Wednesday, August 31, 2011

Morgan Stanley Cyclical Index Implodes


I really don't follow the Dow Jones Industrials at all.  No one trades it and its makeup is completely irrelevant to the original spirit of the index.  And I only anecdotally follow some of the components of the  Dow Transports. With the Transports making new highs before the 2008 collapse, many were using that to call for a new bull market.  Contrarily, at that time we wrote that the Dow Transportation Index also made a new high in 1929 right before the markets fell 95% and that the new high did not mean the start of a new bull market.   Even if the Transports didn’t make a new high in 2011, the railroad and trucking indices did.   Once gain, who cares?  

I follow the direction of some sub-indices for particular clues as to the original intent of Dow Theory but anything to do with equity markets is only marginally useful as long as we have a runaway financial system, a destroyed economy and indices comprised of stocks that don’t reflect its original intent.   And this has been the case far longer than the last few years.  Since at least 1995 we have seen the U.S. economy crumbling underneath the financial thievery of Wall Street and the corporate lobbyist bribery machine. 

The Morgan Stanley Cyclical Index, ^CYC on Yahoo Finance, is a much better industrial index than the Dow Jones Industrials. The Dow has become a ridiculous index comprising financial, consumer, corporate welfare and war state companies. If you want to get an idea of industrial companies who actually and substantially serve the American economy, the CYC is a much better barometer than the generally industrial-less Dow Jones Industrials. 

The CYC peaked just about the time we wrote that we were bearish again on bank stocks early this year. And it has formed what is looking like a massive double top with the 2008 peak. (So has the Transports if one wishes to consider these two indices under the original intent of Dow Theory.) 

The CYC index has essentially not made any progress in eight months just as the banking index has failed to do. And the industrials within the CYC are down much more than the major equity averages. The CYC fell over 30% and is now in bear market territory.  (Greater than 20% decline) From peak to trough the CYC has retraced about 40% of its rally gains in a watershed collapse. And, it is now sitting just above the precipice of a substantial topping process that occurred over a multi-year period from 2006 to 2008. If it eventually fails here, we could see another watershed decline wiping away most of its gains since the 2009 bottom.

Remember, it is the direction of the market that matters.  It gives us an indication of the state of the status quo.  And that’s about all it tells us.  There is NO value in any generally-held equities based on any intrinsic measurement as we have ranted incessantly.  Intrinsic value for the S&P is closer to 200-450 and the Dow around 2000-4000.  We are at these elevated price levels because we are in the midst of the greatest financial bubble the world has ever seen.

I am seeing a preponderance of bullish leveraged bets being placed in equities, albeit on low participation rates.   We have a massively more overvalued equity market than was so in 2008.  Some stocks have made substantial new highs beyond 2008 with so much leverage and free Federal Reserve money being thrown at liquid assets. 

The status quo believes this market is headed north and that we are in the midst of a double bottom here.   Numerous data points indicate few institutions are  selling.   We have written on here since well before the 2008 collapse that these markets will move well too fast for people to get out.  So, instead what we have seen is people holding major declines, hoping the market will recover.   And now we have another psychological factor weighing on the mind of investors.  Many sold with substantial losses in 2008 only to see the market recover.  I’m sure some true believers will attempt to just ride out any future volatility, anticipating that 2008 will repeat itself.  In other words, see a substantial recovery in liquid asset prices. 

I think one must consider that another outcome is possible.  That is, financial markets as we understand them may cease to exist in the future.  Or that prices may not recover to these levels.  Ever.   We are at an enormous inflection point that has never been seen in our country’s history.  That means riding this pig down again could mean a permanent loss of wealth.  Permanent is a long time.   The reality is we don’t need a stock market as it exists today to have a thriving economy.  In fact, I could make an argument there is a much more elegant democratic solution for corporations in need of public funding.  And I will share that some time in the future. 

Remember, one of our theses is that the investor class is going to get butchered.  They still believe they are going to get bailed out because of the same fraud that bailed them out countless times while allowing them to thieve endlessly from the rest of society.   That mindset works until it no longer works.  Fraud eventually causes systemic failure with no recovery.  History is replete with this timeless truth.  

posted by TimingLogic at 10:37 AM

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