Bear Market Race Week 114: The Stock Market and US Dollar StrengthPublished: December 19, 2009 by GoldSpeculator The 1929 & 2007 Bear Market Race to The Bottom Week 114 of 149 The Stock Market and US Dollar Strength DJIA’s Volatility Review Mark J. Lundeen mlundeen2@Comcast.net 18 December 2009 Color Key to text below Boiler Plate in Blue Grey New Weekly Commentary in Black Below is my BEV chart for the Bear Race.  I never said that our Bear would be a carbon copy the 1929-32 Bear. This report’s perspective has always been one of comparison. Week 114 of the Great Depression Bear (the second week of November 1931), saw the DJIA down to its BEV -70.36% line. Where in our Week 114, the Bear looks like he left town months ago. But I am not sounding the all-clear siren yet; as there is tomfoolery going on in our financial markets, and hanky-panky in the conduct of our national finances. Due to short-term-political considerations (such as political corruption), and the need for the Big NY Banks to justify their year-end bonuses, this crummy market is going to last for years. What needs to be done is demand reconciliation of all past due debts, and liquidation of defaulter’s assets, at whatever price the current market can bear. Had this been done this in October 2007, and the American Citizens “bit the bullet” and taken their losses like adults, the American economy would be rebounding now, and the Baby Boomers would have had a few good years to build up their finances for retirement. But this is the one thing that will not be done. Why? Because this single action would have cleared the market of three decades of financial deadwood; bankrupting the Banking System in the process. Painful? Like a heroin addict going cold turkey painful! As it is in 2009, the Banking System, including the Federal Reserve, has mostly dead wood for its assets and reserves. The politicians and academia are resisting asset liquidation as the Banking System they regulate and manage also functions as a conduit to deliver a generous taste the Fed’s Monetary Inflation to these same Political Parties, and Academia. So expect this crummy market to drag on for the foreseeable future. The Stock Market and US Dollar Strength The Stock Market was down this week on “Dollar Strength.” But years ago this same “Dollar Strength” was the reason given for the Stock Market’s advances. How can the same cause produce opposing effects? Well who is telling us that the Stock and Forex Markets are connected? The usual “Experts” paraded on CNBC who never present historical data to support their claims. The Chart below has the UK Pound, Canadian Dollar, Japanese Yen & Swiss Franc, indexed and then averaged. The US dollar is strengthening when the plot rises and is weakening when it falls. Since 1975, correlations between the ups and downs of the Dollar and the Stock Market could be better explained by chance.  The Stock Market started its historic rise in August of 1982. In 1982, the US dollar was strengthening as the DJIA took off. But the DJIA continued to climb until the Crash of 87 on a very weak dollar. From 1982-87, the DJIA actually ignored the dollar. Let’s take a look at the NASDAQ high Tech Bubble Market (1990-2000). For 10 years, the NASDAQ climbed to record levels as the dollar strengthened. And note how the NASDAQ bubble popped on dollar strength. Looking at the chart above, we see how Greenspan’s Bubble was blown up and deflated during the same 12 trend of dollar strength. The long term correlation between the Forex and Stock Markets is very weak, if it exists at all. For the short term, this relationship is just as weak. But changes in the dollar are as good an excuse as anything else to shift attention away from Government manipulation of the Financial Markets. If the DJIA was down this week, it’s because the “Policy Makers” allowed a little hot air out of the DJIA’s bubble, and the Forex Market took the rap. I’m watching the DJIA’s BEV -25% line. My gut feeling tells me the “Policy Makers” see a sweet spot at the current levels. I don’t expect the DJIA to stray too far above or below 10,500, as long as “Policy Makers” maintain their control of market valuations. When can we see that they have lost control? Market volatility will increase. Below is the DJIA Volatility’s 5 Day M/A & BEV Chart  We can see in the Chart above, and in the table below, volatility is absent in this market. Even major breaking news can not move this market. This week in Copenhagen, President Hugo Chavez of Venezuela announced at the “Global Warming Conference” that President Obama, exactly as did President Bush, smelled of sulfur. This seems a more likely reason for the DJIA’s weakness than the dollar’s strength.
