Tuesday, October 23, 2012

US Stock Market Commentary 23 Oct 2012

A few days ago, I published a blog saying that there is historical evidence that the market would likely be in a flat to downward trend for years to come. It wasn't easy to post that when it appears that the stock market is on the verge of new all-time highs.

My post mentions that the average bear market lasts something like 17 or 18 years. Since the stock market peaked in 1999, and we're still not at new highs, it means that we've been in a flat to declining market for 13 years already. So, we have 4 or 5 years to go in a flat or declining stock market (from peak) on average.

Declining Earnings And Endless Quantitative Easing
It's been my opinion that the stock market will not make significant new highs. Recently, we were getting close to all-time highs, but I don't think it's going to happen. This despite easy money "forever" from the Fed! I'll be willing to bet that the market rolls over here and now.

There's a serious and obvious "technical" problem now that we're making the 3rd and slightly lower top in 13 years. It's called a "triple top" in market technician terms. Let me re-phrase this:  it's a long-term MEGA Triple Top in market technical terms!  It's a very big deal to market professionals if we fail to make a new high here and go down from this price level.  This on top of the evidence that the bear market is likely to last many more years.

Figure 1:  A Chart of the S&P 500 Stock Market Index Since 1997 Showing Triple Top (http://www.ritholtz.com/blog/2012/10/market-returns-q3-2012/)
The Federal Reserve Is "All-In" 
The Fed appears to be "all-in" with ZIRP (zero interest rate policy) and QE (quantitative easing) basically "forever". That's it!  I don't think they have anything credible left. I think the Bernanke "put" to support the market is "kaput" and that's also very big deal.  Afterall, the Fed itself has given itself credit for the market being 50% higher than it would have been otherwise without Fed actions. If there's no more hope from the Fed, than a huge 'prop' is removed from the market.  Hopium infusions could never have lasted forever. Now corporate earnings are rolling over. So fundamentals and market "technicals" point down as far as I can see. So, I wouldn't be surprised to see a 15 to 20% correction--and maybe much more if financial distress in Europe or elsewhere develops. There are many financial distress hotspots that could emerge: Japan, China, Belgium, Spain, Italy. Such distress may come from a surprising place while everyone is looking in a different direction.

But a Stock Market Dip Should Probably Be Bought
Ironically Romney might mean "austerity" to the market, but Obama means a likely fiscal cliff "crisis,"  But I doubt if there will be real austerity in the US; where govt spending actually declines. There hasn't been real government spending cuts since the end of the Korean War. It's also a reasonable bet that Congress will kick the "fiscal cliff" down the road. Romney might also mean an attack on Iran by Israel--which is a big negative.

At 10% down, buy a tranche of the market. If it goes down 20% buy your second tranche. Something like that.

The October surprise for this election season may be a lousy and declining stock market.

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