The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Wednesday, April 15th, 2009.
Picking things up from the other day, and in an effort to continue being successful investors, we are here today to check the analog comparisons that have proven invaluable in aiding us identify pattern and timing elements in present day stock market movements. You will remember from our discussion on such things Monday that developing an appropriate / realistic 'big picture' view and then continuing to monitoring / model ongoing progress / change is key to becoming a successful investor, so here we are continuing this process. And I am happy to report history continues to be our friend in this regard, in knowing where to look, such that pattern and timing elements overlaid with the 1937 / 1938 echo-bubble sequence in the states and post bubble Nikki are running incredibly close matches.
In terms of the central message one should take away from this exercise, and to refine our big picture view with these sound bites, it appears our hypothesis equities are currently enthralled in a speculator induced seasonal inversion that should take stocks considerably higher within this specified timeframe remains in tact, that being the March to November window. Moreover, and again, an opinion shaped by the montage of chart panels pictured below, it appears attempting to trade within the larger move higher might prove just about impossible, as many are now discovering, because the squeeze could be unrelenting. Such an outcome would of course be consistent with the typical nature of cyclical / bear market rallies, rallies based in manic speculator behavior and unadulterated greed.
That is to say, the secular trend remains lower for stocks, irrespective of all the inflation talk that will be apparent again this fall if stocks continue to zoom higher. And while we may need to take a temporary brake in the bullish price action soon if the chart panel comparing the 1930's Dow to the S&P 500 (SPX) of today pictured directly below has any predictive value, in terms of the larger move, this would still be a blip on the screen, a blip that could last a few months in the here and now however. So, one should be mentally prepared for such an outcome, not that I am predicting this of course. (See Figure 1)
As you can see above, if this were to occur, and we are short-term overbought so anything could happen, comparatively we would be at a similar point to that of the Dow at 4/ 22 /38, where a multi-month consolidation commenced. Of course if you look below, in bringing the post Nikki bubble crash pattern into view, and in realizing we are in the midst of the grandest speculation / inflation cycle ever, which has been noticeably accelerating since Nixon closed the gold window in '71, history also provides us with examples to support the hypothesis any pullback here will be relatively shallow and short lived. Again, this is why we school not attempting to trade this move higher, not as long as US index open interest put / call ratios continue to push higher, which happens to be the case. (See Figure 2)
And it should be noted they are climbing in spite of declining volume ratios, which as usual lead most traders to believe bullish speculation is rampant, which at a minimum, should sponsor a short-term correction in their view. So, this is why any pullback here could be quite shallow and fleeting, just like the post Nikki bubble pattern pictured both above and below. You may have noticed it's set against the Nasdaq as opposed to the SPX because over the entirety of the move this pattern match was better considering both declined over 75% in the end. Of course in terms of timing the move going forward, this does not matter, as you can see on the shorter duration panel picturing an SPX overlay presented below. Again, if this pattern takes precedence, then stocks will remain far more buoyant than most traders presently anticipate. (See Figure 3)
An argument could be raised that because all the above are trading day comparisons the validity of any such hypotheses is suspect given human emotional tendencies are prone to universal stress points in time, making calendar comparisons of a higher utility. That is to say, in mass manias, the subject population will tend to be bullish and bearish for similar, if not more exacting periods of time, where trading day comparisons can change sequential durations materially. In this respect it should be remembered that back in the 30's the stock market was open 6-days per week, not 5 like today. Nor was there so many holidays as well, meaning a great deal more calendar time must pass today in order to see the same number of trading days. (See Figure 4)
Based on the tight correlation seen above however, again, we have a picture that is suggestive of unrelenting gains moving forward, meaning no matter how you want to measure it, one should not get cute about trading in and out of long equity positions right now. Of course for gold bugs the immediate future still might prove frustrating, because not only do the bankers want to keep the metals contained, as postured in our last outing, speculators have gone bullish on the sector in thinking inflation expectations actually matter in this regard, which of course they do not given our faulty and fraudulent pricing mechanisms these days. So again, here, some patience may be required.
Unfortunately we cannot carry on past this point, as the remainder of this analysis is reserved for our subscribers. Of course if the above is the kind of analysis you are looking for this is easily remedied by visiting our continually improved web site to discover more about how our service can help you in not only this regard, but also in achieving your financial goals. For your information, our newly reconstructed site includes such improvements as automated subscriptions, improvements to trend identifying / professionally annotated charts, to the more detailed quote pages exclusively designed for independent investors who like to stay on top of things. Here, in addition to improving our advisory service, our aim is to also provide a resource center, one where you have access to well presented 'key' information concerning the markets we cover.
And if you have any questions, comments, or criticisms regarding the above, please feel free to drop us a line. We very much enjoy hearing from you on these matters.
Good investing all.