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Brett Owens began studying commodities closely in 2004, and opened a futures trading account with $2,000 in 2005. He promptly bought a sugar contract, and has been fascinated with the commodity bull market ever since. Like many commodity traders, he dreams of pyramiding his gains into great... More
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  • Comparing the 2008-09 Stock Market With the Great Depression's 1st Leg Down
     This epic stock market rally has done exactly what it was supposed to do - it's retraced about half of the losses from the previous crash. It's got folks feeling comfortable again - while maybe not outright enthusiastic about things, they now believe the carpet is not going to be pulled out from under them.
     
    That's exactly what buying stocks now is a more dangerous proposition than it has been anytime this year thus far.
     
    So can big rallies, following big crashes, be sustained?
     
    I did a little bit of digging through historical data, to see if there was a case where a severe crash was isolated - that is, it retraced back up, and there was nothing more to it. Typically, crashes occur in three legs down (five "waves" in total, counting two countertrend bounces) - at least this was my belief, which I wanted to double check.
     
    I'm going to compare this market crash/rally with the crash/rally from 1929/1930, and only that, because I was not able to find another market crash, and subsequent rally, as severe as what we've experience over the past year or two (severe being 50%). I wish we had another example to look at, but I wasn't able to find one since 1900 in the US that met this criteria!
     
    The Great Depression's first leg down, and the 2008-09 markets, are in rarified air that meets these stomach churning guidelines:
    1. A ~50% stock market drop
    2. Followed by a ~50% stock market rally
    Astute traders and investors, no doubt of which our readers here are, know full well that 50% down, followed by 50% up, does not get you back to break even!
     
    First, let's take a look at the first leg down of the Great Depression, using the Dow Jones Industrial Average (DJIA) as our measuring stick.
     
    Source: StockCharts.com

    Date DJIA % Change # Days
    09/03/1929 381.17
    11/13/1929 198.69 -48% 71
    04/17/1930 294.07 +48% 155

    You have to love the symmetry of the 1930 rally! 48% down, then 48% up...before turning back down. Eventually the DJIA bottomed in 1932 at 41 - shedding an awesome 80% from the Dow's 1929 high.
     
    Now, let's check out the newly minted Crash of 2008:

     
    Source: StockCharts.com

    Date DJIA % Change # Days
    10/09/2007 14164
    03/10/2009 6547 -54% 518
    10/19/2009 10092 +54% 223
     

    Oh the symmetry is fantastic! This time we retraced 54%, after giving up 54% initially - again roughly 50%.
     
    Now, the million dollar question is: "Where to next?"
     
    It's hard to make an argument for stocks continuing their rally from here. They are expensive by all traditional valuation measures, the economic recovery is not robust (maybe even non-existent), and until proven otherwise, this rally has been nothing more than a standard retracement.
     
    The stock market doesn't just drop 50% for no good reason. Something more is usually amiss. Judging from the only recent historical analogy we have to use, caution is still the order of the day!
    Tags: SDS, UUP, SKF, great depression comparison, bear market rallies, technical analysis, fibonacci retracements
    Nov 09 01:01 pm | Link | Comment!
  • Are Markets Driven News? A Closer Look at This Old Wive's Tale
     With the markets at a potential inflection point (an inflection point down, in my humble opinion), I thought it'd be fun and instructive to revisit a topic we've noodled on a bit lately.
     
    Does News Actually Drive the Financial Markets?
    >
    It's common knowledge that increasing earnings drive stock prices - with the only caveat being that there's no evidence of this being true. A couple of weeks ago, we posted a short guest article that challenged this assumption, making the case that stock prices actually drive earnings, not the other way around.
     
    Since I'm becoming more and more sympathetic to this outlook of the markets driving the news, I thought it'd be a fun exercise to take a closer look at this hypothesis.
     
    To be as objective as possible, I conducted a few searches using the Google News search function, so that we could count up the number of stories that contained my search phrase. First up...
     
    Bear Market Rally

    Stories about the bear market rally have tapered off - it's a new bull market!
    (Source: Google News)

    How ironic that the number of news stories about a "Bear Market Rally" peaked in March...the month the rally was just beginning! Being a somewhat disparaging term, I find it fitting that the use of this phrase in news headlines has dissipated as the markets have rallied.
     
    I'd imagine the reason is this rally no longer viewed as a mere bear market rally, but a new bull market! Probably just in time for the markets to turn down once again.
     
    The grand prize goes to the Financial Post, for their March 5th article Talk of a 'bear market rally' may be premature. It sure was - by about 24 hours!
     
    Bond Vigilantes
     
    Why do interest rates rise and fall? It's a complex question - one that appears to be too complex for the news headlines to adequately explain!
     
