Bear Market Race Week 122: US T-Bonds Don’t Look so GoodPublished: February 13, 2010 by GoldSpeculator The 1929 & 2007 Bear Market Race to The Bottom Week 122 of 149 US T-Bonds Don’t Look so Good NYSE’s 52 Week Highs Suggest Future Weakness Foreign Prime-Rates Have not Moved for Months Mark J. Lundeen mlundeen2@Comcast.net 12 February 2010 Color Key to text below Boiler Plate in Blue Grey New Weekly Commentary in Black Below is my BEV chart for the Bear Race.  Lots of Bearish talk in the Financial Media concerning the European Debt Crisis. Usually such talk is a sign of a bottom, but in Wk 122, we’re far from the bottom. So these concerns should be heeded. US T-Bonds Don’t Look So Good So how are the Treasury Bonds doing?  For a financial asset long known as a safe haven during a financial crisis, they could be doing better! Note how this bond gained in value during the first stages of the Credit Crisis, Summer-Autumn 2007. The Blue BEV Plot doesn’t show it, but looking at the Red Yield Plot, we see US T-Bonds soaring during the Stock Market Crash of October 2008, just what US T-Bonds are suppose to do in a time of financial crisis. The Current Yield dropped over 200 Basis Points as the DJIA fell below its BEV -40% line. But since October 2009, as a Debt Crisis stirred in Europe, money has been slowly walking away from the US Treasury Bond Market. So the question we should all ask ourselves is whether this money is Smart or Dumb Money? I think it’s Smart Money. Where these people are taking their wealth I don’t know. But unless the current trends we see in this bond reverse soon, we may be witnessing the early stages of a crisis in the US T-Bond market. Is that possible? Yes, it’s happened before in the 1970’s. But as you can see in the chart below, before the 1970s, came the 1950s & 60s.All-in-all, these were 30 years of losing money in the US T-Bond market. But in the 1970’s, the flood gates of US Monetary Inflation opened wide, and US T-Bonds earned the moniker of “Certificates-of-Confiscation.” Wall Street always has a way with words. Last time there was a crisis in the US Bond Market, it took decades for it to come to a boil. But in 2010, it seems President Obama and Congress are in a hurry to push the Bond Market over a cliff.  I think it’s noteworthy that in December of 2008, as Mr Bear was running amuck in the Stock Market, the yields for US T-Bonds fell to levels not seen since the 1950s. When Mr Bear comes back, I don’t think T-Bonds Yields will revisit those lows again. I’m not in the Bond Market, so that is just my opinion. But the T- Bond Market has been losing value since October, because big sellers have been motivated sellers, and that is not a good sign for the future prospects of the Stock Market. When Mr Bear comes back, don’t be surprised if the losses in the US Debt Markets are as large, or larger, than those in the US Stock Market. There are good reasons believing the December 2008’s highs in the US T-Bonds are a top for US Bonds. And to my eyes, the December 2008 down spike has the appearance of a Bond Bull’s last dying gasp. But we should expect Doctor Bernanke to fight this trend with all his might should a Bearish Trend in Bonds develop. But in time, even a Princeton Man will have to come to terms with Mr Bear. It may be all pain, with no gain for bond holders from this point on. Below is the DJIA Volatility’s 5 Day M/A & BEV Chart  What is there to say about this chart in Wk 122? Volatility is rising, and we all know what I think that means!  I like my BEV Format, as it translates numbers into percentage terms based upon the last all-time high of a Bull Market. In the chart above, the percentage terms seen on the Left and Right Scales are based upon the 09 Oct 2007 DJIA Last All-Time High. Like Bonds, the DJIA doesn’t look so good either. But that can change quickly; all it has to do is go up. Will the DJIA go up? It could, but I don’t think it will. Even if we saw the DJIA turn around and jet up above its BEV -20% line (DJIA @ 11,330), that would do nothing to fix the underlying problems in the Global Financial Markets: worthless assets pretending to be viable reserves in the World’s balance sheets. I’m sorry to say that also includes the US Dollar, and most likely the Euro.
