If the Wall Street establishment had any guts the Dow Jones Industrial Average would have blown past the 15,000 mark and ended the week comfortably above it, say 15.3 or 15.5. That would have made a huge statement that this Bull Run is legitimate and worth investing in, and not just another fluff and puff advertising campaign choreographed by the Street. But no, they didn’t make that statement this week – even with a news cycle beneficial to their pitch.
Bull Market advertisers see this stock market move as totally justifiable. They read recent headlines in the Wall Street Journal and say, consumer spending is beating expectations, housing in finally rebounding, the jobs situation is improving – and the Fed stands ready to help even more. Below are samples of those WSJ headlines this week.
• Consumer Spending Rises
• Home Prices Score Highest Annual Gain Since 2006
• Job Gains Calm Slump Worries
• JP Morgan Under Regulatory Fire
• Fed Says Bond Purchases Could Rise or Fall
• ECB’s Draghi Opens Door to More Easing
With these promising headlines and the prospect of a seemingly endless supply of free new money, one would think that the Wall Street establishment would have gotten drunk on the Fed’s tab and belched the Dow passed the 15,000 mark. You’d think.
But no, that didn’t happen. Why?
Well, the consumer spending increase was just .2% in the most recently reported month. Economists (the “experts” in this story) were expecting zero change in consumer spending (a.k.a. no growth and no shrinkage). So to put it plainly, consumer spending is beating expectations, but only barely. It is growing, but only barely.
This kind of fractional move adds up to 2.4% annual growth for the largest segment of the market (GDP). Take inflation out of the equation and the economy is almost standing still.
Maybe it was this weakness that made Wall Street traders skittish about holding the Dow’s intraday high of 15,010 this week.
Just maybe.
There are so many people on and around Wall Street that believe housing is the key to economic turnaround – that somehow housing, or when people are comfortable “moving around” again, will remedy every Market woe.
So you’d think the recently reported 9% year over year advance in housing would be enough to propel the Dow up another measly 25 points by day’s end to symbolically close the week at 15,000.
But no, that didn’t happen either. Why?
First and foremost, the notion that housing will fix everything is just silly. Banks – the institutions – must be fixed before housing can correct (see: De-Institutionalize); and as JP Morgan Chase and former rock star CEO, Jamie Dimon, can attest: major systemic concerns remain deeply rooted in America’s biggest banks.
Housing remains ill because banks are still broken. Perhaps it was this grim reality that held Wall Street big-wigs from inflating the pot any more.
Or maybe it was basic mathematics. After all, the gains experienced in housing in 2006 came at the tail end of a housing boom that began in the late 1990’s – with 2000 through 2005 being huge years of rapid price increases (a.k.a. inflation.) The ‘06 gain bettered an already very high ’05 value.
But that’s not the case now. Housing gains realized this year are adding to a still very depressed 2012 value. In other words, this week’s housing news is no big deal.
Maybe it was this simple math that stifled the Dow from reaching 15,000 this week.
Perhaps.
But as we know, housing can’t possibly improve without an improving condition of employment. The unemployment rate ticked down ever so slightly this week, standing now at 7.5%. It has moved down .1% in three consecutive months recently. And while it might sound good that the unemployment rate is moving in the right direction, the broader employment gauge known as underemployment (U6) increased by an ironic .1% this month – and now stands at 13.9%. (see: Broader Unemployment Rate Ticks Up, WSJ online, May 3, 2013)
To translate that large percentage into people, consider that there are currently 20 million Americans looking for better work (i.e. they are working part-time and want full-time work) or they can’t find a job at all. Twenty million, that’s a lot of people.
Maybe it was the fact that so many consumers remain underemployed that scared the Street away from Dow 15,000 this week.
Or perhaps it was a hindsight tally of first quarter earnings that shows growth to be just 2.5% over last year, and according to corporate reports and announcements, the rest of fiscal year 2013 looks weaker than that. This news alone could have scared off some big time speculators this week.
But who knows for sure. Whether it was one of these specific reasons or combination of them all, the Dow Jones Industrial Average ended the week coyly at 14,975, up 1.8%. Stock market strength continued to bounce with the 15-51 Indicator adding 5% in the week. It looks to be building a base where it is now. Technical traders call this a “triple-top.” See the chart below.
That’s one year of activity using weekly data points, and there is little question that the Dow and the S&P 500 (not shown) are high at these levels. They are at all-time highs, after all. This is not uncommon. Stock values leap over fundamentals all the time. That’s not really the important point here. What is important to successful investing is to understand the nature and extent of stock market inflation when it occurs.
The action zone is a mechanism I use to illustrate those points. The action zone high can be considered the line of “irrational exuberance.” The Dow is clearly trading there. The 15-51 Indicator was up there in September but has corrected, and now resides around “fair value” (the action zone midpoint) – according to this chart’s timeframe. More on that in a second.
Using history as a guide, right now the DJIA is trading at a market multiple higher than any point in the last 20 years. In fact, the last time the Dow was even close to this valuation was 1999 – the pinnacle of the tech-boom.
This economy is nothing like that one. There is no bona fide boom, unemployment is too high, consumers are stressed, and fiscal governance is in major deficit. That economy was growing 5% in Real terms. This one is standing still.
I have one more chart to show you. It begins in 2010, which is about time the broader stock markets reached “fair value.” It has a little more than three years of activity with weekly data points. Take a look.
From this view it’s easy to see that the 15-51 strength Indicator is still “irrationally exuberant.” So when a broader market correction ensues the 15-51i will again slip in value. That’s the time to buy it. This buying opportunity will be just as easy to identify as the high selling point was in September (see: Strength Hits All-Time High, Again).
That’s the best thing about the 15-51 method. When you know exactly how your portfolio is built, you know when it is high (time to sell) and when it is low (time to buy). Add this to an understanding of Market conditions and where broader market stock values are in their cycle, and what you have is a winning recipe for investment success.
That’s the Lose Your Broker way.
The pertinent question to ask yourself when making investment decisions right now is this: Is stock market activity based on economic expansion and vitality, or Wall Street shenanigans – is it Real, or is it irrational exuberance?
Answer: To price today’s “market” above the tech-boom’s climax can be called nothing short of shenanigans — in Real terms.
Stay tuned…