Year 2011, a stock market odyssey. That’s the case a lot of bulls on Wall Street are betting on.
Market Roundup
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.
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| Summer meltdown |
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.
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| October high. |
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.
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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.
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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,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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What is going on ? In the last couple of days, all I have seen is money crash,stocks
go down the toilet, 5 years long etc.. Give me some help here.
Thanks
Have not we seen enough blood of our armed forces shed? I wonder how much hawkish talk we would have if we had a enforce able DRAFT again. Yes all in my family served. How much more of our treasure and blood are we willing to sacrifice. I hope this beating of more war drums is not out of greed.
I agree with JS. We’re having trouble paying back the trillions we borrowed to fight the Iraq and Afghanistan wars. We are having trouble paying for the care of our wounded vets. We’ve still got homeless vets that go back to the Vietnam war, still not
getting the mental and physical help they need. Maybe the war mongers should be the first to sign up for active duty. In Syria there are so many factions fighting in this civil war, it’s hard to know who to trust, and who to back.
I can remember that during the 2011/2012 market melt-up, Weiss Research was still bearish. I lost quite a bit of money on that advice. Unfortunately, no one knows the future, especially when it comes to stocks. What probability would you put on a downside versus upside move now, Mike?
They’ve been bearish since Obama took office in 2009… I believe that makes them dead wrong since then… :(
i know the future. stocks always eventually go up. look back a hundred years and stocks always eventually go up. the bears are only right once in awhile.
I enjoy your commentary and find it useful, but I dislike having to click through the email to get it online. I would love to see you go back to just putting it in the email.
Things won’t improve until we get a conservitive ; Tax cutting ; common sense ; listen to the people – PRESIDENT ! Remember the fish always stinks from the head !
History shows us that the Markets do horribly under the Conservatives… Try doing some homework and turn off Limphog, aye?…
Yes!
there’s been a HUGE rise in the markets since liberal democrat barack obama took office. likewise during the entire time liberal democrat bill clinton was in office. so much for your theory, dude.
Hint: Look back over the past 100 years, Yea?
look back 200 years and you’ll see the same thing. stocks have always been the best place to be.
It would be just as easy to argue that the Conservatives usually inherit a mess concocted by the previous Democrat administration. Carter was just great. Reagan gave us policies that triggered a twenty year boom that Clinton conveniently took credit for. Bush certainly wasn’t much but I bet I could goose the the Stock Market too if I borrowed $10 trillion from future generations and pumped it into the market like Obama. In reality the American economy generally manages to progress in spite of all these Ds and Rs. It’s the American people that make things happen and we do it much better when we are left alone. Jim
Amen brother!!
When we are left alone, the rich get richer, the poor get poorer and no fixes the crumbling infrastructure or does anything about the destruction of the planet.
the stock market has a life of it’s own irrespective of who’s in office. it should be obvious by now to everyone that it’s fed in control of the economy, not congress or the president. but if it happens on your watch while you’re president, you’ll take the blame or get credit for an economy you had no control over.
This looks more like a 1998 or 2011 pullback, that like then, should take the markets to one final rally high in either 2016 or early 2017. Then we should see a Major Decline every ones been waiting for. Larry Edelson was thinking a deeper correction but since the S&P broke above the 50 MA, I suspect we completed the double bottom. I am guessing 2400-2500 tops the next move up. 30% give or take. $INDU to 19980-20000 give or take.
And Martin Armstrong suggests the same big rally due to an influx from Europe and Japan.
So, Obama has no answer to Comrade Putin’s actions in Syria. That means Putin’s Russia becomes top dog in at least a part of the Middle East. It also means Russia is taking sides with Iran and the Shiites in Iraq and Syria. (Russia already supported Syria, of course.) That is interesting, because Shiites are vastly outnumbered by Sunnis in the Muslim world, about 85% to 15%. Underdogs united!
All that and we had to and invade Iraq twice which set up this disaster…. Any other draft dodging Republicans want to take us to war in the Middle East?…
Russia is a pathetic two bit dictatorship that would be totally irrelevant if they didn’t have nukes. We saw what their hardware was capable of in Desert Storm. It’s junk. Half their cruise missiles crashed in Iran. Between the sanctions and low oil prices the Russian economy is toast. Jim
Four crashed in Iran. Most of the Russian missiles, 83%, made it to Syria and Iraq, how accurately I can’t say. If they doubled down, they may have still destroyed most targets. I don’t think we should deny the threat they pose to pose, especially if the warheads go nuke. A 900 mile minimum range targets most of the U.S. from subs off the coast. We have no effective defense.