The DJIA’s Step Sum appears to be reversing its trend from Bullish to Bearish. It seems to be thinking about what comes next, just as the DJIA is now doing. But there is no Box formation going on here, so if the Step Sum starts going down, it should take the DJIA with it. Lets take another look at the comparison of the DJIA’s Step Sums from the Great Depression and our current Bear Market.  Last summer I used Horror Movies plots as a template for Bear Markets. In the opening scene, everyone is happy and full of hope for a wonderful future, just like at the final high of a major Bull Market. And then, scene by scene, a horror movie breaks down hope and happiness. Oh, there is always hope in scene 12. After all, in scenes 6 & 9 there were some close calls, but not everyone died a cruel and senseless death. But the actors say goodbye to all that in scene 13, as the maniac cuts his way out of the closet with a chainsaw. In my studies of the DJIA’s Step Sum, which is linked at the bottom of this report, every massive DJIA’s BEV -40% Bear Markets, since 1885, saw its Step Sum decline into a catastrophic collapse, as Mr Bear comes out of his closet in scene 13. Like a horror movie template, this is something he always does! And like in the movies, in the Bear’s scene 13, the Bulls come to realize that all hope if forlorn. One of my technical reasons for not believing that the lows of March 2009 were the final lows of the 2007-10 Bear Market, was because the DJIA’s Step Sum hasn’t entered into its catastrophic collapse. In the chart above, we see that it took over 420 trading days before the 1929-32 Bear saw its scene 13. In our Bear Market, we are now at day 591. But the Blue Plot for our Bear Market is showing signs of turning around. I don’t think scene 13 of the 2007-10 Bear is far away. 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. NYSE’s 52 Week Highs Suggest Future Weakness In Wk 105, my 16 October 2009 Report, I speculated the Percentage of NYSE Companies hitting New 52 Week Highs might be a record coming into March 2010. I was wrong, and that’s not good for the future prospects of the Stock Market. First a explanation of the Data displayed on the Charts below showing 61 years of the NYSE’s 52Week Highs – Lows Ratio. I subtract the daily 52Wk Lows from the 52 Wk Highs, and then divide their difference by the total number of shares traded that day. The results are either Positive, Negative or Zero, as per the table below.
So don’t think that just because the Ratio was Positive on a certain day, there were no NYSE 52 Wk Lows; there usually are. All it takes to drive a day into positive territory is more 52 Wk Highs than 52 Wk Lows. Negative days occur when there are more 52 Wk Lows than 52 Wk Highs. How high, or low the ratio goes from the zero line depends on how large the net proportion of High-Low to the total number of shares traded that day. The Table below lists examples.
In the chart below, positive days are Blue, negative days Red. And don’t forget, a day producing a positive Ratio will most likely have some NYSE 52Wk Lows too, and a day producing a negative Ratio, usually has some NYSE 52Wk Highs. Note there are periods in the chart below where the Blue & Red Plots coexist at the same time line. This is mathematically impossible as each day is either a positive, negative or zero. But in displaying the data on a chart spanning 61 years, the overlapping of the Blue and Red Plots is unavoidable as each daily data point is much smaller than the width of the chart’s plots. When charting only a year or two, this technical problem disappears.  In Wk 105, my expectations for a new record high in the NYSE’s 52Wk H-L Ratio were: as share prices fell dramatically during the second worst DJIA Bear since 1885, how hard would it be for most shares, trading on the NYSE, to rebound to new 52 Wk Highs? Stocks took a terrible tumble during those 6 months: October 2008 to March 2009. On 10 October 2008, the NYSE saw: 52 Wk Highs ---------: 10 52 Wk Lows ----------: 2901 Total Shares Traded: 3306 Making the NYSE’s 52 Wk H-L Ratio hit -87.45%, a 61 year record! In February of 2010, this ratio seems ready to tumble back into negative territory, rather than rise up to record highs. So it appears that most companies listed on the NYSE, but not included in the major Dow Jones or Standard & Poor’s Indexes, have not made new 52 Weeks Highs since March 2009. One must keep in mind that many companies traded on the NYSE, are not covered by Investment Firms, or included in the indexes everyone follows to track the stock market’s trends. But Market History shows, via the NYSE’s 52 Week High and Low Data, that how these companies perform, in the aggregate, do influence the Major Stock Market Indexes.  