    In June, the return of the "bond vigilantes" was a popular reason for soaring yields on long dated US government bonds. The bond markets were pissed, and ready to raise hell about soaring government deficits.
     
    The only problem about investing based on the "news" that the bond vigilantes had returned, ready to drive up yields further, is that your timing would have been exactly wrong.
     
    Yields topped along with this news, and both have quietly rode off into the sunset since.
     
    2009 news about the "Bond Vigilantes" peaked in June.
    (Source: Google News)
     

    Right along with yields
    (Source: Yahoo Finance)

    Dollar Reserve Currency

    Here's one near and dear to my heart - the overblown reporting of the dollar's reserve currency status being in imminent danger. You'll notice there was a low, steady hum of stories - up until March of this year, when the dollar topped out (for the time being).
     
    News of the dollar's demise really picked up AFTER it started to decline.
    Source: Google News

    Since then, the dollar has been declining, and stories of the dollar being replaced as the world's reserve currency have been all over the financial media. My favorite was a recent story in London's Independent entitled The Demise of the Dollar, which may have coincided with a significant bottom in the dollar index, which has rallied steadily since!
     
    Bottom line: Using the news to trade is a losing proposition...you'd be much better off using the charts to predict the news. The financial news media is a fantastic example of groupthink at it's best, or worst, depending on your perspective.
     
    You can always count on financial news stories to break after the market has already tipped it's hand!
     
    Tags: UUP, SDS, financial news, investor sentiment, leading indicators, bond vigilantes
    Nov 01 09:06 pm | Link | Comment!
  • Three Sanity Checks at this Key Inflation-Deflation Inflection Point
    I think we're at a key inflection point in the financial markets at this juncture. The direction that things head next could decide the winner, at least for the next few years, of the inflation vs. deflation battle.
     
    So I spent the morning revisiting and rereading many of my favorite arguments from both sides of the debate, and came up with three key metrics for us to revisit. 
     
    First, let me lay a little groundwork and list my preexisting assumptions:
    • My timeframe is defined as the next 3 years. After that, we may well see hyperinflation and/or a true crash in the dollar - but for the sake of this argument, I want to look at the next 3 years only (reason being, if you misplay the next 3 years, you could be toast anyway!)
    • I accept the Fed's ability to "print" money.
    • I also believe that inflation is preferable to the government, and given the choice between inflation and deflation, they will inflate (or at least attempt to) every time. Also, massive government deficits certainly make inflation all the more tempting.
    When revisiting my favorite arguments for both sides, I noticed that three central themes were the focus of much of the debate:
    1. Inflation will occur when the banks start lending again.
    2. The demand for money, or prevailing social mood, will determine if consumers trade in their cash for anything (leading to inflation), or if they hoard their cash to pay down debt (leading to debt deflation.
    3. Stock prices will reflect a goosing of the money supply.
    Checkpoint 1: Inflation requires an increase in bank lending
     
    Thanks to the wonders of our fractional reserve banking system, where banks are only required to have a fraction of the money they lend out, bank lending has a tremendous multiplier effect on the money supply. During times of expanding credit (2002 - 2007 most recently), this effect was felt in full force, as loose credit led to a bubble in nearly all asset markets.
     
    Since the credit crisis began, banks have significantly curtailed their lending. While the Federal government has boosted the balance sheets of the big banks, there has not been a proportionate growth in loans (see chart below).
     
    Herein lies the rub - bank lending has not picked up, at least yet. Check out the graph below, courtesy of the St. Louis Fed: 
     
     

    Conclusion:     As long as bank lending continues to decline, it's difficult to make an argument for inflation. However, if and when this chart begins ticking up once again, that will be a strong indicator that inflation may be on the way.
     
    Checkpoint 2: The demand for money and prevailing social mood

    From World War II until 2007, the world was a place of expanding credit. This growth was driven by consumer demand for credit, which was particularly strong in the US. That is the key point - that the growth was driven by from the demand side, which in turn, resulted in increasing supply. 
     
    While many blame Alan Greenspan for creating a housing bubble this decade with artificially low interest rates, it's important to consider the role that consumers played in that spectacle. Greenspan was only giving the populace what it wanted - more credit. He may have spiked the punch bowl, but only at the insistence of the drunken party goers!
     
    Today, with mortgage rates still near historic lows, we have no housing bubble any longer. In fact, we have a plummeting housing market. Why?
     
    Because there's no demand for credit. Consumers are choking on debt - they are screaming "No Mas!"
     
    Can the Fed inflate the asset markets one more time? They are trying like hell, but they'll only be successful if the social mood in the United States permits it.
     
