Bull Market Break Out On Tap?
Before I even get started, I will come clean and remind Urban Digs readers that a year ago I suggested that a new bull market could be born out of conditions just getting less worse (Introducing the Less Worse Bull Market). The suggestion was at best ill timed at worst a major flub and total boneheaded call as the market imploded 4 months later. The somewhat improving technicals were merely a head fake that kept complacent investors from bailing before the really heavy stuff came down. So how do I feel about the current stock market action?....conflicted! I hate the economic outlook, both short and long-term, I hate what the government has been doing to capitalism, risk and reward and all that is fair about our flawed but egalitarian system by not letting banks fail. I believe that smaller banks are in for a world of pain along with the commercial real estate market, while large banks have been incented to sit on their festering stinky old loans and "kick the can" forward for as long as possible instead of recognizing losses. This suggests to me that debt capital for worthwhile new investments, at rational prices will be stymied......not what our system needs right now to re-invent itself. Need I mention that the states are bust, the government is bust and there is no next big thing for the U.S. economy to leverage off of....carbon credit trading anyone??
Now that emotions are out of the way. Let's go to the tape. Stock charts are made by real investors with real money, crazy, deluded, smart as a fox or not. The equity market is an incredibly powerful capital raising machine when it is in gear and there is no doubt that that is in fact the case today. This morning the Wall Street Journal carried a quote from a bank executive saying "It's easy to raise capital now." We are seeing where all the TARP (and other liquidity programs worldwide) is starting to flow out of the banking system, into stocks and commodities. We must not ignore the power of "reflexivity", George Soros' concept, that markets often drive economic trends as opposed to the normally expected course of events.
The chart above is the Dow Jones Industrial Average getting ready to "go topside" in the immortal words of my friend Stan Weinstein. I have waxed poetic before about the importance of the 200 day moving average to markets and stocks (Where is The Stock Market Headed? 200 Day SMA). So suffice it to say, that when a stock or index is able to surmount it's 200 day moving average in convincing fashion, particularly if that moving average is no longer trending down strongly it is an important signal of future trading activity and for many students of technical analysis it is the only sign of the birth of a bull market. The logic being that if a market can sustain an upward bias for 200 days, it has had time to fully digest whatever news was making it go down, and vice versa. In other words time heals all wounds.
Now most technicians also want to see confirmation of a bull market turn in more than just one major market index. Dow Theory actually requires that the Dow Transports be in a bull market along with the Dow Jones Industrials. The idea here being that goods being manufactured should be improving, along with increases in goods being transported to market. Today many technicians look at the NASDAQ composite (COMP) and S&P 500 (SPX) confirming a move in the narrower Dow Jones Industrial Average. You can see that both the COMP and SPX here (View image) and here (View image) have already broken out. FYI the COMP is about to also get a technical afterburner signal called a golden cross, when the 50 day (shorter term) moving average powers above the 200 day moving average, potentially signaling that the NASDAQ is the way to play for upside at least short-term.
Last time I was premature to suggest that maybe things were not going to get much worse and the stock market could start to recover. Of course the stock market has already had a huge move off the bottom and frankly with the extensive damage to the economy that has taken place and dangerous changes to the capitalist system my outlook is pretty bleak. In fact I am going to work on a piece about the Misery index soon, a subject that is relevant when jobs are scarce and inflation is booming. But the stock market doesn't care about my outlook and contrary to my son's belief I am not all knowing and all seeing. I'm not telling anyone to go long stocks here, or suggesting that the best returns off the bottom have not already been earned. I am just saying that if the Dow Jones breaks out above its 200 day moving average on volume and doesn't immediately roll over and crash a couple hundred points, it's a new bull market. Like it or not, don't try to fight it. How long it lasts and how much of a return it produces I will leave up to the professionals. However, it will take a lot of unexpected bad news to turn it back into a bear. I still think there is lots of potential for unexpected bad news further out into the future, so I am a scale seller looking to redeploy capital into cheap, well positioned income producing property that others will be forced to liquidate because they paid too much for it and used too much leverage. I am much less bullish on residential property that will not pay you income while you wait, but a bull market is good for New York City residential real estate. You can quote me on that. Does it mean prices are going up? not necessarily anytime soon. Real estate cycles are notoriously slower than stock market cycles. Does it cushion remaining downside....yes. I will also be working on a piece on the employment outlook for Wall Street, which is another critical factor for New York City residential real estate which should be re-visited in light of the improving financial markets.
Comments (21)
Well, it doesn't have to take unexpected bad news to turn into a bear. Another scenario is when market participants are forced to recognize bad news that they are already aware of, shucking off their denial.
