Market Melt-Up Risks Melt Down?

As the bears melt away under a market which rises on shrinking volume and increasing incredulity, does the very slope of the rise presage a coming drop? This is the provocative argument of Michael Panzer in ZH yesterday: in the past 90 years, 78% of the time (11 out of 14 occasions) the 12-month rate-of-change has exceeded 40%, meaning a steep upwards slope, a "notable" correction follows, including the crash peaks in 1929, 1987 and 2000. 

Guy Lerner at The Technical Take put on the green eyeshade and looked inside this analysis. He found that it was too coarse a level to trade from. To give on example, when the twelve-month ROC hit 40% in 1929, the market still had nine months and 31% higher to go before crashing. 

In other words, the steep slope suggests a sharp correction ahead, but not how soon, and a lot of upside could be left on the table reacting too early. Instead, better to wait for the break down, pocket less in winning but winnings that might have been foregone. Given that we have yet to see a 10% decline, that provides a simple marker to exit. 

Comments

[Hank Wernicki]

Thoughts for Monday : Sell the News !

Enjoy the Holiday Weekend

Hank

[Mamma Boom Boom]

>Monday: Sell the News !<

NEWS FLASH

Yesterday, the Easter Bunny was killed by a hit-n-run driver, and mashed flat on hwy 357. It's very sad. Lots of little boys and girls ...*&(*&^%%)

(I can't go on)

[john]

I don't have any idea what it would take to get there, but the 1929 crash looks like it started at about the 50% level. Very interesting.

[GlennLoserNeely]

Ask DG.

DG knows everything because he follows the "Master" of all idiocy who is in total denial of how he has missed the last 500 points in the S&P... because he says that the markets have become oh-so unpredictable.

LMAO!

[Hockthefarm]

Hats off to the bulls who have been right all along. I don't think the bears like Dent and Prechter ever had a grasp of just how willing the "gubmint du jour" would be in terms of destroying future generations with massive handmedown debt or with fixed incomers just looking for a reasonable return on their savings.

While no real fan of Schiff, I thought he summarized it nicely:

April 01, 2010

The Fed's Last Hurrah
by Peter Schiff



During the 1990s, inflationary Federal Reserve policy fueled a tech stock bubble. When that bubble burst, the Fed inflated a larger one in real estate. Now that the real estate bubble has burst, the Fed is inflating the biggest bubble of them all - a bubble in government. While the earlier booms at least provided the illusion of prosperity and some fun while they lasted, the government bubble will cripple the economy and deliver widespread misery to the vast majority of Americans.

Of course, there will be winners in the government bubble, at least for a while. As was the case with the stock and real estate bubbles, plenty of money will be made by the well-connected and parasitic classes. Government employees will continue to enjoy pay raises at our expense, as will anyone benefiting from the new wave of subsidies, such as Wall Street investment bankers, financial speculators, and those working in health care or education.

These gains will come at the expense of the taxpayers who foot the bill and the consumers who face higher prices. As government grows, it deprives the private sector of the resources it needs to survive and grow. The result is a lower overall standard of living. Not only are government jobs less productive than private sector jobs, but bureaucratic interference actually makes the remaining private sector jobs less efficient as well.

Our economy is being transformed from a mostly capitalistic one to a mostly socialistic one. More decisions are being made by politicians and lawyers in Washington and fewer by entrepreneurs. The motivation behind this shift is the mistaken belief that the financial crisis of 2008 was caused by too much capitalism and a lack of proper government oversight. This conclusion is self-serving for those in power, and couldn't be more economically misguided. Through corruption or just plain ignorance, Congress and this Administration have embraced an ideology that has failed every time it has been tried.

Take the recent student loan reforms that were slipped into the health care bill. Obama wants to reduce the cost of providing student loans by taking the profits out of the industry. According to Obama, student loans are too expensive because banks profit from making them. If the government nationalizes the function, we would apparently bring down costs by eliminating those pesky profits.

This is a Marxist argument, pure and simple. If true, it would apply to all industries, not just banking. States like Cuba and North Korea would be the envy of the world, as they prohibit profits across the board. The truth is that profits, earned from free-market competition, keep cost down. By taking the profits out and putting the bureaucrats in, any incentive to provide better service or lower costs is eliminated. It's not hard to predict that student loan costs will now rise faster than ever.

That is clearly not the result we want. To solve the problem, people must understand that college tuitions are so expensive specifically because the government has guaranteed student loans (see my video blog on this topic for a detailed explanation). Guaranteed loans don't mean more access to education, but rather that universities are free to charge more per pupil than if their customers were paying out-of-pocket.

Obama's plan only serves to remove more market forces and creates an even bigger moral hazard. Under the new rules, students will be required to repay a much smaller portion of what they borrow. As a result, students will be willing to borrow even greater amounts of cash to pay inflated tuitions, making it that much easier for colleges and universities to raise them.

