by Kimble Charting Solutions
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Tuesday, August 9, 2011
Long Term DJIA - Inflation Adjusted
by Fred's Intelligent Bear Site
Note the following about this chart:
- Dividends are excluded, so the chart only shows capital gains. The dividend yield of the S&P is running near 2%. (IndexArb.com)
- The inflation rate used on the chart is the government CPI number until 1993. Beginning 1994, I have added 2.7% per year to the government CPI number. This should better reflect the true inflation rate since the government number has not been accurate since around 1993. The added 2.7% corrects the geometric weighting formula used by the government to calculate CPI. The government does other adjustments that constitute another 4% reduction in the inflation figure, but I will assume those adjustments are valid. For more information on inflation, see the following articles: http://www.shadowstats.com/article/56 , http://www.safehaven.com/article-8848.htm
On the chart, the long term trend line in green shows an average return of 1.9% per year. If you factor in the long term 15% capital gains tax, the return is even worse. Since capital gains tax is not adjusted for inflation, the average tax must be based on the 5.4% trend of the non inflation adjusted chart, so 15% of 5.4% is 0.8% tax. Therefore, your 1.9% return is reduced to 1.1% after taxes. The Wall Street shills do not want you to know that this meager amount of capital gains is all you should logically expect from a long term general stock market investment.
The Dow has historically moved within well defined channel. The boundaries of the channel have been touched only 4 times since 1910. The top of the channel was last touched in 2000.
They say "the market always goes up in the long term," but at an average return of 1.9% per year, it can take many years to recover from a large decline. The peak in 1929 was not ultimately exceeded until 1992. When the market touched the bottom of the channel in 1982, its value was about equal to the value at the beginning of the chart in 1910.
Most bubbles eventually correct back to where they began. The bubble that began in 1922 gave back all its gains by 1933, and the bull market that started in 1949 gave back almost everything by 1982. The bubble that ended in 2000 has already corrected back to the 1995 level. The correction could easily continue to the 1988 level of 5000. If the Dow hits the bottom of the channel, it would go to about 4000. Keep in mind that these are values in today's Dollars, so the future values after inflation will be higher.
The chart below compares the current inflation adjusted stock chart to a chart of the period from 1964 to 1984 adjusted for inflation and adjusted so the peak in 1966 matches the peak in 2000. Historical comparison charts are generally useless, but the similarity here is at least interesting. The current rally in the stock market may break this comparison. It is amazing what massive government spending and quantitative easing can do to boost the stock market.
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Potential? It is a Bear Market!
Only two days ago, I wrote that there is a “potential for a bear market”. Potential? Forgetaboutit. This is a bear market.
My analysis really has little to do with Monday’s price action which saw the major equity averages down over 6%. While the closes below key pivot points foretold possible trouble ahead, it is those other important charts that I warned about that are spelling “b-e-a-r- m-a-r-k-e-t”.
Figure 1 is a weekly chart of S&P Select Financial SPDR Fund (symbol: XLF), which is an ETF representing the all important banking sector. I first warned about XLF on July 19 and then again on August 3. More importantly, a close below 3 key pivot points (those red dots on the price chart in figure 1) is bearish. Period. (And when I mean period, I am talking about a pattern or breakdown that has been tested across multiple assets and market periods.) 13.97 is now resistance.
Figure 1. XLF/ weekly
Figure 2 is a monthly chart of the i-Shares MSCI Emerging Market Index Fund (symbol: EEM). I showed this chart of June 24 and stated: “This is the first real technical warning sign that the market is on the verge of breaking down and the economy is on the verge of a recession. “ The cluster of negative divergence bars (pink labeled bars) is a reliable sign of a market top, which is seen across asset classes and time frames.
Figure 2. EEM/ monthly
Figure 3 is a weekly chart of the i-Shares FTSE China 25, which I highlighted on July 18. Here we have a close below 3 key pivot points, and there is little support below.
Figure 3. FXI/weekly
When looking at these 3 charts – banking, emerging markets, and China – it is hard to make the case that we are NOT in a bear market already.
And to all those readers with IQ's greater than 145, let me remind you what I wrote on Sunday: "This isn’t the time to hope. This is the time to take some action to protect yourself and your money."
What is Next for the S&P 500
by JW Jones
Three weeks ago I began urging members of my service to reduce risk and raise cash. I pounded the table incessantly for the past two weeks to continue to raise cash and reduce risk. I have not issued a trade alert to members in over 3 weeks, but by acknowledging risk ahead of the debt ceiling debate I was able to sidestep one of the worst weeks in U.S. financial markets since 2008.
Armed with cash and my emotional capital intact, I am going to be able to take advantage of price action in coming days and weeks. I am expecting a bounce in the near term, but the downgrade of U.S. debt on Friday by the S&P rating agency could have a dramatic impact at the open on Monday morning. I intend to remain in cash until the news is digested by the marketplace.
My first public warnings about a potential top came back on July 8 when I posited an article which illustrated the bullish and bearish position of the market at that time ahead of the debt ceiling debate in Washington. The following excerpt and chart was taken directly from that article:
This particular head and shoulders pattern is not getting a lot of recognition in the media which lends it a bit more credence. If we start hearing about this pattern on CNBC or FOX Business I will expect the pattern to fail. Call me a contrarian, but in the past when major television personalities are constantly talking about chart patterns they almost always fail.
Besides just technical data points, continued worries stemming from the European sovereign debt crisis helps the bear’s case further. In the event of a major default in the Eurozone, the implications to the financial sector of the U.S. economy will come into focus. It is widely expected that a banking crisis in Europe could spread to some degree to the large money center banks in the United States. Clearly this would have negative implications on price action in domestic equity markets.
In addition to the European debt crisis, the United States government has a looming credit crisis of its own. With politicians currently arguing over whether to raise the debt ceiling, bears point out that if the United States defaulted on its debt (unlikely) the implications would be severe. However, many traders and economists point out that the end of QE II may have dramatic implications on price action as well. The current uncertainty around the world lends itself in favor of the bears.”
Clearly the head and shoulders pattern has played out and barring a breakout over the 2011 highs on the S&P 500, an intermediate to long term top has been carved out. In fact, I believe we are likely entering the next phase of the ongoing bear market that started back in 2000.
Panic level selling pressure has been registered and the S&P 500 is in an extremely oversold condition as is evident by the charts below:
Stocks Above 200 Period Moving Average
The charts above illustrate that we are extremely oversold in the intermediate term time frame and that we are nearing extreme oversold conditions in the longer term time frame as well. I am expecting a bottom to form in the next few weeks which should offer outstanding risk / reward long entries for short to intermediate term trades.
Another indicator that is showing some extreme fear in the marketplace is the Volatility Index (VIX). The VIX has traded in a choppy pattern for quite some time before finally pushing higher the past few weeks.
Almost every indicator that I monitor is screaming that the current market is extremely oversold and fear levels are running at or near 2011 highs. When the masses are fearful and the S&P 500 is this oversold, I want to be looking for opportunities to get long risk assets.
The weekly chart below illustrates the key support levels which could hold up prices and also future targets for the likely reflex rally:
Once a bottom has been carved out, the use of Fibonacci Retracement and/or Extension analysis will help me determine more precise resistance levels. We could see further selling pressure this week before we see a pronounced bottom carved out. With volatility at these levels price action will be pretty wild. I intend to use smaller position sizes with wider stops to start layering into exposure as opportunities present themselves.
By sitting on the sidelines during this downside move, members of my service are ready to take advantage of lower prices to get long. Now the interesting part will be how Mr. Market handles the downgrade of U.S. debt on Monday . . .
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