After falling fractionally for five consecutive sessions the Dow Jones Industrial Average got almost all of it back on the last trading day of the week. It closed Friday up 199 points to 16,020 (a 22% gain for the year) on a stronger than expected jobs report and an upward revision to third quarter GDP, from 2.8% to 3.6%.
But perhaps the most amazing angle to this stock market resurgence is the story of strength, which after being negative for most of the year, has made a major move to the upside. The 15-51 strength Indicator is now up 11% for the year. See below.
Today’s good news is tomorrow’s bad news.
For instance, the GDP growth rate sounds good. The move has prompted some “experts” to say some really stupid things, like: “The world and its mother are optimistic about the future.” In other words, broker-types are using these two economic releases to sell the pipedream that the storm has passed and that it’s a perfect time to go long and deep on stocks.
However, much of the GDP growth came from a build-up in business inventories, perhaps for the holiday season. Consumer spending, the long-term driver of economic prosperity, grew at just 1.4% in third quarter ’13 – the weakest gain since the recession supposedly ended a few years ago. And as of right now, all indications are pointing towards a weak holiday shopping season.
If consumer demand doesn’t rise significantly in the current quarter it will completely wipe out the third quarter’s gain, as inventories (supply) won’t need replenishment or further build-up. In short, take third quarter GDP numbers with a grain of salt.
Same is true with the unemployment rate which dropped to 7%, shaving .3% from its previous mark. But here again, the move has more to do with negatives than it does positives. For instance, most of the rate drop came from people leaving the workforce – those who have stopped receiving unemployment benefits or quit trying to find work. You see, once people are out of the government system they no longer count.
This can be corroborated by the labor participation rate, which is at a historic low (63%); and the long-term unemployment rate, which remains way too high (37%). These are twice the ’08 levels.
The drop in the unemployment rate doesn’t feel real because it isn’t real.
Nevertheless, we know that improving economic conditions will bring about an end to quantitative easing (QE). QE is a Federal Reserve policy implemented to keep interest rates low. It does so by printing new money to fill the free-market demand gap for U.S. Treasuries. They try to keep yields low to make it easier for borrowing, and to hypothetically expand individual and business net worth. In essence, the Fed tries to boost the housing market and business expansion by keeping interest rates low with QE.
However, the Fed has said on numerous occasions that QE will be tapered when unemployment lowers and economic (GDP) growth stabilizes. That’s bad news for the Wall Street establishment, as recent economic data forces the Fed’s hand to end QE.
As mentioned on many previous occasions, a QE taper will automatically bring about an increase in yields (a.k.a. market interest rates.) Such a condition will stop the housing market cold, tighten consumer credit, and ultimately slower the growth in business expansion and broad-based inventories. And stocks will correct to the downside.
Speaking of corrections, gold has done just that – and for some time. It peaked in September 2011, and in July of 2013 its trend-line met the 15-51 Indicator’s. This is a significant move.
It is important to note that gold has been leading “the market” since the money crisis first presented itself. Since then every time gold has made a significant move stocks have followed suit several months in arrears. See below.
Gold bottomed out in November ’08; and then four months later stocks did. Gold jumped in value in December ’09; and then stocks made a similar leap five months later in May ’10. Then gold spiked to its highest level in September ’11, and once again stocks followed several months later, in April ’12.
In the modern market gold bottoms and peaks faster and more robust than stocks for the simple reason that market activity is being driven by monetary policy and currency devaluation more than anything else.
That’s not what We want.
What we want is for stock valuations to be driven by economic expansion that is primarily driven by consumer demand – not governmental efforts to print new money and manipulate markets.
In the current Market condition consumer spending is light, QE and government spending is heavy, unemployment is way too high and wage growth is weak. These are major Market hindrances – this at a time when stocks are at all-time highs.
Indeed gold has been in correction mode for a long time, down some 35% since reaching its all-time high. But markets correct all the time, and in environments this manipulated they correct more extremely and for longer periods of time. That’s the gold condition.
That is also the condition of stocks, which have largely regained their previous high positions: the Dow has almost reached its objective* (Nominal GDP), and the 15-51i strength indicator is just 6% away from its all-time high (reached in September ‘12).
That’s way too strong for the current economic condition. Stocks have corrected to the upside because of easy money and QE, not Market strength.
If we listen to gold it tells us that stock market strength is due for another major correction some time in the near future. The Dow Average, this time, should follow.
Stay tuned…