This article was published by The McAlvany Intelligence Advisor on Wednesday, June 10, 2015:
Right up until early April, that is. The Value Line Geometric Index, the unweighted index of approximately 1,700 stocks that fund manager Dana Lyons likes to watch, topped out at 522 and has declined by almost 10 percent since then.
By Monday, June 8 the Dow’s decline had wiped out all of its gains and is now flat for the year. The Dow Transportation Index fell 2 percent that day, its worst day since January 6, wiping out its 11 percent year-to-date gain. The Dow Utilities Index has suffered an even greater decline, erasing all of its 16 percent gain.
The Dow is one of the primary leading indicators used by financial advisors like Bruce Bittles, the chief investment strategist at RW Baird. Bittles manages $100 billion of other peoples’ money, and he’d better be right. Now, he’s getting nervous: “The technicals are deteriorating and monetary conditions are deteriorating.” He’s focused on the S&P 500 index to see if it breaks support at 2070. At this writing it’s barely above that level, at 2080.
Other advisors like Robert Shiller, the developer of the real estate Case-Shiller Index, prefer his own CAPE ratio which, at 27, is at or close to the levels notched in 1929 (just before the Great Depression), 2000 (just prior to the bursting of the Dot Com bubble) and 2007 (before the start of the Great Recession).
Still others, like Doug Short (who has been watching the markets for 25 years), have developed their own proprietary models. Short’s index is a combination of four indicators which is higher now than at any time in US history (with one single exception).
Each of them has every right to be nervous. Recently reported declines in factory and consumer goods orders have never happened outside of a recession. Corporate profits have fallen for two quarters in a row while GDP went negative in the first quarter. Margin debt has just set a new all-time high which to some is a key contrarian indicator.
Add to this sour mash the letter Deutsche Bank customers just received:
At issue is whether or not the Fed in particular but the market in general has properly understood the nature of the economic problem. The more we dig into this, the more we are afraid that they do not. So aside from a data revision tsunami, we would suggest that the Fed has the outlook not just horribly wrong, but completely misunderstood.
And then there’s the tongue-in-cheek letter from the “plunge protection team” that the Wall Street Journal published, entitled “A Letter to Stingy American Consumers”:
Do you know the American economy is counting on you? We can’t count on the rest of the world to spend money on our stuff. The rest of the world is in an even worse mood than you are. You should feel lucky you’re not a Greek consumer. And China, well they’re truly struggling there just to reach the very modest goal of 7% growth.
The Federal Reserve is counting on you too. Fed officials want to start raising the cost of your borrowing because they worry they’ve been giving you a free ride for too long with zero interest rates. We listen to Fed officials all of the time here at The Wall Street Journal, and they just can’t figure you out.
Please let us know the problem. You can reach us at any of the emails below.
The Wall Street Journal’s Central Bank Team
With new and used car loans stretching out to six and seven years, and margin debt setting new records, the table is set for a large helping of disappointment. The most bullish thing the stock market can do is go up, except when it doesn’t.
CNBC: Dow loses gains for the year; transports off 2%
The Economic Collapse Blog: 2 Things That Are Happening Right Now That Have Never Happened Outside Of A Recession
The Economic Collapse Blog: Is The Stock Market Overvalued?
History of the Dow Jones Transportation Average
History of the Dow Jones Utility Average
Background on Robert W. Baird and Company
Background on Shiller’s CAPE ratio
Deutsche Bank says Fed is horribly wrong
ZeroHedge.com: Final Pillar Of Bull Market Showing Cracks?
Graph of Value Line Geometric Composite index last six months