I agree that we’re overdue for a serious correction now that the Fed’s printing presses have slowed down. All the QE’s simply amount to “pushing on a string,” a policy that’s always failed to stimulate the economy. The current rally has me a little nervous only because I followed your advice and shorted the Euro (EUO) and junk bonds
Fed can’t do it alone. All it can do is make cash available. Others have to make use of that cash. If business doesn’t, then the government must. Republicans pretty much killed off that possibility early in Obama administration.
Blood is in the streets. Earnings and the economy don’t matter now. There are more bears than bulls. Not a lot of money on the sidelines but enough for a sustained rally until everyone is happy again.
It’s hard to be in a bull market when high continuing dent will not give you sustained growth.
It’s hard to be in a bull market when high continuing debt will not give you sustained growth.
Back in July, the Dow broke through it’s 200 day Moving Average. The S&P 500 waited until later in September to do the same, but it was on the same day both had their recent big drops, and the same day both MAs turned south. Now they both appear to moving to challenge their MAs. A failure to break and stay above would technically be a very negative sign.
I understand the short position is huge on stocks.. Are these rallies caused by short Covering
Not sure what to say about what might happen at this point it seems like new territory
What ever has happen in the past, has absolutely nothing to do with what will happen in the future. It does not work that way! You can not find your way by looking in the rearview mirror! Why are so many ignorant of this simple truth?
Those that do not pay attention to history are bound to repeat it….
The US has absolutely no respect for ANY nation’s sovereigny! It means absolutely nothing to our leaders!
Lets pray Larry and Mike are right for once, Because we are all shorting the Markets for the Last month. And we are taking a Licking being stopped out of every short so far.
And as of today the Dow closed above the 17070 mark, Does that mean the next test is at 17500. If so this is really going to HURT.
Be patient. Just need to wait for a few more bears to throw in the towel.
All bull markets get and need corrections. We finally got one. Nothing domestically has changed. Interest rates are still zero and going nowhere (maybe negative) since it woud cost the Treasury hundreds of billions of dollars a year. Also, now that Japan and the EU are doing QE that money has no where to go but here. New highs here we come!
Correct! Jim
If employment and markets don’t improve quickly the Fed is also going to QE. They will figure a way. Remember, Dow Transports lead the way, and they have declined for over a year.
Nice Article Mike. If we look over the broad economic spectrum what doe we see.
Too Much Debt both Corporate and private. How many people are actually unemployed
but not counted as not employed. They can not help the economy very much with
viable purchases of goods or services. How many people are on social programs of some
kind or another. After all its people that drive the markets one way or the other. Plus we
have Politicians and Bankers playing their games.Eventually with too many people not
working and not being able to participate in the marketplace. There is only one thing that
will take place that will smooth all this turmoil out. There is going to have to be a global
economic reset of some kind. Especially to get the crooks washed out. IMHO it is about
to speed up to the downside. As usual there will be winners and losers and whiners
on both sides. The laws of economics will eventually have their sway.
Those who are prepared will survive and thrive. Those who remain willfully ignorant will suffer from the end result.
Best Regards
CaptainFred
what is touted as a great transfer of wealth.
Ya, we were doing quite well until the Republican Revolution of 1981… Since then the average American has taken it in the shorts, while the already wealthy got even richer.. Mean while the GOP kept blaming the Democrats who did pretty darn well from 1932-1981….
The Democrats completely bungled the Great Depression, making it much worse than it should have been, with their Keynesian claptrap. It took a traumatic event like WW 11 to get us back on track. Ike and Kennedy did well and then that moron Lyndon Johnson broke the bank in Viet Nam. Then the moron Nixon took us off the gold standard and the decline you refer to began. I wish all you guys on both sides would realize the D and R crud is only useful for dividing us and making it difficult to understand that all those political sociopaths are out to do us in. Jim
Amen again brother!!
FDR so hoodwinked the American people that they elected him more than any American President in our history…. Somehow that doesn’t sound “Bungled”, aye?
It should be obvious that currently the bulls are in charge. They were taken by surprise with the big drop in late August but now they are awake and defending against further drops. You will notice that each time the indexes start sinking new buying comes in to suport the markets. They are taking delight in ruining the bears plans and they are forcing the shorts to cover and seem to have all the money necessary to keep it up. They are winning the battle for now and I don’t see what will change that unless something unexpected happens.
Yesterday, Congress just voted to overturn the 40 year ban on oil exportation. Should have done it months ago to help boost the oil industry in the US that has been sagging recently due to the price of a barrel under $45. Europe could be our first customer then give the finger to Putin’s pipeline. Oil produces would get a big boost in profits making it up on volume. Remember, the Saudi’s made billions when it was $10 a barrel in the 70’s and $80’s.
