Feb 02, 2013
The Dow Jones Industrial Average leaped over the 14,000 mark on more fluff-and-puff from the Wall Street establishment – and its trusted ally, the mass media propaganda machine. This is exemplified most clearly by CNBC’s Jim Cramer, who said last night (February 1, 2013) on his primetime show, “If your stock portfolio is outperforming the averages consider it a red flag.” He went on to say that a portfolio beating the averages is a sign that it wasn’t diversified enough – and that investors need to buy more stuff to lower their performance returns.
What a load of bull.
It’s this kind of stupid advice that inspired me to write LOSE YOUR BROKER NOT YOUR MONEY. In fact, the easiest way for me to sell a million copies of my book is to put a big clown nose on Jim Cramer’s face and place it on the cover over my right shoulder. My smiling face would remain exactly where it is now.
Dow 14,000 is an investment check point – caution is advised to all investors – and be extremely careful who you take advice from and what they are trying to sell you.
The theme of headline news this week was one of unexpected surprise. Total market activity for the fourth quarter 2012 – the holiday season – was reported to have contracted by .1%. It was a shock to some. The unemployment rate also continued to show lackluster action by rising fractionally to a dismal 7.9%. Sure a few other market fundamentals showed slight signs of life. Consider them nothing more than mixed signals.
A shrinking economy is one in recession, and while conventional wisdom defines “recession” as two consecutive quarters of GDP contraction, common sense dictates that prudent investors consider contraction as it occurs; and uses persistent unemployment as proof in its pudding.
No doubt, it is easier to see disaster coming when you read the writing on the wall. That’s why I connect this blog to my social network walls and profiles free of charge; this to make good on the chapter 8 guarantee outlined in my book. In it I show how easy it is to stay ahead of “the market” as long as you keep your eye on what’s happening in the Market. That is the purpose of these blogs.
Alert: the market economy is shrinking, stock market averages are rising, and strength is weakening. These are not normal operating conditions.
And they’re also no big surprise.
Besides the holiday season, the fourth quarter also included a heated presidential campaign, the expiring Bush tax cuts, and a crisis called the “fiscal cliff” that supposedly was averted on January 1, 2013, with the signing of a massive tax bill called, the American Taxpayer Relief Act of 2012.
In other words, Congress was paralyzed in the fourth quarter and couldn’t spend what they otherwise could do. As mentioned many times before, any substantial reduction in massive government spending programs will undoubtedly cause recession. (see: The Fiscal Cliff We Need)
But a central government recession is exactly what the American Market desperately needs – and its forthcoming occurrence shouldn’t be a surprise to anyone following along.
Instead, the surprise this week was that the DJIA once again reached the 14,000 climax. The last time “the market” found itself in this territory was October 2007 – just one short year before the whole financial market collapsed. That was a time when everybody who meant anything was completely surprised and caught off-guard by the massive correction.
Don’t put me in that camp – then or now.
History has a funny way of repeating itself – especially to those who haven’t read my book and don’t know history.
Once again this week the Federal Reserve reinforced its open-ended commitment to flood banks with at least $85 billion of fresh new cash every month. As long as the Fed keeps handing freshly printed money to investment banks, those institutions will continue using it to manipulate stock market averages and use it to recklessly lure idle capital off the sidelines from unknowing consumers. Let’s be fair, new money can easily find and inflate the Dow 30 or the twenty-five stocks that make the S&P 500 really move.
Add to this that the Senate voted this week to delay the deadline for dealing with nation’s fiscal crisis – and what you end up with is another irrationally exuberant “market.”
This is common protocol.
However, and because the Dow has once again reached the 14,000 apex, investors should know that is another good time to check their portfolios within the context of where investment is in the cycle. With the first release of fiscal year 2012 GDP numbers, it is the traditional time I recalculate the Action Zone for the coming year.
As mentioned previously, the action zone is a dynamic range. It is affected by ever changing items such as inflation, economic activity, and stock market multiples. It is meant to be a barometer of investment, an average trading range defined by three values, a high, middle, and low valuation. These values are pegged to the Dow Jones Industrial Average, which represents the average of all stocks. The action zones indicate high, low, and “fair” values for all stocks.
Knowing where stocks are in the cycle of valuation is extremely helpful when making your investment decisions – including, and most importantly, asset allocation.
Below is a long-term look at the Action Zone in chart form. A commentary follows.
This long-term view begins in January 2007 – ten months before the Dow last reached the 14,000 milestone. As explained thoroughly in my book, back then “the market” was greatly outpacing economic activity and Market fundamentals – despite bank failure after bank failure. The economy, back then, was sending “mixed signals” – some numbers were good; others not so much (sound familiar?). Regardless of the confusion, the DJIA was trending above nominal GDP at that time, see above.
This happens during booms. And like all booms, the housing boom went bust and the DJIA fell far below its historical low market average. This once again demonstrates how the stock market overreacts to all conditions, in up markets and down. It happens a lot, in fact.
The Action Zone is a color-coated range showing the DJIA’s historical valuation based upon current market conditions. The red line is a high-top warning; it is the line of exuberance, irrational or otherwise. Be careful around it – and note that the Dow is currently heading towards it.
The Action Zone midpoint, now identified by a yellow line, can be considered “fair valuation” in a “fair market.” The Dow, right now, should be trading below it in a fair market. Yes, that is to say that stock prices are extremely over-valued at the present time.
A major “buy” signal occurs when the Dow falls below the blue line, the Action Zone low mark. Please note that this is not a pricing bottom, as proven in 2008 and 2009, but just an alert to be ready to act. Market conditions and your objectives, of course, should always be the main drivers in your decision making process.
Below is a one-year performance picture of investment within the updated action zone as defined above.
Indeed, strength bounced back this week but it continues to build lower-lows. The DJIA has at least 2,500 points of inflation in it, and gold continues to look misled.
These are not signs of market strength.
The 15-51 Indicator continues to shed light on the future course of stock market averages and the market economy. Prepare your plan, and…
Stay tuned.