Friday, October 30, 2009

This Sure Looks Like the Start of a Second Bear Down Leg

The Dow Jones Industrial Average dropped today more than 250 points, or 2.5 percent, closing near 9,710. The Nasdaq was down 2.5 percent and the S&P 500 lost 2.6 percent.

Financials, materials and energy sectors were all down more than 3 percent.

All 30 Dow components were lower, led by Bank of America -1.15 (-7.31%), JPMorgan -2.58 (-5.82%) and Alcoa -0.58 (-4.46%).

On an anecdotal basis, what really signals to me that this may be the start of a second down leg in the Bear Market is the failure of the market to follow through to on yesterday's rally. Thursday's action certainly looks like the "One Day Wonders" that I wrote about yesterday morning before the markets opened. I had no idea that yesterday was going to be that day, but the down action of earlier days certainly caused me to expect a "One Day Wonder" at some point. There will be others.

The financial news cheerleaders, dressed for Halloween as serious reporters and analysts, are out reporting that the market is essentially flat for the month of October, but there is no magic to the October 1 date. The key is that the long term factors surrounding the money supply and the overall economy are negative, at the same time, from a more technical stock market posture, the stock market looks like Roman Polanski did after Swiss authorities told him that there would be a slight delay in his picking up the film award he was there to get.

I should note that the dollar is continuing strong. Sharp commentators are picking up that we are in a period of down stock market and up dollar action. They don't really know why, but they know it is happening. For the record, the up dollar, down stock market (and yes down gold) is because of the lack of Fed money printing which is causing increasing demand for dollars in terms of foreign exchange, stocks and hard assets. It's about basic supply and demand.

The one trend that I believe will show a reversal is the current relatively strong bond market. I see it as a knee jerk reaction to the down market. At some point, though, the continuing Treasury supply of new debt will overwhelm the new debt. It's very dangerous to be long bonds right now.


  1. I'm confused. Are you trying to say that the absolutely huge increase in printed money (I don't remember the exact percent, but Bob Murphy posted a graph that looked like _|) that just stopped 6 months ago (or whatever) has not only entirely made its way into the real economy, but also that already there is a shortage?

  2. When the second dip begins, we watch for Bernanke to start printing money again. Once that starts, how quickly can we expect the dollar to start weakening?

  3. Anon,

    Not sure which chart you're talking about, but Wenzel likes the monetary aggregate M2. And yes it shot way up at the end of 2008, but at this point it's not higher than you would have expected from its 5-year-trend.

    And if you're referring to the ginormous increases in reserves, then no those haven't gotten into the hands of the general public yet. The banks are sitting on them. So for me, that's why I think long-term price inflation is inevitable, because I don't see how Bernanke is going to deal with those. If Ron Paul were president and eliminated the IRS, then maybe things really would naturally unwind as the economy boomed and it would be fine. But if the economy is sluggish for the next 10 years (as I think it will be), I don't see how Bernanke eliminates the threat of those $850 billion in excess reserves.

  4. Murphy/Wenzel. What a great team. Long-term I agree with Murphy although its very difficult to know for sure how or when the excess bank reserves will enter the economy. Short-term I generally agree with Wenzel but not sure this is the beginning of another Bear market. The sharp decline in the equity indexes on higher volume in the past week hasn't happened since 6/15/09 and 6/16/09. After that the market indexes declined 7% to 8% from peak to trough in about 6 weeks. Perhaps this time we will see a decline of 8% to 12% but a Bear market would technically require a drop of 20% or more. Seems unlikely but possible.

    We will have to stay tuned to the Wenzel/Murphy prognostications.