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Spring Has Sprung and the Market's Done?
by Mark M. Rostenko
Editor, The Sovereign Strategist
March 23, 2005

Have you noticed? Stocks are falling. Oh, not enough to give the bulls nightmares at this point. Perhaps it’s just another dip in the eternal bull market, yet another buying opportunity. On the other hand, there’s a very good chance that recent weakness is signaling the end of the cyclical bull and re-emergence of the secular bear.

While the overall trend remains upward, cracks that began to appear some time ago continue to grow wider. A glaring divergence between the Nasdaq Composite and the other major indices tops the list.

Those familiar with Dow Theory understand the importance of confirmation between the Industrials, Transports and Utilities. I’m not so sure that the Dow retains the significance it once did and prefer an updated version of the theory which observes relationships between the Dow Industrials, S&P 500 and the Nasdaq Composite. In a strong and healthy bull market we like to see all three indices moving generally in tandem.

It’s no secret that the Nasdaq was visibly absent at the recent new cyclical bull market high party for the Dow and S&P 500. That first major sign of weakness was confirmed last week when the Nasdaq fell below its January low, thus extending the bearish intermediate-term trend which began in earnest on the first trading session of this year.

Arguably the Nasdaq hasn’t moved quite in tandem with the other indices for some time so we might be tempted to dismiss the apparent significance of this development. We might, were it not for the fact that both the Dow and S&P 500 failed dismally at their recent new highs. What should have been a bullish event ushering in new buyers and renewed bull market enthusiasm instead woke up sellers who grabbed the ball and ran with it, to almost a 5% decline in two weeks (S&P 500).

Now just for sport, let’s engage in typical investor/media/ government/Fed practice and all stick our heads in the sand and ignore all those obvious danger signs. (Click your heels together three times and mutter “Bubbles never pop! This time it really is different!” for good measure.) With heads firmly planted underground, we’re more likely to experience a swift kick in the rump by a few other unmistakably foreboding divergences.

Take a gander at the financial stocks. Or just at XLF, the Financial Sector “SPiDeR,” if you’re exceedingly lazy like me. What we have here is a series of descending highs indicating that buyers have grown weary. Top it off with last week’s breakdown that confirmed a major top. Meanwhile the energy stocks are in the stratosphere. Bearish financials coupled with bullish energies doesn’t generally paint a rosy picture for the market as a whole.

While you’re at it, take a peek at the CRB Index which hit a new 24-year high last week. Prices of tangibles, real goods, continue to climb while paper assets struggle. The 18-20 year paper/tangibles cycle that I discuss from time to time is obviously in full swing and still only in its early stages. Should paper (stocks) regain long-term strength, it’d be in direct defiance of a consistent and undisputed 130-year pattern.

But somehow I doubt that things are different this time, my primary evidence being that they never are. Only the faces of the clowns who insist that “this time it really is different” change. (But not nearly fast enough for my tastes.)

Anyone expressing any semblance of surprise at the sell-off and growing weaknesses simply hasn’t been paying attention. Or perhaps paying far too much attention to Chief Spin Doctor at the Ministry of Economic Propaganda and Fantasticallacious Financial Delusions, Alan Greenscam who, as usual, delivered yet another long-winded and painfully dull reiteration of the ”everything is fine and under control” song on Tuesday.

Naturally the Fed acknowledged inflation concerns to prevent the commentary from slipping too deep into the patently absurd and 100% laughable. Even the Fed knows you can’t fool all the people all of the time, (just most of the people most of the time), so it’s wise to acknowledge some kind of risk in order to maintain some modicum of credibility.

Say what you will about the risks of inflation, but prices are rising and it has everything to do with a weak dollar, the result of massive credit and money supply expansion. More and more dollars fetching a relatively steady supply of stuff. What’s the risk of $60 oil and $3 per gallon gasoline? Pretty high in an economic expansion that is at the tail end of historical average longevity. But don’t worry about that. The White House assures us that adjusted for inflation, gas prices aren’t much above the 1970s highs.

Next time you’re at the pump be sure and ask your friendly neighborhood mini-mart clerk if he can break a 1970s inflation-adjusted $20 bill. Then you can fill your tank and take the family out for an inflation-adjusted meal at McD’s and still have enough change left over to see an inflation-adjusted movie. Or maybe just stay at home and regale the kiddies with exciting tales of pre-Greenspan days when $20 bought more than a quart of generic brand corn oil and half a Twix bar.

Or just enjoy watching the stock market come under continued pressure. The chickens are coming home to roost and even the inflated stock market is having a hard time avoiding the flurry of feathers. The deficits DO matter. The weak dollar DOES matter. Near-record lows in national savings don’t lay the groundwork for a healthy economic expansion.

Sure the numbers might look better but the devil continues to reside in his favorite place: the details. We’re creating some jobs but they’re low-paying service industry jobs. Wages aren’t increasing. Of course that’s spun bullishly as well. The feds call it “a lack of wage inflation pressures.” You and I call it “not making ends meet.”

Yes, the headline numbers can be and will continue to be manipulated, massaged and presented in as bullish a light as possible. But just look to the markets for the real story. With raw materials at 24-year highs, fuel prices at record highs, and stocks into their second year of struggling with making new highs, it’s becoming exceedingly clear that the cyclical bull is gasping for breath. Meanwhile, spring has sprung and the bear is scratching his armpits looking around for a meal. Don’t let it be you...

© 2005 Mark M. Rostenko
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