Currently, the inability of most companies traded on the NYSE to make new 52 Week Highs, after their traumatic lows of October 2008, and March 2009, indicates significant weakness in the general stock market. This makes the major indexes, investors and the financial media follow daily, vulnerable to a downturn. Before looking at the data for 1999-2010 we should break up the data displayed above into more manageable bites. With a DJIA BEV Plot, we can see if there are any identifiable patterns between the DJIA and the NYSE’s 52 Wk High & Low Ratio. For my readers not familiar with BEV, aka “The Bear’s Eye View” Plotting Basics, in Wk 110, I wrote a tutorial on BEV Plotting using the now discontinued, Barron’s Stock Groups Steel Average. There is also the link at the bottom of every report on the DJIA -40% Bear Markets explaining BEV Charting basics. It was that article that inspired my weekly series of reports on the current Bear Market. The BEV Plot is easy to understand, and essential to know if the following charts are to be fully appreciated. 1949-69 A Terminal Zero in the Charts below would be the last all-time high in the DJIA before a correction of 10%, or greater. For your information, due to the BEV Plot’s inability to show it, you should know that in December 1949 the DJIA was at 200, and increased to 1000 in the next 15 years. From 1949 to 1966, we’re looking at a DJIA Bull Market. The most obvious observation in the relationship between the DJIA and the NYSE’s 52 Wk H-L Ratio is actually counterintuitive. At least it was to me before I analyzed the data. I assumed the largest proportion of stocks, trading on the NYSE, would reach their 52 Wk Highs as the DJIA approaches its Terminal Zeros. But since 1949, that’s not what actually happens. Take a moment and study the chart below. We see the NYSE’s 52 Wk H-L Ratio peaking shortly after the DJIA bounces back after each price correction. After the DJIA exceeds its previous all-time high, producing new BEV Zeros (one zero for each new all-time high), the NYSE’s 52 Wk H-L Ratio tapers off until very few companies on the NYSE are making new 52 Week Highs as the DJIA reaches a peak. Here’s the counterintuitive bit: while the DJIA is approaching its Terminal Zero (final all-time high of the move), most stocks on the NYSE have already reversed their trends, and are heading towards their 52 Week Lows. The reverse situation is sometimes apparent when the DJIA reaches it Bull Market Correction or Bear Market Bottom. This has made the NYSE’s 52 Wk H-L Ratio, one of the most reliable leading predictors of the DJIA’s future trend since 1949.  The Chart below is typical of the relationship between the DJIA and the NYSE’s 52 Wk H-L Ratio. This pattern has been constantly repeated for the past 61 years. The NYSE Ratio peaks early in the Bull Move, and then tapers off as the DJIA approaches it Terminal Zero of the Move.  1969-79 The Chart below shows the Stock Market from 1969-79. This was a bad time to be in the stock market. But on 11 January 1973, where the DJIA produced its last BEV Zero Point, until November 1982, Barron’s annual Round Table, with George Soros, carried the head line: “Not a Bear Among Them!” I think it’s accurate saying that none of these Bulls were watching the NYSE’s 52 Wk H-L Ratio below. Note how the NYSE’s 52Wk H-L Ratio declined from 18% in March 1971 to only 5% at the DJIA’s Terminal Zero of 11 January 1973. In the next two years, the DJIA fell into its first BEV -40% Bear Market since 1942. The 9th worst since 1885.  The 1973-74 Bear caught investors and money managers’ attention, but not the attention of the 1974 US Congress, and for good reason. .But by 1974, (36 years ago!) the shortcoming’s of Washington’s Social Security System was painfully evident. I’ve been through every issue of Barron’s since 1921 a couple of times, usually focusing on the data I was compiling from their statistics section. But every now and then, tedium would get the better of me, and I would take a quick look at an article from the time. My favorite on Social Security was in their 21 Sept 1936 issue; what a hard hitting article! Too bad no one with the necessary political influence has been listening to Barron’s for the past 7.5 decades. As what was true in 1936, is still true today. Past Articles on Social Security From Barron’s 1. 21-Sep-36Social Security spends money as fast as it comes in ...there are no reserves … accounting a fraud … etc! 2. 14-Sep-64Medicare Problems to Come 3. 5-Jul-71Social Security too Expensive 4. 2-Jan-77Social Security = Ponzi Scheme 5. 15-Sep-80End Social Security 6. 