Bear Market Race to the Bottom – Week 89 – The Baby Boomers go Double or Nothing

The 1929 & 2007 Bear Market Race to The Bottom Week 89 of 149

The Baby Boomers go Double or Nothing.
Huge Increase in NYSE Margin Debt

Mark J. Lundeen

26 June 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.

The Bull closed the week below the DJIA’s BEV -40% line. I’m referring to this market as a Bull as it had a nice bounce off its BEV -50% line. But this is only a courtesy. If we had a real Bull, the -40% line would be no problem for him. As it is, he seems stuck on it.

June saw the lowest daily volatility for well over a year. Considering that we saw the second worst DJIA Bear Market Low since 1885 only 4 months ago, I think June’s low volatility is an anomaly. Such an extreme low should have created huge upward pressure for the DJIA, and a reduction in daily volatility should have benefited the Bulls. But it did not. That is something we should keep in mind.

Forget last March’s lows below the BEV -50% line. Let’s pretend our market is one with little public or official expectations of it. We saw such a stock market from 1940 to 1971. As we can see in the chart below showing the DJIA Daily Volatility’s 200 Day M/A since 1900, from 1940 to 1971, the DJIA had the lowest daily volatility of the 20th Century.

Why would that be?

There was a generational hangover from the 1930s market. After the 1930’s, retail investors disappeared from Wall Street and didn’t come back until the Baby Boomers, born long after 1929, became old enough to become investors.

NYSE Margin Debt (see charts in next section) never recovered from its 1929 highs. The stock market was un-leveraged.

And maybe the most important factor was that the US Dollar still had a link to the Bretton Wood’s gold standard.Before 1971, the “policy makers” didn’t have the “liquidity” to move markets that they clearly have since 1971.

These are 3 circumstances not at play in our market! The public is up to their eyeballs in stocks. May & April of 2009 saw a huge increase in NYSE Margin Debt. And the US dollar is experiencing historic inflation, with much of this inflation targeted at the stock market.

So I have reasons to believe that June 2009’s low volatility is a freakish occurrence within a massive Bear Market. When volatility picks up again, we should see a drive downwards to new Bear Market lows in the DJIA. That is how I’m envisioning the market in the months to come.

But the market has a way of frustrating its prognosticators. Who knows exactly what the future holds? I don’t! So the market may still have a few good months ahead of it. If that is the case, I have no problem watching it rise up without me.

Below is my 8-Count & DJIA BEV Chart

Well June may have had abnormally low daily volatility for a Bear Market, but it couldn’t keep its 8-Count down to zero for more than 2 days.

Look at the chart above. From March 2006 to July 2007 there was only one 2% day! This 16 month period took the DJIA from 11,000 to 14,000. By following these 2% day (up or down 2% days, makes no difference to the Bear) we can see when the DJIA started to have problems; July 2007.

Seeing the 8-Count bumping up and down above its zero line is historically very Bearish. Seeing June of 2009 with four 2% days is not a good omen of things to come.

Daily Volatility Statistics for Wk 89

70% A-DMonday8339.01-2.35%2-75.43Tuesday8322.91-0.19%2-Wednesday8299.86-0.28%2-Thursday8472.40+2.08%2-Friday8438.39-0.40%2-