The market is still 40% over valued and has been for two decades and the Fed has been setting the stage for a bigger drop than 2008 with their lousy money policy. The big banksters are making billions thanks to the Fed, Bush, Obama and Dodd-Frank. We the People are and will continue to be the big losers. Buy silver as a hedge as many believe it could go up 60% in 2016.
The enabling legislation to remove Glass-Steagall, was called Gramm/Leach/Blyley and EVERY Republican vote to remove… A few Democrats also voted to remove… Ya, Clinton turned his back on America by not vetoing it… Huge mistake, which I’ve never forgiven him… Amazing how far $400 million went…
That and removing the Uptick Rule were huge mistakes. There is no shortage of blame to go around. Jim
I am mystified how anyone could say with a straight face that now is not the appropriate time to remove the export ban on oil, unless you just plain hate oil. Jim
Oil is back up in the 50/60dollar range where the Saudis want it, and make a nice profit, but most frackers break even at best. More exports will tend to lower the world price again, but I agree the ban was stupid and never should have been instituted in the first place.
Gramm/Leach/Blyley were ALL powerful REPUBLICANS…..Every REPUBLICAN voted to remove along with a FEW Democrats and Clinton……. That is NOT ” no shortage of blame to go around”…… That is ANOTHER Republican disaster plain and simple, just like NAFTA was!….
Dave has it right
The only reason we have the oil export ban was to trick Americans into thinking it would lower gasoline prices, which it didn’t. It’s incredibly stupid when you realize it is still legal to export gasoline! Jim
Then show it.
Guess I now know where Weiss stands on censorship. Lesson learned. Steps to be taken.
ask weiss about their record at the sec and you’ll see censorship galore. even this post will get deleted, so read it fast.
Markets go up–and markets go down. That’s why they call it a market. Or is it? It seems that now the market is controlled by those who predict a penny deflection in a stock and buy or sell options to direct to their desired results. Even the larger brokers are now teaching their minions to trade options. Not a good sign for the long-term investor, I think!
Re. the China auto gridlock: Just try to travel through any major U.S. city during rush hour and you will have a similar experience, trust me! (Or, try it for yourself!)
It appears to me that our elected officials need to focus on internal infrastructure rather than their current focus on global dominance. Just saying!
All hell is coming, are you ready for the next crash. Look at everything and all the fear out there. It’s a trigger that will be pulled. You better hope your not there when the hammer comes down. Your a fool if you cannot see the signs.
During the fourth year of a Democrat President there is no way that the Market will crash before next November. It won’t happen until its convenient to blame the Republicans. Jim
Jim,
The economic history of the past 100 years demonstrates that the Republicans are not only blamed, but guilty as charged….
I,m suspicious about the sudden change to the north in the stock market.Looking around whats going on worldwide,not only China, but also the european situation where this enormous influx of refugees will drag down the economy more than the politicians will see or admit.So i fear the market will turn to a bear situation and not into that promised rallye what the wall street guys are telling us.
I trade sp charts technically. Short term, Swing and day trader. One can watch a chart for simple pattern of a market struggling or not. We do see much of that these days. Corrective markets lack in 1-2 patterns. They mostly just turn and move onward. So personally the bear corrective is still in control. Not only that in Elliott Wave trading, one may not be able to count waves at times as the larger pattern takes over, but one thing always shows up to end the count and that is a distinct 1-2-3-4-5 pattern. That has not been seen going up so the bull is still in control in this corrective stage is my view.
Mike, you can continue your “sky is falling” rant but it’s falling on deaf ears. Yes, the Dow is down about 4% for the year, but when you consider double digit gains over the last 5 years, things are not that bad. Personally, I believe the bull market will last another four years or so. Now’s a great time to snap up some bargains on high quality stocks (buy the dip!).
Tom,
The wailing and gnashing of teeth has been at fever pitch since Obama and a Democratic Majority were elected in 2009 (when they brought a bottom to the Cheney/bush Stock Market Crash)…. When another Democrat is elected President and more Democrats are elected to Congress in 2016, these guys will have a stroke!… :)
we are on the latest TITATIC …. build CASH reserves buy GOLD 7% to 12% wait and seat back until the BIG CRASH is here aprox. 12 months then go BOTTOM Fishing . . have your list ready good companies that PAY us dividends . . . and get some inverse ETFs now . .
get your glass or Red Wine and pray that the CUBS win all the way !
salud amigos que DIOS los bendiga mucho mas
Your hope of the bull market lasting another 4 years is far fetched. I believe the market is almost at the top. If you are hoping to buy at lowest and sell at the highest you must
god. The problems are only multiplying and not reducing. The middle east is on the verge of collapse, Europe has many problems of it’s own with 22 of the 28 countries in EU having financial problems and to add to it there is the migration problem to sort out. This is just the start. What about the cultural shock and the reaction of the migrants to it. What about the response from the European community to the migrant demands. It’s like somebody walking into your house, refuse to leave and says what are you going to me. I am going to live here. I think the economic, political and religious problem is real and may not be solved as easily as most people think.
