Polar Opposites…it’s Sure Not 1982

In August 1982 the stock market exploded higher as the Federal Reserve cut interest rates during the Mexico debt crisis. It was a financial explosion that reminded one of a real life volcanic explosion like Mt. St. Helen’s in 1980.

The week of August 15, 1982 kicked off the 5th cycle wave of a 5 wave Super Cycle move from 1932.  The DJIA rose 10.3% that week, closing at 869.30. The CAPE ratio in July and August 1982 was just 6.64.

That was the lowest CAPE reading since 5.57 in June 1932.  The all-time low reading since 1881, came in at 4.78 in December 1920. That 1920 reading was during the depression that no one talks about.

Long-term interest rates were 13.06% in August 1982, down from 15.32% in September 1981. Today long-term interest rates are 2.50% up from 1.5% in July 2016. And of course we have several countries with long-term rates less than zero today.

So here we are in April 2019 with the DJIA at 26,477.  It has been an amazing bull run.  There have been some amazing companies created in this last leg of the Super Cycle.

Apple (AAPL) went public December 12, 1980 ( 1 1/2 years before Wave V kicked off).  Microsoft went public on March 13, 1986 and Amazon went public May 15, 1997. All of these companies we talk about now as trillion dollar market cap companies.  What will we be saying in 2030?  Who knows?

What I do know is that everything runs in cycles.  And when it comes to human nature, there is nothing new under the sun. This current extreme valuation environment will not last.

We are near the tail end of this bull run.  We may indeed have several more months before the final top is in.  But when you step back and look at the forest instead of just the trees, you get a little better picture of where we are in time.

I feel like we are playing one big game of musical chairs. Who will have a seat when the music stops playing? And when the music stops on this bullish extreme…watch out.

MMM just had its worst day since the 1987 crash…yesterday.

Oh, but wait, I forgot, the Federal Reserve will save us.  I hear that a lot lately. But the Federal Reserve has been around since December 23, 1913.

Global Economy – Off a Cliff?

I last wrote about the Baltic Dry Index three years ago. At that time the stock market was in the midst of its second leg down in Intermediate Wave (4) of Primary 5.  The Baltic Dry Index (BDI) hit an all-time low close of 290 the week of February 7, 2016 telling us the global economy was on its knees.

For perspective, until 2015 the BDI never traded below the 1986 low of 556.  The all-time high was 11,612 the week of June 1, 2008. See the chart below.

The BDI hit a 4 year high the week of July 29, 2018 at 1756 and then proceeded to break down. And just recently it closed at 610 the week of February 3, 2019. This is the lowest weekly reading in 3 1/2 years. So what is this telling us?

This is telling us that the global economy hit the breaks hard in the 2nd half of 2018.  The BDI struggled for 2 1/2 years to get back on its feet after the February 2016 bottom.  And for longer term perspective, last week’s reading of 634 was lower than the 2008 low of 663.

Baltic Dry Index – Weekly

So when you have UBS come out, like it did this morning, and cut Caterpillar from a buy, straight to a sell, we shouldn’t be surprised. They cited the global slowdown affecting many of CAT’s markets as the reason.

How low will the Baltic Dry Index go? Who knows for sure. No one thought in 2008 that it would drop from 11,612 to 663 in 6 months.

Yes, it’s a Bear Market

Many folks ask, when are we in a bear market? What indexes are in a bear market at this time? The commonly referenced measure as to whether we are in a bear market or not, is a 20% decline from the high.

I use closing figures for the calculation. And as for the 20% rule, I guess its better than nothing. In reality a bear market will start to reveal itself by lower highs and lower lows and a general deterioration in overall market sentiment.

So once a 20% decline is achieved then is the bear market considered to start from that point forward? No, the bear market actually began at the high and has been underway since then, but confirmed by the 20% decline.

There are 5 major indexes that I review on a regular basis. They are: Dow Jones Industrial Average (INDU) with 30 stocks, S&P 500 Index (SPX), Nasdaq Composite Index (COMPX) with 3000+ stocks, Russell 2000 Index and the NYSE Composite Index with 1900+ stocks.  You will see an interesting correlation between the number of stocks in an index and the bear market.

So who entered the realm of the bear first? In the video below, I review each of those indexes and show who is considered to be in a bear market at this point in time.

So the DJIA and SPX have not hit bear market status yet. They got close but didn’t hit the 20% mark. I believe the broader indexes are leading and that the DJIA and SPX will catch up.

Once you know that we are in a bear market, adjust accordingly if you haven’t already. And remember bear market rallies can be swift and strong. But the rallies usually don’t last.

And once you’ve entered the bear’s realm, some pretty heavy duty selling can still lay ahead. In the 2007 – 2009 decline, the SPX wasn’t considered to be an official bear until July 9, 2008.  And that bear didn’t end until March 9, 2009, with a whole lot of angst in between.  And it can last a whole lot longer as the 1929 to 1932 bear market can attest.

Crash to Come…

LINK

It has always been clear that a decade of negative real interest rates would cause excess investment in some area or other, which would eventually bring the overinflated stock market crashing down.

Misguided share buybacks are hollowing out companies’ balance sheets and …

The crash to come will focus therefore on the major names of corporate America, which have hollowed out their balance sheets to goose the prices of their management’s stock options.

MarketWatch.com