12-Jun-01Social Security "Not so secure" There was also an article, around 1973, predicting retirement problems for the college students of 1973, for the lack of action Congress has shown regarding Social Security. In the past 74 years, Barron’s has reported on the criminal malfeasants in the management of Social Security many more times than we see above. And as Barron’s noted in 1936 & 1977, the US Government has operated Social Security as a Ponzi Scheme from its inception. But if the , Congress will only need to convene public hearings, covered by CNBC, with select and friendly witnesses, with the intention of covering their rear ends from the public’s wrath. Congress will have fact-finding commissions, similar to Reagan’s 1981 Greenspan Commission that they hope will divert attention, and soon be forgotten. But maybe Social Security will be different, as its failure will result in lingering economic suffering for most Americans for decades to come. Have the victims of Madoff’s Ponzi Scheme forgotten yet? So in 1974, unlike October 2008 when the DJIA next crossed its BEV -40% line, Congress never convened public hearings as a response to the 1973-74 Bear Market. No doubt the Fed and Treasury Department communicated with Congress in an off-the record, unofficial manner, but there was no need to summon the Federal Reserve’s Chairman and the Secretary of the Treasury, in a public format, to account for themselves 36 years ago. As this is exactly Congress’s response to market crashes today, this tells us at how high a level the Government is now involved in today’s markets! But the DJIA’s 1973-74 BEV -40% Bear Market was non-political, as Congress had yet to legislate their tax deferred retirement accounts. 1979-2000 My next chart shows the DJIA’s relationship to the NYSE’s 52Wk H-L Ratio from 1979-2000, so we’re looking at the greatest Bull Market of the 20th Century. On 11 October 1982, two months after the start of the Great Bull, the Ratio hit a 61 year high of +31.90%. This was the high I expected our DJIA’s March 2009 rebound to break in Wk 105 (last October). Note also, during the 1980’s, the Ratio on three occasions’ peaked over +20%. Like the NYSE’s Ratio’s bounce off the DJIA’s 1974 BEV -40% low, this is a sure sign of a strong market. Students of the late 1990’s stock market remember the then famous, but now largely forgotten “Greenspan Puts.” We can see how effective Doctor Greenspan was with his “Injections” from 1997 to 2000.  The Chart Below provides a better look at this strange period of market history.  We can never know for sure, but observing the 61 year history of the NYSE’s 52Wk H-L Ratio, the DJIA appeared ready for a major decline in 1998. It almost reached its BEV -20% Line. But I remember watching CNBC at the time, and everyone just knew the Greenspan Fed was going to come in and turn the market around, and it did. In 2000, Doctor Greenspan, thanks to his “Injections”, may have been the most famous person in the world, as he was making it possible for everyone to retire wealthy. However, starting in 1998, the decades long pattern between the DJIA and the NYSE’s 52Wk H-L Ratio deviated. After the 1998, 20% decline, the Ratio could only rise to 5% as the DJIA continued to rise for the next 2.5 years.Take a moment and examine the NYSE Ratio from 2000 to 2002 above. From the DJIA’s Terminal Zero, to its 2002’s BEV -37% bottom, the NYSE saw more 52Wk highs than lows for these two years of a major decline in the DJIA. And look at the pathetic number of NYSE 52 Wk Lows during the termination of the 2000-02 Bear. Something unusual happened here! The best explanation I can come up with is that Doctor Greenspan was medicating the Stock Market to keep Congress off his back, and to maintain his international “Rock Star” Status. Looking at the data for the past 10 Years, we see the DJIA’s relationship with the NYSE’s 52Wk H-L Ratio returning to normal since the 2002 bottom.  Unlike the DJIA’s BEV -37% bottom of 2002, the declines of October 2008 & March 2009 had a huge effect on the NYSE’s 52Wk H-L Ratio. After the DJIA’s October 2007 Terminal Zero, positive NYSE H-L Ratio data points all but disappeared, as the Ratio sank to 61-Year Lows on 10 October 2008. The inability of the NYSE’s H-L Ratio to turn positive by December of 2008, provided a clear warning that Mr Bear was not finished with your mutual fund. In March 2009 he took the DJIA below its BEV -50% Line. We see Positive Ratio Data Points just 10 Days after the March 09, BEV-53% Bottom. The market had turned. But in the next eleven months, the Ratio never came close to +20% since this horrible bottom. Note how unenthusiastically the NYSE Ratio’s rebounded after its March’s lows; the 2003 rebound in 52Wk Highs was stronger. This worries me. My next chart displays only the negative NYSE’s 52 Week Highs – Lows Ratio data points. In other words, I stripped off all the Positive days from the plot below, from the Start of the October 2007 (the Bull Market top) to February 2010. So we’re looking at the last 2.5 years of the Red Plot above. Currently the NYSE Ratio sits around the +1% line, but how long will it stay there? With the lackadaisical market we’ve seen since October, we should have seen a few days where the NYSE’s 52 Wk H-L Ratio was visibly negative on this plot. But the chart below tells us that since 23 March 2009, we have not.  