Also, since the government will actually be loaning the money directly, rather than simply guaranteeing private-sector loans, the Treasury will actually have to borrow the money itself before it can re-lend it to students. I suppose the irony of going into debt to loan money never registers in Washington. Further, as this bill will cause tuitions to rise even faster, it will necessitate even larger loans that will produce even greater taxpayer losses when the loans end in default or forbearance.

Whether it is in education, housing, health care, automobiles, insurance, or banking, greater government involvement in the economy means higher prices, lower productivity, more bailouts, bigger deficits, increased taxes, diminished industrial capacity, fewer private sector jobs, less freedom, and a falling standard of living.

In the end, when runaway inflation and skyrocketing interest rates burst the government bubble, there will be no more bubbles to replace it - just one hell of a hangover.

For in-depth analysis of this and other investment topics, subscribe to The Global Investor, Peter Schiff's free newsletter. Click here for more information.

Hock

[Michael]

April is the strongest month of the year for inflows into equity funds. Even in 2008 and 2009, you still saw about $6 Billion come into the equity markets.

I wouldn't think that it would be any different this time around.

Good Luck Bears!

[Chabazite]

Hock - great post. Although I live in the 51st State, I can say that we have been there and seen all this transpire over a period of 13 years which has seen our country transform from one of the most successful - at the time the 4th largest economy in the world - to virtual dereliction. We (well, some) elected Blair in 1997 amid high hopes that cool Britannia would once again rule the waves. Blair's Chancellor put virtually all of his eggs into the Banking sector. When that fell flat we have been left, outside of the London connurbation with ... well, virtually nothing. Britain is a wasteland. Blair's most enduring legacy to Britain is not his ready agreement with W to participate in a war; it is his chancellor and successor Brown who, best described as a presbyterian socialist, now 'presides' over the most deceitful, misguided and totalitarian regime (imho) that I have had to endure in my 55 years on this planet. It is hell bent on imposing deeply unpopular social engineering projects, will only support 'dinosaur' industries with large workforces for political reasons - not economic, and is determined to tax everyone with any asset out of existence to support a huge and inefficient public sector. In the UK today we have at least one in five people employed by the government, and it may be as high as one in four all of whom currently enjoy a significant degree of job security and perks like generous pension schemes. The result is that we now have an economy which is growing at 0.4 of 1 percent, a declining housing market, a huge budget defecit, and a huge long term national debt. And most frighteningly NO WAY of paying for it. And the goverment lies. It lies and lies and lies believing that if you can't fool all the people all the time then you can fool most of the people most of the time. And in their way the people are starting to revolt. Beleive me, we have journeyed to place of your vision of the future and it is NOT a pretty sight!

[David]

i have posted an spx update for those interested...

http://www.tradeyourwayout.com/2010/04/spx-hourly-chart-update-triangle-it-is.html

[DG]

"DG knows everything because he follows the "Master" of all idiocy who is in total denial of how he has missed the last 500 points in the S&P... because he says that the markets have become oh-so unpredictable."

You know what would give your criticism more credibility? If you had actually ever made a real-time trading recommendation instead of just carping from the sidelines.

[Whitebear]

http://www.nuwireinvestor.com/articles/low-supply-pushes-london-residential-real-estate-asking-prices-to-54649.aspx

London housing market in decline? Are you talking about London, Ontario?? Wait, Canadian housing market is also on fire. Except a few selected countries in Europe and in the US, housing markets are on fire in Canada, Australia and Asia (including Singapore, Korea, Hong Kong, China, Malaysia...) Have you been to Vancouver? Do you realize that average single family house is worth 1.6M now in Vancouver West side?

You tell me this is bear market??? Tell me why in all of the above countries that real estate is already past their 2008 peak???

[Chabazite]

Whitebear. READ what I said. 'Outside of the London connurbation' ...
House prices remain sluggish, Nationwide says http://news.bbc.co.uk/1/hi/business/8593771.stm
Mortgage slowdown continues, Bank of England data shows http://news.bbc.co.uk/1/hi/business/8592495.stm
Britain still facing chronic housing shortage http://news.bbc.co.uk/1/hi/world/8598515.stm
Any way you look at it, its NOT a healthy picture.

[Gooner70]

Yelnick

Some great stuff lately, I really like the way your page has evolved from merely an Elliot
wave discussion page to a more general informative page with some excellant articles
both inside and outside the box. Do you have any views on currency related stuff? I'm looking at the USDJPY and thinking we may have or are in the process of completeing
a significant base. Interestingly the EUR, may also be basing versus the USD though this is not yet clear, and may need a little more time. Keep up the good work..

P.S. Chabazite , I too am from the 51st , and your spot on in your summation of the dire state of this nation. Guys he is not exaggerating, creeping socialism is coming
to America fast, and it ain't prettty.