Macro Economic Trends and Risks
Market Timing

Related Links
Discussion Boards

By RodgerRafter
June 30, 2008

Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light. How are these posts selected? Click here to find out and nominate a post yourself!

Here we go again... The market is selling off, with the Dow hitting new lows. We've already gone through the drill a couple times this year. On the one hand, there are huge systemic problems, raging out of control, threatening to unravel the financial markets. On the other hand, we have the Federal Reserve and Federal Government apparently eager to prop the markets up by any means imaginable.

Which way do we go from here? Plenty of talking heads and investment gurus will tell you that you can't time the market. Technical Analysts have their signals that work some of the time, but also give false signals. I don't think it can't be done all the time, but over the years I've found some helpful signs to watch for with regard to when the market is likely to change direction and have developed some useful theories about how the market really works. They serve as my own, imperfect technical indicators...

Dow Jones Industrial Average

All TIme Highs - October, 2007
Intraday 14,147.30 October 1 (Monday)
Closing 14,087.55 October 1 (Monday)
Intraday 14,166.16 October 5 (Friday)
Closing 14,164.53 October 9 (Tuesday)
Intraday 14,279.96 October 11 (Thursday)

Closing 12,743.44 November 26 (Monday after Thanksgiving)
Intraday 12,707.26 November 26
Intraday 12,711.98 November 27

Closing 13,727.03 December 10 (Monday)
Intraday 13,850.92 December 11

Closing 12,099.30 January 18 (Friday)
Emergency, unscheduled 75bp rate cut 1/22 pre-market January 22.
Closing 11,971.19 January 22 (Tuesday after MLK holiday)
Intraday 11,508.74 January 22
Intraday 11,530.12 January 23

Closing 12,743.19 February 1 (Friday)
Intraday 12,841.88 February 1
Intraday 12,810.34 February 4

Closing 11,740.15 March 10 (Monday)
Fed negotiated acquisition of Bear Stearns by JP Morgan Chase, March 14.
Intraday 11,650.44 March 17 (Monday before Easter)
Fed begins accepting AAA Mortgage Backed Securities as collateral for $100+ billion in overnight loans to prop up prices, March 20.

Closing 13,058.20 May 2 (Friday)
Intraday 13,191.49 May 2
Intraday 13,105.75 May 5
Intraday 13,170.97 May 19

Low (so far)
Closing 11,346.51 June 27 (Friday, with 4th of July 1 week away)
Intraday 11,258.58 June 27

Weekends, and especially holiday weekends, often market market tops and bottoms. The theory being that friends and families get together and build upon the general feelings of fear or greed, leading to final rounds of selling at the bottom or buying at the top. Over a period of days or a few weeks Wall street buys into the selling or sells into the buying, then starts moving the market in the other direction, often by enlisting the help of the Fed.

In my view, movements in the Dow get far too much attention, and it is therefore a good target for manipulation. The hoopla that comes from breaking through a level like 14,000 or 13,000 usually is enough to sucker a bunch of retail investors in at the top. The Dow also tends to be propped up when the market is beginning to break down, and it tends to fall hardest at the end of a down cycle. The Dow didn't fall as much in the first few declines, but has fallen fastest this time. The S&P 500 and Russell 2K have not yet hit new lows:

S&P 500
1515.96 December 10
1310.50 January 22
1395.42 February 1
1273.37 March 10
1426.63 May 19
1278.38 June 27

Russell 2K
791.20 December 10
671.57 January 22
730.50 February 1
643.97 March 10
763.27 June 5
698.14 June 27$INDU,$RUT,$SPX

The Dow is heavily weighted in financial stocks, which probably should have taken the largest beating in the March selloff, but they are really taking big hits now, when the financial news has been pretty tame. Stocks that are really driving it down now are largely financial (AIG, AXP, BAC, C, JPM) but also industrial (BA, GE, GM, MMM, PFE, PG,T, UTX, one could argue that GE and GM are largely financial stocks). Broader economic troubles, like rising oil prices and job losses are getting more attention now which could be dragging on some of the industrials, but others remain near highs:

I look to the end of Q2 and the July 4th weekend as possible turning points for the market. We'll probably get some bad economic news this week with the jobs report among other reports. Meanwhile, Goldman Sachs' quarter ended in May, but they have a large stable of hedge funds they provide credit for that may be benefiting in some way by their recent downgrades of GM & C, their call for $150 oil and continued shorting of the market for mortgage backed securities. They seem to have a policy of spreading fear lately. With Paulson imbedded in the Cabinet, it's no wonder that GS has been right with their own bets on all the key market moves lately.

Speaking of MBS, the Fed tried to prop them up in March, to help shore up bank balance sheets, but they're starting to break down again based on the reality of the mortgage market:

Money Supply Growth is also stalling, with M2 only up at a 1.8% annualized rate over the past 2 months vs. 6.3% for the previous year.

The Yen has been suppressed lately to support the carry trade and inject dollars into US markets. It worked for awhile, but became ineffective in June:

None of that gets any real attention in the financial markets, but I believe that these factors point to the genuine weakness that has been driving down stock prices lately.

If the market is going to bottom, it will probably take another creative action by the Fed to bring buyers back in. After arranging currency swaps with European central banks in December, the big surprise rate cuts in January (to boost banking profitability), and support for MBS prices and expanded overnight lending in March (to pad bank balance sheets), I have to wonder what is next. If the economic news is bad enough, we could see a much more inflationary Fed, cutting rates further and/or reducing capital and reserve requirements.

There is so much bad news still to come, that I have trouble seeing it all hit in the next week or two, but that doesn't mean the market can't bottom soon. If the most important bankers (including GS, JPM & BAC in my opinion) can load themselves up with equities as the general public sells off, then the Fed can continue propping up the banks with a very inflationary set of policies.