It has been a month of zeros in the DJIA’s 8-Count.  Since the second week of November, the DJIA has been stuck in a trading range of only 2.14%! In BEV terms, between -25.86% & -28.86% from October 2007’s Terminal Zero, or the DJIA’s last all-time high. The Step Sum is game for action, but the DJIA refuses to go along. Well it is what it is, and it is a boring market in December 2009. But I expect 2010 to liven things up before June. Maybe the “Policy Makers” will allow the DJIA to rise above the BEV -20% line. The Step Sum is an indicator of market sentiment. When the underlying sentiment is bullish, the Step Sum rises. When bearish, it falls. Think of the “Step Sum” as the sum total of all the up and down price “steps” in a data series over time; an Advance – Decline Line for a data series derived from the data series itself. Logically, bull markets will have more net up days, while bear markets will have more net down days. Understanding the Step Sum is no harder than that. DJIA’s Volatility Review I haven’t focused on Volatility for awhile, so now is a good time for an update. Volatility has been absent from the market since last Summer. When my agents reported the Bear had finished eating his day-old jelly donuts at a Midtown, NYC Dunkin Donuts last October, I had thought he was headed Downtown to Wall Street, but that was not the case. In Wk 114, we can only assume that he returned Upstate New York to hibernate for the winter. But rest assured, my agents in New York are leaving no garbage can in the Big Apple unobserved - just in case. I will alert you to any sign of Bear Tracks they uncover. I understand why the Bear wanted to leave town. The function of a Bear Market is to scrub clean and sanitize the repulsive remains of the Bulls’ bacchanal. But with the exhausted Bulls still wearing their togas, and partying as hardy as tired Bulls can party, why should the Bear get in the way? I can only speculate what a typical devotee of Bacchus would feel like after a non-stop, 3 day bacchanal. After the grotesque gorging of food and drink, in honor of Bacchus, it stands to reason that after a sleepless 3 days and nights, Sunday evening is not as festive as was Friday Morning. But eating and drinking during a wild weekend would leave someone in better shape than the Financial Asset Bulls currently are in. After all, since August 1982, they have been attending a nonstop bacchanal. I keep saying the DJIA is “Baby Stepping” upwards. With no disrespect intended towards Dow Jones Inc., that only observes these festivities from afar, it’s actually more accurate to say the 30 stocks in the DJIA are crawling uphill, as best they can, under very difficult conditions.Doctors Greenspan & Bernanke have been very generous with their “Liquidity Injections” for the past 27 years. The Bulls, and anyone else who took full advantage of the banking system’s generous credit at “attractive rates”, are now in a very bad way. Take a look at the Earnings and Dividend Payouts for the S&P 500. They don’t look so good.  For the 500 companies comprising the S&P 500, making a profit in this economy is difficult. So why has the S&P increased 62% from last March’s lows? Washington is fixing market valuations, just as Doctor Bernanke promised Congress he would. Market volatility is low because Bernanke knows how fragile the market’s supports are. The Federal Reserve, which he chairs, is that support and he’s not letting anyone rock the boat. It has been months since I’ve shown the charts below. A year ago they were featured every few weeks as 2% Days were coming fast and furious. Wall Street is never more volatile than when the Bear gets busy. That’s to be expected as people flee Wall Street for their financial lives. Writing off toxic debt and marking down overpriced assets is always painful. But Doctor Bernanke, with his “Injections of Liquidity” into the Financial Markets, didn’t cure the disease, but the “Injections” did stop the pain. Time Magazine, a particularly clueless publication, awarded Doctor Bernanke, Person Of The Year Award (or “POTY” pronounced as “the Potty Award”), in recognition of the doctor’s success in “saving the financial system.” So nine months after the March 2009 DJIA bottom, most financial observers believe the Bear Market is over. I disagree. We need to understand that we live in a finite world. Wealth * may * be measured in units of currency, but units of currency * are not * necessarily wealth. When a society forgets these facts, the Bear always returns to show it the error of its