Monday, February 20, 2012

Equity Market Strength - Real Or A Mirage?

I have shown my unmanipulated advance-decline data numerous times on here.  It is a simple but accurate predictor of pricing action.  It has never been wrong regarding future pricing action.  I am well aware the day could come when it fails but I tend to be dubious given the method through which it is constructed.  That said,  nothing is perfect.

I don't believe I have ever shown a weekly view of the data. So, let's take a look. The rally post the 2008-2009 collapse has had five distinct upward waves as noted on the graphic below. (The S&P is also included in the graphic for perspective.) Except for the first wave, which was skewed substantially by buying to cover short positions, each of the next four waves of the data were just about identical in height. In other words, from trough to peak, they all rose essentially the same amount.  The fifth wave is just now completing but may have just a little further to the upside if this pulse remain consistent.    The market has responded less constructively to upward advance-decline pressure over time.  That is consistent with any market that eventually tires due to lack of new sponsorship or demand.  Given Wall Street has traded substantial demand out of financial markets, just as large corporations have done within the underlying economy, it really doesn't matter terribly much if the Federal Reserve would possibly issue a new quantitative easing.   In other words, the Federal Reserve cannot "paper" over the corruption and rot in our economy.  Additional easings by the Fed would more than likely just increase Wall Street's leverage even more.   That is, unless, easing took on a new dynamic to get money into the economy and hands of people and not banks or large corporations who are destroyers of jobs and economic activity.  That isn't going to happen as long as corruption holds sway in Washington.  In other words, monetary easing is having less and less impact over time because Wall Street's monopoly is keeping the money from getting into the hands of American citizens.  So, the breadth of financial demand continues to wane as Wall Street's corruption ensures its eventual demise.  That means leverage must be increased by the remaining players in the game to make up for that lost breadth of demand.

American citizens, not corporations are the source of our economic wealth.  Corporations come and go.  It is people who create, build and invent.  Not CEOs or corporate boardrooms who literally create nothing but, like politicians, live off the labor and talent of others.  In other words, as we have discussed ad nauseam, pro-business policies, supported by both political parties, kills economics.  Pro-markets policies empowers  democracy, a living wage, economic vibrancy and job creation.  

As you can see from the data, the April-May 2010 top was the peak in the advance-decline data as we have noted before on the daily view. Since, the market has skirted higher on less and less participation as measured by the advance-decline data.  This was predictable and in fact, we have discussed at least a dozen times in the last three years this dynamic would eventually develop.  In other words, while the market is making marginally higher highs and higher lows, the advance-decline data since April-May of 2010 is making lower highs and lower lows. (We have gained a little more than 100 S&P points over the last two years.  That's nothing to sneeze at but we have seen single days that have lost nearly 100 S&P points.)  The  divergence of demand, as noted in the unmanipulated advance-decline data, and price will resolve itself at some point.  Either demand will increase or price will correct.  Without fixing the corruption in our banking system and our politics.........

By the way, both Marc Faber and Warren Buffett have remarked recently that they are bullish on equities.  I respect both men immensely.  Faber for critical thought and Buffett for his accomplishments, but I clearly do not share their views that the crisis in equity markets has passed.  I'm not going to write a dissertation on their positions but needless to say I believe both men clearly don't appreciate the scope and scale of the financial  bubble and how it has distorted asset prices not over years but over generations and, therefore, has created a generation of systemically-incompetence boobs running our financial system.  That most definitely includes mutual fund managers, Wall Street, hedge funds, etc.  And, I think it has affected both of these men and their ability to appreciate some of the data points surrounding equity market valuations.  (I have an upcoming post on Buffett's recent investment in IBM that I hope to have up within the month.)

In closing, look at how volatile the data is since the 2008-2009 collapse comparative to before the collapse.  I suspect this is a result of how much leverage is being used in markets.  And, how that leverage is used to create substantial upward pressure to levitate markets.  In other words, leverage in our financial system has become even greater since 2008.  That is a fact not an opinion.   Additionally, look how far below the 2008 advance-decline top the unmanipulated data is.  Before this latest rally it was closer to the 2009 low than the 2008 peak.  This after the market has rallied for the past three years.  That is not a sign of a healthy market.  It is a sign of collapsing demand.  (We said for years this was going to happen and now we have the data to confirm it.)  Contrarily, the NYSE advance-decline data has made a substantially new high beyond 2008.  Of course, that data point is an aberration that is a result of Frankenstein finance.  It is manipulated.  Not consciously.  It simply isn't a reflection of true fundamentals.  The tranquility of low volatility we see on the surface of most financial markets is a mirage.  The cycle of volatility remains in full force.
Click on graphic for a larger view
posted by TimingLogic at 12:10 PM

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