We all "knew" that internet stocks were overpriced in the 1990s. And we all "knew" homes were overpriced in the late 2000s, but we were able to sustain our disbelief until a catalyst event.
Now, we all know unemployment keeps rising, but we are in a state of denial about it (green shoots, anyone?). The market still seems to be valuing stocks based on peak earnings, rather than acknowledging that we are heading toward a "new normal".
Posted by Thisson | June 3, 2009 12:47 PM
Thisson,
I agree that if known bad news comes to hold much greater significance it can kill a bull market. If for example the failure of bank lending leads to wide spread small and mid sized business failures. Or if crude prices get so high they start eating up everyone's disposable income again....could be triggered by hurricanes this summer. Who knows? But we are back into who knows when stocks will start going down territory, instead of who knows when they will start going up. I don't see this as a raging snorting bull, with lots of upside, but I believe it will break out and become a "technical bull" soon.
Posted by jeff | June 3, 2009 12:57 PM
If anyone is long gold, I suggest tracking the Aussie as well. It's easy to say that it is topping out on a down day like today but longer term views also seem to suggest a deflationary bias. These views come from the fundamental macro view like the recent re seminar offered by Jeff as well as data from the govt like this (focus on 1st 2 lines):
http://www.bea.gov/newsreleases/
national/pi/pinewsrelease.htm
Personal income increased but personal consumption decreased. That is indicative of a higher savings rate. And w/the US economy 70% based on consumer spending that looks like a strong deflationary signal.
Posted by In Debt We Trust | June 3, 2009 1:12 PM
I agree with everyone that the US is going to have a tough run in the coming year or two if not more. However, again, I still don't believe it means you should not be invested in the stock market -- maybe not at the current prices though -- certainly a 40% spike in the S&P makes values less compelling. I'm not committing any new capital to work.
Hey I've been promoting buying quality equities here for a couple months now. At this point -- I am not putting new money to work right now as it has been harder and harder to find companies that that are great bargains.
Despite believing that housing prices will not rebound for some time -- i still believe in a weaker dollar and strong inflationary pressures from higher energy and food prices.
Posted by RegularAnon | June 3, 2009 1:52 PM
check out the weekly chart of the Q's. double bottom, inverted head and shoulders(sloppy) with little overhead resistance. tech is the place to be for the next few weeks. definitely showing relative strength to the rest of the market.
Posted by cfranch | June 3, 2009 4:29 PM
well, at some point stocks will may, and I repeat MAY, start to act negatively to news that is positive. Just like they started to act positively in mid March to news that was not yet so convincing that slowdown was occuring at a less fierce pace.
Who knows. All I know is stocks have been wrong twice in last 18 months, very wrong. But I do think this rally still has some legs as Im sure data will prove LESS WORSE for a few quarters more. Its the V recovery that I think will ultimately disappoint, and then the surprises and unintended consequences that occur after a major earthquake, like we just had. Hard not to expect follow up shimmys
Posted by Noah | June 3, 2009 4:36 PM
I think the Dow still has some upside--will go to about 9600-9900 and will drop back to about 7000 in or around the 4th Q. If this happens (or dare I say "when this happens"), Manhattan RE is going to feel real pain. This may be what pushes Manhattan RE prices to 40% below peak.
Posted by Anon | June 3, 2009 4:54 PM
What is interesting with this economic environment is -- what should we fear more inflation or deflation.
Personally, i think that if you have substantial cash reserves in addition to the money in the market, I'd be more fearful of inflation.
Noah -- by the way-- score one for Tivo! Quirky investment working out so far. I love how everyone jumps on the bandwagon after the investment is not nearly as attractive -- (ditto for the market).
Posted by RegularAnon | June 3, 2009 5:39 PM
deflation
no chance for hyperinflation
Posted by joedavis | June 3, 2009 6:56 PM
both suck. unfortunately, market forces will do what they need to do to maintain equilibrium.