    One of the major reasons Japan was never able to reignite another bubble after 1989 is that the mood of consumers permanently shifted. The demand for money increased - consumers wanted to hoard it. They did not want to speculate, or trade it in for assets.
     
    Did the social mood of the US permanently change in 2007?
     
    One tea leaf worth paying attention to is the demographics card. By 2007, the US had some noteworthy demographic parallels with Japan of 1989 (ie. we're getting old). Though we are not "as screwed" as Japan in terms of demographics, thanks to immigration and somewhat higher birth rates, we've peaked demographically as a country, at least until further notice.
     
    Conclusion: Demand for money, and social mood, are admittedly challenging to measure in an objective manner. There may have been a permanent shift in 2007 - if so, the Fed may find that, like Japan, it's "pushing on a string" in terms of trying to change consumer behavior and attitudes towards debt.
     
    Checkpoint 3: Monetary goosing will show up in stocks, especially financials, first


    According to Milton Friedman, the script for inflation roughly goes like this:
    1. Increase the money supply
    2. The new money goes into stocks first, increasing stock prices
    3. Then economic activity increases (a false boom)
    4. Then the Consumer Price Index (CPI) rises
    Sure appears like the script is playing out to a tee. With regards to stocks, we've seen that financial stocks have been the strongest performers, which you'd probably expect in an inflationary boomlet.

    But - this market rally has, thus far, only qualified itself as a stellar bear market bounce. We are still in typical retracement territory. Bounces usually retrace roughly half of their losses - often even more. The 2009 bounce is currently eerily similar to the 1930 bounce in terms of magnitude.

    Conclusion: The jury is still out on what has actually driven this stock market rally. We could be at an important inflection point. If the market continues to head higher, the case that it's being driven by inflation will strengthen. If it makes new highs, that would probably seal it. On the flip side, if the market turns down from here, then all we saw this summer and autumn was a classic bear market bounce.

    Bottom Line: The coming months will be very interesting, and hopefully quite insightful, in terms of illuminating which side is winning the inflation/deflation battle. It's too close to call just yet in my opinion, as both scripts have been fulfilled thus far. But we could be near a fork in the road!
    Tags: inflation, deflation
    Oct 25 01:58 pm | Link | Comment!
  • Using the Wall Street Journal to Gauge Investor Sentiment
    I thought it’d be fun to peruse the Wall Street Journal to see if we could glean some insights into current investor sentiment. Mainstream business publications are famous for (unintentionally) signaling tops and bottoms in markets – but is this really the case, or more of an old wives tale than truth?
     
    I couldn’t think of a better publication to test out than the Wall Street Journal. Those who believe they’re getting an inside scoop by reading the WSJ are amusingly naïve about their “inside source,” which is read by millions of other investors each morning. Even pre-Murdoch, the Journal wasn’t hiding any investment secrets. These days, it has the added bonus of catering to the masses – combined with its wide reach and coverage, what a perfect match!
    So please join me, as I flip through the pages (web pages, of course) in this week’s Journal, in an effort to gain an edge – by taking the other side of the trade!
     
    Further Evidence the Dollar Has Bottomed
     
    From the front page of today’s Online Edition, we see a story entitled:
     
    Small Investors, Big Bets on Currencies.
     
    Oh my. The piece begins:
     
    The dollar is zigzagging, falling below the 90 yen mark Friday and testing the depths it plumbed against the euro a year ago. That kind of action is music to the ears of investors such as Ray Firetag.
    As most of America slept on a recent Monday night, Mr. Firetag was in front of his computer in Elk Grove, Calif., wagering on the Australian dollar.
    For those of you not familiar with Elk Grove, please allow me to fill you in. It’s a (somewhat lower) middle class suburb about 15 minutes south of Sacramento. From 2002 until about 2006, it was regarded as an “up and coming” neighborhood, where many first-time home buyers in the Sacamento flocked to buy homes that were relatively cheap.
    Three years or so after the top of the housing bubble, an astounding number of homes in the town sit empty – either officially foreclosed, or unofficially abandoned – while prices languish 40-50% off their highs.
    You should always “short” Elk Grove – always. When their residents are buying homes, you should be selling. When they are trading the Australian dollar in their pajamas, you should probably be backing up the truck to go short!
    When small investors are on the front page of the Wall Street Journal trading currencies, you’ve gotta think we’re probably in for a massive rally in the buck.
     
