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MONETARY THERMOMETERS ARE 
INCREASINGLY BEARISH
by Bob Bronson
Bronson Capital Markets Research
March 28, 2005

So-called "monetary thermometers" are popular market timing tools. They typically accumulate the number of stimulative and depressive actions taken by the Federal Open Market Committee with thresholds for stock market buy-sell signals. More sophisticated constructs include not only the ordinal count and percentage amount of such actions, but also their comparative absolute levels and the various type of such monetary-policymakers actions.

The chart below illustrates the past seven quarter-point raises in the Fed Funds rate, which were accompanied by the same-sized (arithmetic, not percentage) increases in both the primary and 

secondary Discount Rate -- although from and to different levels. Not surprisingly, note that five of the first six were very near short and/or intermediate term reversals the stock market trend.

The fifth increase on Dec 14 was the closest, in both price and time, to the recent yearend peak in the stock market, measured by the S&P 500.

Interestingly, only three days before the all-time S&P 500 peak on Mar 24, 2000 the Discount Rate and Fed Funds Rate were increased for the fourth and fifth times, respectively. And while those previous peak levels were twice as high as recent levels, the recent cumulative increases have been 2-3 times larger on a percentage basis.

During the past 75 years there have been seven times that the Discount Rate has been raised at least five times. During the following three months following those fifth-time raises, the stock market's median change was +1.3%. This last time was consistent since from Dec 14 through Mar 14 the S&P 500 index gained +0.25%.

What's more interesting though is that during the following, or second, three-month period following these seven occasions the stock market declined over 6%. This time -- so far since Mar 14 -- the S&P 500 has already declined 3%. Compared to the all-time stock market peak five-years ago when these rates were subsequently raised only one more time, it can be argued that this time their actions are more bearish -- although current rates are not as high as then -- because not only has the Fed already raised these short term rates two more times, but everybody knows they currently plan to raise them several more times.

There is a relevant parallel with the last Supercycle Bear Market of 1968-74 during the last BAAC Supercycle Bear Market Period. At the end of the last B cycle-trend -- also an echo mania -- in that ABC zigzag price pattern, the Fed raised the Discount rates eight times, from 4.75% to 8.00% -- for a total increase of 325 basis points or 68%.

Already this time, the Fed has raised the Discount rate seven times for a total increase of 175 basis points or 175%. Considering that the last Supercycle Bear Market Period was a K-Cycle Summer with its secularly higher interest rate and inflation environment -- after all, interest rates are the inflation rate of credit money -- we believe the market timing implications of the Fed continuing to raise short term rates are, consequentially, extremely similar considering today's K-Cycle Winter secular environment of lower interest rates and inflation: an incipient 50% decline in the S&P 500, especially as the Fed continues to raise short term interest rates during a final Presidential term post-election year, as we have pointed out before.

© 2005 Bob Bronson
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Bob Bronson
Bronson Capital Markets Research
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