EclecticLip

Friday, the Dow dropped below its late-last-year low.  Consequently, people who believe in Dow Theory conclude that it’ll drop a lot more. Like all popular investing superstitions, this one is self-fulfilling — because, well, it’s popular.

The idea is that, if the Dow Jones Industrial Average and the Dow Transportation Average simultaneously plumb new [twelve-month*] lows… then the primary trend of the US stock market is down, until proven otherwise. (To practitioners of this fiduciary faith, “otherwise” means having the DJIA and DJTA both soar to new [twelve-month*] highs.)

* I chose twelve months out of thin air; Dow Theorists look for local maxima and minima on multi-year stock market charts.

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I’ve seen estimates arguing for the Dow to hit the lower 6000’s before the current shakeout is done, which isn’t unreasonable, for various reasons.

• first, the fundamentals are poor.  Stocks tend to be valued based on price-earnings ratio (though free cash flow is a superior metric) and corporate earnings are a mere “Mini-Me” of their former selves
• secondly, the technical analysis tea leaves predict — like “Clubber Lang” in Rocky III — pain

Still, considering the Japanese Nikkei remains mired below its fifty-year moving average, we’re not so badly off. Yet. Check back in 2019.

(Six years ago the Nikkei’s fifty-year moving average was 9070 as noted here.  Friday it closed at about 7400.)

Once the Dow hits its bottom, wherever that is, it’s likely to drift gently upwards for several years, probably past 10,000 again. And then deliver one final plunge to scare the bejeezus out of investors who’d just gotten used to dipping their toes in the market again. It’s just the way these things usually go — the Great Depression went like this, as did the secular bear in US stocks of ‘66-’82.

The post here from John Maudlin dissects how macro (roughly 20 year) stock bulls and bear market trends derive from stocks’ relative valuations.  Basically, nine years of bear market (2000-2009) just isn’t enough to crush stocks down to the point where fifteen-to-twenty-year-bull runs begin.  So after this current crisis, we’re probably due for an encore — a bear market curtain call — a few years from now, during which Mad Money’s Jim Cramer will probably lose his remaining hair. (One presumes Donald Trump, having recently scored a bankruptcy hat-trick with his company’s *third* chapter 11 filing, will keep his wig.)

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Gold has continued to soar upwards, and hit US$1000/oz this morning. Demand has dried up in India, and the average Indian retail consumer is usually fairly good at not buying gold when it gets peaky. The absolute opposite can be said for the average North American retail investor. Most years, gold hits a yearly high March to May (hmm… that’s just around the corner) before jogging around a bit and eventually hunkering down over the summer months. Balance of probabilities says it does that this year again, though it seems determined to shoot up higher before swooning.

The Canadian gold stock ETF (XGD) has doubled from its fall low, back to its highs from last year. The Sprott gold fund has also doubled in the past three months. Mind you, in the eighteen months prior, it halved. And halved again, for which feat it qualified as “the biggest loser” among gold funds last year. So as far as performance goes, it’s still a hobbit among men. And so’s my portfolio, among gold bulls. (grumble)

At any rate, if gold hits the cover of the Economist (or the stock market’s woes do) then it’ll probably be the sign the trend has changed.

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In the course of the Obama stimulus package debates, fiscal conservatives have argued that government spending can’t resuscitate an economy — as evidenced by the fact that FDR “only” reduced unemployment from 25% to 14%. (For shame!)

Unfortunately, that argument is untrue — government spending DID pull the US out of the Great Depression. It just took World War II to drive government spending to levels high enough, to do so.