All-Time Highs

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Nothing can be more in-your-face to the secular bear market call as new all-time highs in a market. Whether we’re talking about equities, commodities, or bonds, when a security hits new all-time highs it should be the check and mate of a bearish call. Last year, such a call was being made on the Dow Jones Transports. This week, the Transport Index hit a new all-time high. Check and Mate on you sir Secular Bear Market.

For twelve months, the Transport Index went nowhere fast as the Industrials broke out to a new 52-week high in September. The Transports failed to confirm this breakout and we were treated to a correction from September to November. On October 4th, near the lows, I wrote an article about the Transport Index (Transporters: More than Meets the Eye) with a bullish call. As the divergence between the Industrials and Transports was taking place, I believed that the issue would resolve to the upside due to four reasons:

  1. Technical support
  2. Pickup in manufacturing and regional economic surveys
  3. The holiday shopping season and internet shopping trends
  4. Wall Street buy recommendations

Technically speaking, the Transports needed to break out above 5200 for the sideways trend to end. That happened on December 17th almost a month after the market bottomed when Congressional leaders held hands with a promise to fix the Fiscal Cliff. Another month later, and the Dow Jones Transport Index closed above the 2007, 2008, and 2011 highs to close at new, all-time highs on Monday – and we’re still rising.

tran 17 jan 2013

Generally, you give a breakout some space before you celebrate. Breakouts are usually confirmed by a 1-3% move above the resistance level and the old resistance level should hold on any retest. 5627 was the 2011 high. We’ll use that number as a reference, but I’d say that 5550 was a key level for the index back in 2007, 2008, and again in 2011 and that’s the level I’d like to see the Transport Index stay above in the next month or two. We’re currently 2.3% above that level, so it’s safe to say the Index has broken out of the last 5-year consolidation. Things look very promising for the Dow Jones Transport Index, especially if the Industrial Average will join in the fun.

On that note, in Dow Theory, it’s important for the two indexes to confirm each other. The Transports are hitting all-time highs. It’s important for the Industrials to do the same. Both are in clear uptrends. Despite flirting with a 52-week high today for the Dow Jones Industrial Average, we are still within a key resistance zone (supply zone). Once the Industrial Average is able to break through 13,660 by 1-3%, we’ll have probably encountered the 2007 high of 14,164. So there’s a lot still ahead of the Industrial Average before we can confirm the all-time highs in the Transport Index, but the probability is very high that we’ll at least test those levels this year.

indu 17 jan 2013

Besides the Dow Jones Transport and Industrial Averages, did you know the S&P 400 Mid cap index and the Russell 2000 small-cap index have hit all-time highs as well?

mid 17 jan 2013

There’s got to be a catch somewhere right? How can the glass only be half full? Where’s the empty? Well if you think about what it has taken to get back up to the 2007 highs, it’s been massive central bank intervention. Historically low interest rates and an incredible influx of easy money into the system from central banks around the globe have devalued the monetary system. Yes from a technical standpoint the market is approaching or reaching all-time highs, but is a 2013 dollar worth the same as a 2007 dollar? Can I buy the same basket of goods as I could then? Probably not.

As Jim Puplava will be writing to our clients this week, a small portion of the letter to clients will discuss the incredible amount of money creation by central banks to combat inflation and contracting fiscal budgets. Here’s a small cutout:

“Money printing by the major central banks is now approaching $9 trillion. That is trillion spelled with a "t". There have been 335 policy simulative measures taken by governments and their respective central banks in just the last twelve months alone. Just to name a few:

  • Japan will announce $136 billion in fiscal stimulus
  • Massive softening of Basel Bank rules
  • Poland cuts rates by 25 basis points
  • China's money supply and bank loans accelerating”  - Jim Puplava, January 2013 Letter

Personally, I try not to worry too much about inflation in my life. I don’t really have a lot of control over it. What I have control over is where I invest. The simple answer to our inflation problem is to invest in a security you think will rise faster than inflation. At least start off with an investment you think will rise! Cash won’t do that for you.

Don’t be a respecter of investments. I remember my baseball coach in high school always saying he wasn’t a respecter of persons. If Johnny’s parents donated $1mil to the school last year and Johnny’s parents wanted him starting in short stop it didn’t matter to coach. Johnny had to earn the position. In the same way, securities have to earn our investment.

So don’t box yourself into one asset class while completely ignoring another. I hear too many retail investors doing this when I talk to them as they focus too much in the rear-view mirror. “I only want to be in gold” or “I only like commodities”. In 2002-2004 when we were investing in commodities and foreign bonds, every other broker and broker-dealer thought it was nuts to invest in commodities because they were “too volatile” and didn’t fit into their 70:30 stock and bond ratio. Now you’ll hear that investing in commodities will lower the beta of your entire portfolio because they don’t correlate to stocks and bonds.

If you take the S&P and divide it by the CPI, it paints a much less rosy picture than this article does on the stock market; however, if the price is rising that means the S&P is rising faster than the CPI. Yes I’m using the government’s CPI and not Shadowstats because I can’t use his data and Bloomberg’s. Using his alternate 1990-based CPI calculations, CPI has increased from 2% to near 5% (year over year) each year from 2009 to present. The S&P 500 is up ≈120% from the 2009 bottom. For simplicity’s sake, we’ll call that 30% a year over the last four years if you jumped in at the bottom. That certainly beats any measure of CPI you use.

sp500 index and us cpi urban consumers sa on 31 dec 2012

The biggest argument I hear concerning inflation is to just invest 100% of your money in gold since it goes up every year. That’s starting to sound like comments we got from real estate agents in 2005 and 2006 when real estate “never went down”. That’s starting to sound like the final stage of a bull market. Gold is up ≈ 77% since the 2009 bottom in stocks. Which was the better investment? Which was better versus CPI? They both have to be divided by the same CPI metric we use, so the one that’s gone up the most wins right?

So the chart above of the S&P divided by the CPI doesn’t look great does it? Well, the point you have to take away with is that it’s been rising since 2009. Should we put our money in cash at the bottom and wait till the S&P 500 breaks out above the 2007 and 2000 high in constant CPI terms? Should we only invest in stocks when it becomes clear we’re in a new secular bull market? The answer is no. You look for investments that can beat inflation and as I write this today, that’s been gold, but it’s also been stocks.

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About Ryan Puplava CMT