Historical Daily Volatility is < 1.0% Source Dow Jones DJIA Volatility Milestones MarketMoving Average Maximum ValueTrading Days Post BEV Terminal ZeroDate of Peak Val1929/3240 Day M/A: 3.81%77 Days13 Dec 19291929/32200 Day M/A: 2.50%803 Days17 May 19322007/0940 Day M/A: 3.83%284 Days21 Nov 20082007/09200 Day M/A: 2.12385 Days21 Apr 2009* 3 Types of Daily Volatility from 1900 to 2008 * Type 1: DJIA Close to Close Price Volatility's 200 Day Moving Average Oscillates Above and Below 0.5%. Type 2: DJIA Close to Close Price Volatility's 200 Day Moving Average Ranges Between 0.5% & 1.0%. Type 3: * Persistent Extreme Volatility * Consists of Two Parts Part 1: DJIA Close to Close Price Volatility's 200 Day Moving Average Rises Above 1.0% and Stays There for Over a One Year Period Part 2: DJIA Close to Close Price Volatility's 200 Day Moving Average Peaks Above 1.5%. The Lundeen Bear Box and Step Sum is below. For the past 24 trading days, the DJIA has completely ignored its Step Sum. Step Sum goes up or down, the DJIA mostly just hung around the BEV -40% line munching those green shoots. But then, the last 24 trading days were in the month June, and June had almost no daily volatility. But like Dr. Fudd said: “push hard enough & it will fall down.” I will be interesting to see which way the Step Sum will be pushing the DJIA this summer, up or down. The Step Sum is an indicator of market sentiment. When the underlying sentiment is bullish, the Step Sum will rise. 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. The Baby Boomers go Double or Nothing. Huge Increase in NYSE Margin Debt I didn't say I was going away, just that I was going to reduce my weekly work load. So when I do my weekly update of data from Barrons', and I see something interesting, I'll pass it along. I wrote about NYSE Margin Debt in March 2009. You may want to review this report. The NYSE published weekly Margin Debt (NYSE MD) numbers from the 1920s to 1965. Starting in 1966, they switched to a monthly basis. The change in data is clearly evident in the BEV Chart below. NYSE Margin Debt are loans made by brokerages to retail customers for the purpose of leveraging positions. If someone has $10,000, but wants to purchase $20,000 of a stock, they can do this with the use of margin debt. Buying your stocks with someone else's money can double gains, * and losses * in a hurry. The numbers for May 2009, NYSE MD's came out last week in Barron's. I found the increase in retail investor's leverage alarming. As with any financial series concerning debt or money, we can see how monetary inflation has increased since 1926. What's amazing about this chart is the abrupt U-Turn NYSE MD has taken since April 2009. NYSE MD has increased 79% from its lows of February! Has this ever happened before? Examining this data as published will not answer that question. So let's look at NYSE MD with a BEV Chart. The BEV Chart below uses the same data as above, but is processed by my BEV Formula: (Data Point / Last All-Time High)-1 Or as Written on my Excel Sheet =K4995/MAX(K$988:K4995)-1 New all-time highs are recorded as zeros in a BEV Chart. The last zero of a bull market is called the "Terminal Zero." All other data points are register as a negative percentage from their last all-time high. The BEV Chart strips away the decades of monetary inflation, uncovering much useful information. Above is a BEV Plot of every NYSE MD data point published in Barron's. Look at the extreme moves in NYSE MD from 1929-48. I take the 95% drop in August, 1932 very seriously. The 82% drop of 1940 I ignore. Why? Look at the next chart. The 95% drop in 1932 was the bottom of highly leveraged market of 1929. Where did the credit for these speculative loans of the Roaring 20s come from? The Federal Reserve. The extremes drops in MD, seen from 1932 to 1966, occurred in markets free from excessive leverage. I wish I could show exactly when the NYSE MD exceeded the 1929 highs, but the monthly values, post 1966, are incompatible with the weekly values. I don't know why this would be. Going back to my first chart on NYSE MD, it's all too obvious the stock market tops of 2000 & 2007 occurred with excessive leverage by retail investors via margin loans. Like 1929, spikes in NYSE MD of the past 10 years were red flags warning of Bear Markets to come. When these positions were liquidated, retail investors with levered positions suffered in the Bear Markets that followed. We in 2009 can see what happened three times before when Retail Investors assume significant leverage via NYSE MD. The spike in 1929 happened in isolation. This is not the case for the spike in 2000 which was followed with another, even more extreme spike in 2007. The difference between the two cases (1929 & 2000) can only be from differences in “economic policy” and communications technology targeted at consumers. Bears are seldom allowed the same access to the media as bulls. So it's not surprising to see retail investors returning again and again to the stock market. Knowing that Social Security has massive problems, what choice do people really have? As people are now older, it's logical that they would leverage their positions to make good their losses since 2007. I believe this reason is the cause for the massive increase in NYSE MD since February. We have to wait a month to see if NYSE MD for June also rises. But what happened in just the past few months tells me that investors believe the worst is over and are making a huge gamble in the stock market. There is something is terrible wrong happening in NYSE MD. In 1929, 2000 & 2007, too many people with no knowledge of the markets were purchasing stocks using margin debt. With the 20/20 vision of historical hindsight, we can see the red flags in the charts above. Now for the 4th time since 1926 we see NYSE MD rising perilously. A 79% increase in only a few months is a sign of great recklessness. When these positions are unwound, expect new lows for this Bear Market. A -60% DJIA Bear is even more likely now. I want no part of this market. If you want my opinion of what you should do, I'd think going cash is a good move right now. And by cash I mean $10 & $50 bills and T-Bills no longer than 6 months in duration. I like gold and silver coins and bars. I really like junk silver coins. You know; old coins that were used as money before they started minting coins from slugs of copper and other base metals in the 1960s. If you have children, and want to do something for your future grandchildren, go to the bank and buy a few boxes of pennies and nickels. Put them aside and forget about them for 20 years. When inflation picks up again in the next year of so, the Feds are going to stop minting pennies and nickels. Those still in circulation will be sent back to the mint and melted down. This is exactly what happened to the coinage of quarter, half and dollars coins minted in silver. I don't know how many old silver dollars and mercury dimes were melted down since 1964. I suspect most of those beautiful old coins did not survive the 1970s. Old coins of silver and gold are much rarer than people think and are well worthwhile to buy and hold for investment purposes. There is just something magical about a Morgan Silver Dollar with an 1879 mint date. Old coins of silver and gold are wonderful to look at and hold. They also make great gifts too! The $1 bills will be discontinued too. Crisp new $1 bills will one day become collector's items also. I'm just thinking ahead. Mark J Lundeen 26 June 2009 Dow Jones -40% Declines From 1885 to 2008 is the article that inspired 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.