There have been 236 Trading days since 13 March, of those days; 25 have produced negative NYSE Ratios data points. However we don’t see them in the plot above, as the largest negative was only -0.51%, so they’re invisible in the chart above. Also, since 09 July 2009 (seven months), there have been only 3 days where NYSE Ratio went negative. Two days in July (9th & 10th), and the third on 05 February. This is all very strange, especially since we’ve seen an -8% correction in the DJIA from 19 January to 08 February. We should have seen some evidence of that 8% correction in the plot above! Well, maybe this is just the pause that refreshes. It’s possible that a fresh wave of NYSE 52 Wk Highs are just around the corner as the DJIA begins to surge ever closer to its October 2007 highs. But with a President and Congress intent upon raising taxes to punish the rich, increasing government regulations to keep business in-line with “Policy”, and nationalizing any private asset they can find an excuse to snatch up, this seems unlikely. And China is making angry noises again. This time they may do more than just threaten to sell a good portion of their 1 Trillion Dollar US Treasury Bonds. That would raise interest rates, and rising rates are never good for financial assets. Here are two articles from Zero Hedge on this subject: Market History suggests that when a market refuses to go up, there is usually a reason, unknown except to a chosen few, that will make it go down in the future. The same logic can be applied to the NYSE’s 52Wk H-L Ratio. All and all, I believe 2010 presents us with a Better than House Odds situation of Mr Bear coming back, and taking the DJIA down to new lows – and then some! These charts on our current NYSE’s 52 Wk H-L Ratio need to be followed weekly, so I think I’ll include them in all future Bear Market Reports. Foreign Prime-Rates Have not Moved for Months I keep a simple average of the Foreign Prime Rates Barron’s has published since 1987.The Chart Below shows the average in both percentage terms and in a BEV Format.  The Blue Plot displays the Average in interest rate terms, however in 1989, as this series peaked at 11.5%, the Blue Plot has been overlaid by the BEV Plot. Remember, between a Terminal Zero, in this case the 1989’s 11.5% data point, and the next new all-time high, which we haven’t seen - yet, the BEV Plot precisely matches its base data series plot. In this case, the International Average Prime Rate I’ve been compiling from Barron’s. Note how the Red BEV Plot was glued on its BEV Zero Line from 1987 to 1989. That is to be expected as the Blue interest rate Plot kept making new all-time highs, and so the BEV Plot was continuously producing new BEV Zero data points. But since 1989, this chart offers the best of both worlds. We can see how far this Average has declined in interest rate terms by looking at the Left Scale, or see how far it has declined in BEV Points by looking at the Right Scale. Well enough about my BEV Charting! These Nation’s “Policy Makers” have nailed their prime rates to the floor boards for the past 39 Weeks. That tells me that they know they’ve lowered their Interest Rate to low, and about 39 Weeks ago (last May), they had their first indications of credit problems in places like Greece. So we see their Prime Rates just sit there as they’re terrified of deflating what they’ve inflated. The paper money men, who use to believe they could manage interest rates better than the market did under the Gold Standard, are standing at ground zero for the coming Bear’s Weapons of Mass Money Destruction. We will all be hit from the fall-out. You know, first we buy these Economists new shoes, and then we send them to college, and this is what they do to us. It’s time we ask these guys for our shoes back, and give them the boot! 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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