ways. So Bear Markets serve two important purposes: 1. Past Bear Markets are cautionary tales of long departed fools who ruined themselves searching for easy riches, and of political schemes based upon the false premise that a social utopia is achievable by the effortless creation of credit and currency. It’s not. 2. Fear of future Bear Markets encourages citizens and their governments to live within their means. However, the United States in December of 2009 lives in denial. Most people are ignorant of financial history, and we have as Fed Chairman a professor from Princeton, promoted as a Great Depression know-it-all. With such a Fed Chairman, Washington and Wall Street no longer fears the Big-Bad Bear. As far as future Bear Markets are concerned, not all, but most “Experts” on CNBC would have us believe that as long as the Fed maintains our current historically-low interest rates, and Congress and the White House keep deficit spending hundreds of billions of dollars, the Bear wouldn’t dare attack asset values again. I couldn’t disagree more. It’s a heroin addict’s befuddled reasoning that concludes his problem can be solved with another fix of heroin. Only a credit-addicted financial system could believe an Ivy-League Quack’s “Liquidity Injections” into an insolvent banking system could be a solution to our current problems. The day is coming when the Bear’s pickup truck will once again be seen parked in front of the NYSE to do an honest day’s work cleaning up the mess Congress and its Regulators created. And believe me; you don’t want any part of that! So watching the DJIA’s daily volatility will be the key in knowing when the DJIA stops its Baby-Stepping ways, and starts Goose Stepping to the Bear’s tune. Remember: Volatility is the Bear’s calling card. So let’s examine the daily DJIA’s volatility from 1900 to 2009. The data points in the chart below register how many DJIA 2% Days exist within a running 200 day sample. It’s the same methodology as my 8-Count, but instead of an 8-Day Count, I’ve increased it to a 200-Day Count of DJIA 2% Days.A DJIA 2% Days occurs whenever a day’s closing price’s movement is +/- 2% or more, from the previous day’s closing price. Interestingly, we know when the Bear is the new Sheriff on Wall Street: the number of 2% Days increase within these running 200-day Counts plotted below. No set rule here, but seeing the plot spiking above 20, or so, we can assume the Bulls have lost most of their paper profits gained when the plot was hovering around zero. It’s just the way it is.  So this chart above presents a different view of Bull and Bear Markets, as seen by market volatility. Bull and trendless markets see very few DJIA 2% Days within a 200-Day Count. Compare the chart below of the actual DJIA from 1947-83 with the same time period in the chart above. Except for the Bear Markets in the DJIA, the DJIA saw very few 2% Days during this 37 year period.Note how Market Volatility increased after August 1971. This was when the US broke the dollar’s link to Gold.  So during a Bear Market, these 2% Days pile up, and it makes no difference to the Bear if a 2% Day was an up or down day. This is counter intuitive, as we would think Bull Markets would have the big up days. But as we see below, the largest positive days in the past 109 years are almost exclusively Bear Market events.  So the largest positive days in the DJIA occurred during the Great Depression’s Bear Market. People believe Short Sellers make their big money trades in Bear Markets – some Shorts do. But in fact the Big Bears hate everyone, and that includes Short Sellers. The Bear makes life a living hell for the Shorts with extreme upside volatility, and for the Longs with their relentless hammering of stock valuations. For 99.99% of investors, the Big Bears are nasty beasts, best observed from a distance. However, for the nimble traders who understand the nature of the Beast, and don’t get married to their positions, Bear Markets can be very profitable even on the long side. But baiting an Ursa Major for fun and profit is a professional game. The best way to make money today is to be in the Gold and Silver Bull Market, and avoid the Stock Market Bear. The 1929 and 2007 Bear Markets obviously have much in common. They both have excessive 2% Days in their running 200-day samples, and the actual day to day volatility frequently caused moves in excess of 4%. In the 124-year history of the Dow Jones Averages, the 1929-32 and 2007-09 Bears are rare markets! Compare them to the other DJIA -40% Bears.
