As you can see in the first chart, the stock market melted down sharply that summer after debt-ceiling negotiations fell apart. Volatility exploded and we saw several swings up and down in August and September. But stocks reversed sharply after making a low in early October, then took off to the races for several months.
I’ve laid out the fundamental case for why things are a lot different now than they were then. It’s also worth pointing out that the major averages didn’t make a new low … with some momentum divergences … this year like they did back then. That makes the comparison between 2015 and 2011 look suspect from a technical basis as well.
To me, the better analog may be 2007. That’s when the housing and mortgage markets were starting to come unglued. You had a significant down leg and heightened volatility in the August-September timeframe. But once the Fed cut rates and otherwise signaled a more-dovish policy stance, stock traders rallied and assumed the worst was over.
You can see in this chart that the Dow actually managed to make a new high in the beginning of October that year. Talk of a “melt up” or massive, year-end rally … driven by more easing … was everywhere.
Then it all started coming apart. The economy downshifted. The corporate earnings backdrop deteriorated further. The credit market tremors got even worse, eventually turning into all-out earthquakes. The Dow ultimately shed almost 8,000 points into March 2009.
Now, I am NOT saying we’re going to get that kind of decline. That would be far worse than my base-case outlook.
|“We’ve suffered a very sharp initial break.”|
What I am saying is that we’ve suffered a very sharp initial break – one that looks like the end of a multi-year bull trend to me (just like in 2007).
We have seen a sharp, reflexive bounce back up, with some stocks and sectors making marginal new highs (just like in 2007).
We have seen a lot of commentary about a melt up rip right into year-end (just like in 2007).
And we have heard talk of more policy easing supposedly being supportive of stocks – regardless of ongoing weakness in credit markets, deterioration in earnings, and worsening economic conditions (just like in 2007).
In other words, 2011 isn’t the only potential analog out there … or even the best one. Previous tops like 2007 look like they may be much better comparisons – and that’s another reason why I still recommend caution as the best investment policy.
Now I want to hear from you. Has the strong rebound from the September lows convinced you the bull is back? Or do you think this is typical bear market behavior? Is there a middle road view that makes even more sense? Are there other market periods, from a fundamental or technical standpoint, that this one resembles to you? Please do share your thoughts at the Money and Markets website when you get a minute.
What’s next for the stock market? What the heck is going on in Syria? And who is going to take this year’s World Series? Those are some of the weighty – and lighthearted – topics you’re discussing over at the website.
Reader Fred 151 had this to say about stocks: “My evaluation of the charts says we should have a small bump up today and then a huge and hard ride down. Way down! Anyhow, that is my current bet.
“Setting exact dates weeks in advance is usually not a good idea. I do think Larry is in the ball park with his forecast, however.”
Reader Billy added: “We have numerous canaries in the coal mines — many, many, many more than back in 2008/9. Look at Caterpillar, which reflects the commodities crash.
“As this deflation takes hold and gets a stronger grip, it will suck the life out of this Keynesian money — and banking-based world economy. It is quite remarkable to see how this is all unfolding in front of our eyes.”
When it comes to the Middle East, Reader Bruce offered this take: “What do I think about how Russia is thumbing its nose at the U.S.? I believe Putin is thumbing his nose at the leader of ‘another country.’ It’s not Russia thumbing its nose; it’s Russia’s leadership mocking another country’s inept ‘executive’.”
Reader Holygeezer also said: “The U.S. and all its presidents going back for years have thumbed their nose at the rest of the world, to say nothing of destabilizing and/or attacking sovereign nations and duly elected leaders. What do you think about that? The only thing Putin and Russia is doing in Syria is calling out the U.S. lies about how we are going after ISIS.”
Reader Chuck B. added: “I have seen reports of increased Russian involvement in Syria and Iraq, which our media seems to be ignoring, except for the Russian air attacks. Their navy apparently launched cruise missiles against ISIS from ships in the Caspian Sea, some 900 miles away, and may have struck their targets accurately. Putin seems to be taking over.”
Of course, with all the troubles in the world, everyone can still use a break some time. And that’s what some of you are finding in Major League Baseball.
Reader Billyboy offered this prediction about who is going to win it all: “St. Louis has the best record in all of baseball, and Kansas City is second. It could be an all-Missouri series. But I think the one to fear may be Toronto.”
To which Reader Jim responded: “There is a first time for everything. Joe Madden has won it all with a team not as good as this one. I was not impressed with the Cards’ September performance. Go Cubs!”
Thanks for the predictions, guys. I know which team my household is pulling for, but we will have to see how things shake out over the next few days.
As for the stock market, we’ve obviously seen a heck of a short-term rally this week. But that smacks of bear market behavior more than anything to me.
Remember what I said BEFORE this week’s rally: Huge, oversold bounces are part and parcel of every bear market on record. Barring a much more significant, lasting change in the fundamental or economic backdrop that got us to this point, I’m sticking with my forecast of more uncertainty, turmoil, and potential losses in the weeks ahead.
But if you disagree with me, let me hear about it at the website. The floor is yours for the weekend.
Dell’s push to buy the storage technology firm EMC (EMC) is accelerating … but it will depend on one potentially resistant partner. The debt markets.
In order to fund the takeover, Dell and its private equity partner firm Silver Lake will need to raise a whopping $40 billion in debt. That wouldn’t have been a problem a year ago. But with junk bond prices tanking and junk bond yields rising, launching the largest technology merger ever is going to be more expensive … and it might not be able to go through at all.
The U.S. has no answer or new response to Russian President Vladimir Putin’s military adventures in Syria, according to the New York Times. President Obama is unwilling to escalate the fight there, and has basically decided that waiting things out is the only course of action.
When margin debt soars, then reverses, it’s a troubling sign – something we saw at the previous market peaks in 2000 and 2007. And that’s precisely what just happened again. After soaring to $505 billion in June 2015, margin borrowing at the New York Stock Exchange fell more than 6% in July and August. This Bloomberg story explains why that’s yet another bearish sign for the long bull market run.
Lastly, commuters take heart. At least your drive to and from work doesn’t look like this scene from China. The country’s Golden Week holiday just ended, and when thousands of Chinese citizens tried to drive back to Beijing they were met by one of the worst traffic jams ever. Even 50 lanes of expressway couldn’t tame the beast. Yikes!
Are you worried about the margin surge-and-flop? Do you think the latest mega-deal is going to fall apart? Have you ever had a traffic nightmare as bad as Beijing’s? Now’s your chance to weigh in using this link.
Until next time,