Have you ever seen I-5 in Seattle? It is 12-14 lanes in each direction near the Boeing Plant, there are in and off ramps in the middle lanes. In some cases in the middle and both sides. Aw but how people love their autos. An RV would be a good idea in a situation like that, pull off the side of the road, camp out for a couple of days until the traffic clears. Wonder what Chinese oil company stocks did that day, all that wasted gas?
Ken Fisher states, “The Conference Board’s US Leading Economic Index (LEI)—a reliable forward-looking indicator—is high and rising. In the last 50 years, no US recession has begun when the LEI is in an uptrend.”
That sounds like a pretty strong indicator given it has an accurate track record dating back 50 years.
Mike, the best analogy is 1937: Seven or eight years after a Great Depression/Recession. Stocks and risk assets rallying (1933-1936), cyclical economic recovery, followed by central bank tightening. The August 2015 drop was akin to the spring 1937 decline. Last week’s rally was akin to the summer 1937 rally: both regained about 50% of the initial drop. We are now set up for an August 1937 style crash taking us quickly down to the Dow 14,000-14,500 level.
Geoffrey,
I think you are spot on…… History is simply repeating it’s self…… 1929 and 2007 Republican Crashes….. 1932 and 2009 Democratic recoveries….. It is NOT going to be different this time….. Those that suck up to the Conservative Ultra Wealthy (CUWs) are destined to bring economic destruction….. Those that look out for the average American bring recovery and prosperity…. It has happened FOUR times in the past 100 years!
As near as I can tell, this is bear market activity. It appears to me that this is only the beginning of a major downdraft. The only thing that concerns me is that there seems to be too many negative comments about the market out there for the market to go down significantly. But, certainly looks like we have had a major trend change, and a few days up in this volatile market certainly doesn’t mean that we are back at a major upswing in stock prices.
I am also concerned about all the analysts turning negative. Could be a sign of some sort of bottom.
Needs a definite break of that 200 day MA and confirmation by retrace though.
The market is confused because the Fed is confused. The Fed is confused because Obama doesn’t want the economy to crash under his watch. Obama is confused because he doesn’t understand economics. The US economy is confused by the whole world. The world is confused by what happens in the USA. And I am confused by the blind faith some people have in the Administration. This is almost as confusing as the produce I read above.
Sorry my spelling corrector confused “produce” for “prejudice”. Will
Mike: I believe that we are at the beginning of a bear market. The amount of margin in the market is at all time highs! When the margin calls come investors will be forced to sell other assets in order to pay off their broker. The world is in a deflationary period. The time has arrived for all countries to reduce taxes and spending simoultaneously, This transfer of wealth will give businesses the necessary capital to correct their mistakes and hopefully save some jobs. Its time to introduce the Austrian school of economices to the American people. Regards, Robert Calabro.
For further confirmation..of Mike Larson’s analysis…have a look at the monthly SP500 macd, pmo, etc…very high cross over compared to 2001, 2008, 2011 and here we are in 2015…schiller//index reckons historically overvalued …with 200trillion global debt and global macros/politics a worse mess than any of the previous crosses…if sp500 gets near overhead resistance ~2040~…I’m going to start building a short ETF position…simon
I agree with Mike Larson’s analysis and conclusions.
What if trumpism is a truce. What if trump is a shill?
What if the market crashes now or later from 20,000 dow?
The prepindereance of evidence suggests that iron coal fuel and shipping crashed between 2001 2008 and tech banks and upscale retailers are going to deleverage soon.
Can the fed and friends rig the market not to crash yet? You betcha? Can market justice be delayed it can can deleveraging be denied no. There can be no recovery without a reset to settle the scores and return world trade to an honest game.
A new deal is inevitable and not in the far future.
All you can.do is place your bets and limit your losses.
George soros warren buffet etc.are not infallible.
The fundamentals and technicals favor the bears.
Place your bets now.
Dont overtrade
Expect the unexpected
Hold gold physically locally
There is the dream world of media, politicians, Wall Street and the central bankers or there is the reality of families and wages and disposable income and excessive debt levels.