Let’s take a closer look at the two most massive Bear Markets since 1885. I have our current Bear Market dated 114 Weeks after its October 2007 top, or Terminal Zero on BEV Charting terminology. But the BEV -50% bottom in March of 2009 occurred 73 Weeks after the October 2007 Terminal Zero. I continue counting weeks as I don’t believe we’ve seen this Bear’s ultimate bottom. This Bear could drag on for years. Political influence from Washington is not only resisting the writing off of past bad debt and lower market valuation in real estate and stocks, but is actually aggravating the situation by increasing government debt by the trillions that will never be made good. Before this Bear is over, it is going to try to knock out the 1929-32 Bear out of the #1 spot in the above table, but it might be years from now. Look at my 2% Day, 200 Day Sample chart above (4 charts up). I’ve placed two green-dashed rectangles containing the last stages of the Bull Market, and the following Bear Market for 1929-32 and 2007-09. The left edge of the rectangles are fixed at the point where the 200-Day Count last went to zero 2% days before the DJIA Bull Market’s tops. In the chart below, I’ve overlapped these two rectangles. There is nothing technically significant in assigning Day 1 to the first 200 day running sample with zero 2% days. But it seemed a logical starting line for comparing the 1929-32 and the 2007-09 in terms of 2% Days.  These are two very different Bears: The 1929-32 Bear started small and then kept building until it peaked in 1932. By the way, the DJIA did not see another zero in its 200 day moving sample until September of 1942. Our 2007-0? Bear just exploded upwards and is now collapsing – why? I can only offer my opinion on the subject. In October of 2008, CNBC televised live Congressional hearing with testimony from Doctor Bernanke and then Treasury Secretary Paulson. A common thread in the hearing was the need for Congress to give the Fed and Treasury “new tools” to ensure “market stability.” When we consider the current action of the DJIA, glued to its BEV -25% line, after rising from its BEV -50% line, and considering the collapse in 2% Days during a economic period with double digit unemployment, falling corporate earnings, bank failings and etc, etc, etc, it seems the “new tools” are effective in manipulating the market towards “Desired Market Valuations.” I read the current freefall in the Red Plot above a confirmation of an Official Sector market rig. But the problem with rigging markets is they don’t stay rigged forever. The last 2% day was in November. So if they can keep this up until next June, we may see the DJIA’s 200 Day sample again with no 2% Day in it. But right now there are 33 days in the sample, and they are dropping fast. So in conclusion, as long as the “Policy Makers” can keep volatility out of the market, the price fix will hold. Likewise, we will know when the Bear comes back; we’ll see it in my volatility charts. Watch my 8 & 200-Day Counts for the Bear’s Tracks on Wall Street. Publishing Note I will be taking the next two weeks off for Christmas and the New Year. They are short weeks with low volume. I also intend to enjoy myself free from the chains attaching me to my computer. My next report will be for Wk 117 on 08 January 2010. Dow Jones -40% Declines From 1885 to 2008 is the article inspiring this race of 1929 & 2007 Bear Markets. You may want to read that article to understand my “BEV Chart.” Dow Jones Industrials Average Market Volatility is the source for my volatility studies. The Lundeen Bear Box and Step Sum is the source for my Lundeen Bear Box and Step Sum Chart Note For the Record: Mark Lundeen does not want a devastating bear market in the next two years. However, in full view of Congressional Market Oversight Committees and under the supervision of Government Regulatory Agencies, things were done that I believe will make a historic bear market inevitable. If you have a problem with this bear market, contact Washington, not Mark Lundeen.
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