    And Gold is Topping Out
    Gold was down this week, settling once again below the $1,000. Thus my search for Gold related stories was initially disappointing, until I came across this great headline:
    India’s ETF Investors Make Up for Missing Gold Buyers
     
    Oh boy – this is going to be good!
    MUMBAI -- Record prices have forced many of India's traditional gold-jewelry buyers out of the market in recent months, but a new source of demand is on the rise -- investors looking for the safety and convenience of exchange-traded funds backed by gold.
    While India continues to be a price-sensitive market, with every rally hitting demand, the rising popularity of ETFs indicates that the Indian market could ...
    I can’t read beyond the “…” because I let my WSJ subscription expire a few weeks ago – but that’s OK, it’s really not necessary.
    It seems like we’re hearing that India, which traditionally bought gold hand over fist this time of year to, surprising, actually use as jewelry. Now they can no longer afford to buy it – at least for its traditional use.
    So they’re speculating on the price instead – and best of all, via ETF’s that take long-only positions!
    This is classic stuff! I’m downright giddy right now – I thought of this WSJ concept for a column on my drive to the coffee shop, with no idea that we’d be able to find such fantastic sources.
    OK well we can’t just end with two. We need one more to close out strong. We had three wishes…thus far, we’ve used two…we know the dollar is set to rally, and gold is in some trouble.
    What’s one more topic we can ask the Swami WSJ to look into its crystal ball and forecast? I got it…
     
    Emerging Markets are Toast
    Alright, I am typing “recession” into the search box…let’s see what comes up…OK here we go! Another nice short candidate:
    “Emerging” Stock Markets Are Looking Better
    The first paragraph says it all:
    On the heels of one of the worst years in stock-market history, some experts say investors should shift more money into a surprising area: emerging markets.
    Good to know that if you do shift more money into emerging markets, you’ll probably be one of the last investors to the party! This article should sweep in the 11th hour bulls just in time for the rally to die.
    On the heels of 50-100% gains in many emerging markets, I can’t see how this could end well for longs. Fortunately we’ve got the WSJ ringing the bell for us here at the top!
    When the global markets turn down again, emerging markets are likely to get slaughtered. What great short candidates!
     
    Three Solid Trade Ideas
    Well kids, here’s what we’ve learned from reading the Journal this week:
    1. Bet on the buck
    2. Short gold – or at least stay away from it
    3. Short the heck out of emerging markets
    We’ll check on these trades in a few months to see how they worked out. In the meantime, can the last dollar bull out the door please turn out the lights! 
    Tags: UUP, GLD, EEG, dollar, currencies, gold, emerging markets
    Sep 26 06:11 pm | Link | 1 Comment
  • It's Time to Go Long the Buck
    Three weeks ago, we discussed the possibility the the dollar was bottoming and poised for a major rally.
     
    My reasoning was that:
    • Sentiment was overwhelmingly negative on the buck. I noticed that even traditional contrarian investment sources appeared to be piling on. When there's nobody left to sell, that's usually a good sign that the bottom is in.
    • We still appear to be in a period of debt deflation, which the Federal Reserve is basically helpless in preventing, because we have a credit based system. When credit goes away, it's gone forever. You can't print credit.
    • The Japanese Central Bank, despite its best efforts, was ultimately unable to produce inflation since their credit bubble popped in 1990. And if the old joke is that their central bank was so incompetent that it couldn't destroy its own currency, I didn't know why ours would be any different.
    What's happened in the last few weeks?
     
    Pulling up the chart, the dollar appears to be forming a bottom. The 77 mark has held:
     
    Is the buck bottoming?
    (Source: Barchart.com)
     
    The equity and commodity markets look toppy. Investor sentiment is overwhelmingly bullish. The AAII index, a very reliable contrarian indicator, is at levels not seen since November 2007.
     
    Furthermore, China, the posterchild of this rally, has turned down - the Shanghai Index rolled over a few weeks ago...along with several key commodities. Gold is yet to break $1,000 decisively, despite the widespread belief that the Fed has successfully created inflation.
     
    Add it all up, and we've got some very bearish pieces staring us in the face. And if we do see another massive deflationary wave down...is there any reason to believe it will behave differently than the last?
     
    I don't think so. So I'm taking some cues from the markets, and positioning myself in the only asset that held up and even rallied the last time around - the US dollar.

    Tags: UUP, dollar index, currency trading
    Aug 30 07:29 pm | Link | Comment!
  • Sugar Prices Hit 28-Year High - How's Jim Rogers Playing It?
    The severe supply/demand imbalance in sugar fundamentals has propelled sugar prices to a 28-year high. The big driver of the rally has been India - which, as we reported earlier this year, has turned into a net importer of sugar.
     
    As you can see below, sugar prices are starting to go "parabolic." Commodity rallies typically end with a big blow off and stories like this one by the mainstream financial media, questioning where the world will ever find enough sugar to meet demand.
    More »
    Tags: DBA, sugar, investing in agriculture, jim rogers august 2009
    Aug 10 05:25 pm | Link | Comment!
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