Still Get a Crash.. but what do i Know..
How many of you, seeing these graphs and understanding how banks loan money that they don't have all day long, still believe that an economy is just a scaled up version of a family budget?
Just curious.
(I'm not asking you to reevaluate the entire frame work by which you view the world. No. I would never do that to you. Really. Sort of.)
every time I see that megaphone the upper line gets higher and higher, if you kept it honest that pattern falied a year ago.
There is no bearish case; another day, another 20 point reversal to the upside. BTFD bitchez!
It has got to go higher. Too many people are expecting a crash for the market not to make new highs.
When the price of oil finally shoots the moon - that is when we get a crash.
Plenty of room for more overdose.
Mega-Dump coming... Fundamentals supprot 1100, overshoot to 800 or 850... Then by the generational low! Again...
Studies have found no merit to visual “patterns” such as cup w/ handle, head ‘n’ shoulders, etc., which on average fail to cover commissions. So, while the ‘megaphone’ shouting loudly may be confirmed, the same analysts likely traded the failed “double top” losing their ass, needing the proposed mega-drop just to get even. Similarly, “buy-the-new-low”and “sell-the-new-high” algos are ubiquitous, and have arbitraged away any profits from using various trendlines.
Having said all that, I’m a firm believer in day-trading using medium-term calculated technical indicators, but ONLY when customized for a single index or stock and used in combinations, AND in conjunction with static levels (i.e., pivot points), and via your own custom ‘plot guides’.
Hey Surf, just for your INFO. Back in the mid 80s there were ONLY TWO CME Members trading as floor traders, that knew how to create and use the so called "Pivot Points." We called them the KEY Numbers, due to the fact that was what the engineer that created the method, called them. The 3 of us were ALL out of the Tulsa, Ok. area. When I left the floor, I shared them with someone I though I could trust to keep them privot... LOLOL!
The thousands of traders who make money solely using these wondrous horizontal lines thank you (as do the annoying algos who surge 1/4 past the pivot on a high-volume 2m candle, then reverse to trap pivot-traders). Sometimes, simple trumps hexadecimal chicanery. Bravo to you and your mates !
LONG LIVE THE MEGAPHONE!
Volume means very little as of today's markets mechanics.
Breakouts happen with low volume, and that's why they work. if they were with high volume, they'd be failing, as distribution would be heavier.
WallSt buys lower prices, and sells high. END OF STORY.
will spx 2000 be like ndx 5000 was in 2000?
this is not about the market being high or low. those in the game make money if it rises and they make money if it declines. in the end, they don't care - so long as they are correct in the direction. you can buy another ranch in Costa Rica with money made either with longs or shorts...
jb
Actually, this time is different.
Well, either this time or next time.
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Actually, I think what happens next may be a combination of both these cases. What I mean is this. Measured in nominal terms, the trend in bull market prices will continue. But measured in real terms, the collapse will happen.
What does this mean? How does this work?
Well, let's perform a simple mind experiment. Let's assume the market comes unhinged and starts crashing. What do you think the federal reserve will do? And how quickly do you think they will do it?
Think about it. Since 2007 the federal reserve has implemented and practiced a whole slew and variety of manipulations. After 7 years of visibly taking responsibility for the financial markets (which they want everyone to believe equals "the economy"), the predators at the federal reserve have a lot of "face" to lose if the financial markets (and economy) fall off the cliff they've been trying to fall off for decades now (at least since the NASDAQ crash in 2000).
So what will they do? They've implemented all sorts of manipulatory schemes, and so now they only need push a few buttons to blast unlimited "liquidity" (additional debt) into the markets (and pretend a little bit even reaches the "economy"). So, when the SHTF in the financial markets, what do you imagine the federal reserve will do, and how quickly?
One very possible if not likely answer is... they'll slam all their manipulation levers with both fists into their "full bore" position. What they won't do is... sit back and let the economy sort itself out like a free market should and must. They'll have no part of anything remotely like a "free market", and we all know that (and even they admit that).
And so, any "dislocation" in the market prices will be QUICKLY erased, and replaced with an even more "robust" (meaning "artificially manipulated") "recovery". Which means, prices of bonds, stocks, financial assets and luxury goods will explode higher... even faster than today.
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But... what's the flip side of that coin? Already the rest of the world is concocting and implementing ways to free itself of the dollar, and even more importantly, the dollar mechanisms. What do I mean by "the dollar mechanisms"? I mean the SWIFT network, and every mechanism the USSA and its financial companies have to control the actions and trades of others, including their ability to just GRAB the assets of other nations.
Add this already-in-progress trend to yet another explosion in fiat and debt, and the world will decide their US dollars and US bonds and anything denominated in US dollars are toxic and must be abandoned. At which point, all those dollars fly back to the USSA at warp speed, exposing the USSA and USD for what they are... a black hole.
As this additional influx of dollars explodes (in addition to federal reserve fiat debt "printing"), serious inflation will necessarily result. At first, a great deal of this torrential influx of dollars will fly straight into the financial markets, further boosting prices and supporting the "bull case" described above.
That will be TIME TO SELL.
Because the next stage is... the inflation of prices of real physical goods will become greater and faster than the inflation of prices of financial assets denominated in USD.
At this point, and from thereafter, the prices of financial assets will continue to rise in nominal dollars. And so, the "bull case" will continue to be confirmed... when measured in nominal dollars.
However, because prices of real, physical goods measured in USD are now rising faster than financial assets, the real value of financial assets will be falling. And so, the "bear case" in financial assets will be confirmed... when measured in real value.
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I'm not sure whether the above scenario will occur "this time" (when financial markets start to crash), or whether the federal reserve will attempt to restrain themselves a bit and thus allow the financial markets to partially crater as in 2008~2009. Sometimes I'm convinced we've seen the last "real crash" (that lasts more than a week or two), because the predators in the federal reserve are terrified their "authority" and "knowledge" and "expertise" will be destroyed by such an event given their extreme measures and confident soothing propaganda of the past several years. Other times I think maybe they'll hold back enough that the collapse will start feeding on itself and grow beyond their control. But even if that happens, that will be the last time.
My opinion today is... they won't let another "real crash" happen. Once it starts, they'll slam those fiat currency-spewing manipulation levers to warp 9.95 to flood the system with liquidity, and that will be the straw that breaks the camels back (in terms of convincing the world to fully extract themselves from USD and the financial control mechanisms the USSA currently dominates).
And so... the bulls will be able to argue how smart they are, and how dumb the bears are, by only talking about "nominal prices" and religiously avoiding any discussion of "real value" (as measured in precious metals or other real, physical goods).
And so the bulls will suffer the consequences of their own propaganda and blindness. They'll eventually sell their stocks for 1000% gains measured in fiat dollars, and pay huge taxes on those 1000% gains... even as those fiat profits are actually losses in terms of real value.
That's what my crystal ball says.
As always, "timeframe" is the most difficult part to predict. But based upon how much faster events are unfolding lately, I'd say the crossover point is not very far in the future. It could easily occur in late 2014, probably will in 2015, and almost certainly will in 2016.
To all you folks who always and forever think and measure only in terms of "nominal prices in USD"... you deserve what you ultimately get (the shaft).