as per TIVO, natural order of markets at work. Everyone HATES market at S&P 666, everyone loves it at 930
Posted by Noah | June 3, 2009 7:09 PM
I agree that the inflation/deflation question is a tough one. Two recent comments I heard resonated with me. A commentator was talking about Bernanke saying inflation wouldn't be an issue due to low capacity utilization...the commentator reminded that in the stagflationary 70s, capacity utilization wasn't high. I think you have to look at world capacity utilization today, which is very loose....BUT. Raw materials are the tightest area in the supply chain, (albeit still in surplus at current economic growth)while new investment has plunged. This leads into the second comment by an oil analyst, which is...oil is inexorably headed towards its marginal cost of production (makes economic sense) in the mid 70s to low 80s per barrel. At that price or above it may cause another downleg in the U.S. economy, while Chinese demand will hold up (i.e. China crowds out U.S. energy consumption). (The marginal cost of production argument holds true for all commodities and is a good reason for the current rally). The big X factor is China, do they crank up manufacturing and export deflation, do they horde raw materials to soak up excess FX reserves and hedge against a weak dollar, thus causing big commodity inflation....my guess is both. If I am right this will result in a huge margin squeeze on final good producers who have to buy expensive raw materials and yet sell against China Inc. (not good for G7 economies). This won't be good for corporate profits...except for raw materials guys. Internet related probably a good place to hide in this environment, with some commodity exposure and cash, cause its gonna be a trading environment, my guess is we cycle up and down for a long time between inflation and stagnation.
Posted by jeff | June 3, 2009 7:47 PM
who said hyperinflation? i simply said inflation. Honestly, for those that have decent sized portfolios and a decent chunk in various forms of cash will be fine if there is deflation.
Joedavis -- i wonder why you think there will be deflation. If you were to ask me about deflationary pressures on housing -- i would agree -- only b/c housing was in a bubble.
But let me ask you this -- do you think that gas is going to be $3 first or $1? Is a gallon of milk at the supermarket going to get cheaper? Are energy prices going to come down? I really doubt that I will see these things happen.
Posted by RegularAnon | June 3, 2009 7:49 PM
Noah,
Also despite pushing for people a couple months ago to invest despite the bad economy, valuations have gotten much much less attractive. It's not nearly as easy to find quality long term investments at great prices. I am still scouring the markets to find a couple more investments but am having a much harder time finding investment opportunities given the risk reward profile of both the market and of individual companies.
RegularAnon
Posted by RegularAnon | June 3, 2009 7:57 PM
couldnt agree more.
Jeff - "do they horde raw materials to soak up excess FX reserves and hedge against a weak dollar, thus causing big commodity inflation"
Again, totally agree and I think they started buying up raw materials already.
Posted by Noah | June 3, 2009 8:05 PM
Noah,
Good job on finally acknowledging that whatever good that happens in the stock market will be good for housing. You have my up most respect.
Posted by ericho75 | June 3, 2009 11:10 PM
Ok, this comment doesn't relate so much to this post but probably to the one before it but maybe it will spark another entry. I am seeing practically ALL of my streeteasy listings go into contract. The last two weeks or so the "in contract" e-mails were dribbling in and this week - BAM - I'm getting two or three every day listing almost every listing as in contract OR the vague "unavailable" which means they took it off the market? Even the apts I thought were a bit overpriced are going.
Posted by amy | June 3, 2009 11:28 PM
Amy,
Well, it could be 2 factors. The first is the recent performance of the stock market as Noah have indicated on his latest entry. There's no bigger indicator that can build consumer confidence as fast and as quick as the following 3 averages: Dow, S&P and Nasdaq. The second is the low interest rates and the recent move up on rates over the past 2 weeks. A lot of 'on the edge' buyer probably started committing because they are afraid with higher rates they might get priced out.
Posted by ericho75 | June 3, 2009 11:35 PM
I am also noticing the contract signed along Central park south condos and Central Park West condos with views. This source I get from OLR. I am starting to also get more people interested in buying again. Any one been to true Gotham lately?
Posted by Ivan pintor | June 4, 2009 3:21 AM
Amy - sick with flu over here but Im working on a piece to discuss this big tick up in action in our market. Yes, its happening, deals are happening, lots of them, but at prices that I have outlined earlier - from wha I can tell from discussions with colleagues. High end way more affected than low end. Buyer confidence up big time with equity rally, first wave down, and concern about higher rates in future and reflation trade. Will discuss in detail once my head clears up
Posted by Noah | June 4, 2009 6:51 AM
Doug left Elliman and went to Rutenberg! The man will be successful no matter where he goes. Hes simply a very good broker.
Posted by Noah | June 4, 2009 7:39 AM
Regularanon: it's important to note that increasing prices of oil, etc can be chalked up as "relative price increases" rather than inflation.
While I agree we are likely to see higher energy and food prices, I think that overall, we're going to have severe deflation.
The source is going to be employment, declining wages, and an increased savings rate. Simply put: if people are earning less and saving more, prices on non-necessities must decline.
Welcome to the balance sheet recession.
Posted by Thisson | June 5, 2009 12:43 PM