Certain times of the year are more important than others. Although we didn’t get an exact hit, this is still the general time of year for important anniversaries. Last week we talked about the 2002 bottom and 2007 top. It was a week where we saw new highs for this cycle and Dow 10,000 party hats. With apologies to the folks on the floor of the exchange, the only people who potentially qualify for party hats at this point are the folks up the subway at Yankee Stadium, Philadelphia or Los Angeles. Regardless of what happened last week, this is still an important time period.
It’s been a long time since I witnessed party hats on either FOX, Bloomberg or CNBC. It used to be you could set your watch to those hats. Back in the day of the old bear market, anytime they got real euphoric during one of those bear market rallies, price action was dropping like a rock within 48 hours of their exuberance. In comes in many forms and usually jumps off the screen. This time we had the textbook example of euphoria. Almost everyone was happy.
If you were watching closely, the only person who wasn’t happy with those hats was Art Cashin; who I consider to be the best technician who graces the screen on CNBC.
There are only two rules in life. First of all, there is no crying in baseball (Tom Hanks) and no such thing as happiness in the stock market. Oh, you can be happy, just make sure you’ve clicked on that little button called SELL and are on the way to the bank. But if you are in a position and feel ‘happy’ chances are it will be short-lived.
It takes a super disciplined person to look at those hats, take a step back and realize the deeper implication. We are also starting to get to the point where it ‘feels’ like the only way for the market to go is up. Don’t you feel the same way?
For that reason I decided to dig up the history books.
I’ve looked at all of the charts dating back to the 1930 rally. There was a handful that didn’t stop. The 1975 rally off that generational low stalled for 12 weeks. The 1982 bottom led to a move that was consistently higher for 75 weeks then finally had a 16% correction.
The other one that comes to mind is the period after the 1987 crash which had a few small pullbacks along the way which included a couple of 11% blips in 1989 and early 1990. We didn’t get the real cruncher until the Gulf crisis started brewing. That peak was in July 1990 at 3024 and fell all the way to 2344, a drop of 22%. Consider the crash bottom at 1638 and we didn’t have a real nasty pullback until the Dow was up 84%. Of course, that led to a new recession.
That was then, this is now. My point is we are not without precedent. Unfortunately, I wasn’t following closely enough to remember at what point party hats would have kicked in. Anyway, I believe it was Maria Bartiromo who first started reporting from the floor of the exchange and if there were party hats, we wouldn’t have known about it.
But if you are curious, the 1990 top was exactly in the 144 week window off the 1987 crash bottom. So in terms of time, we are not even close. But we are entering the 33rd week off the March bottom and for the NDX we are 47 weeks off the November bottom.
While we are likely overdue for corrective activity, any talk of a double dip recession is probably premature. The NDX is 72% off the bottom, while not 84% the Dow was able to achieve in what was a secular bull market, you can see this one is probably in the late innings. Think about this one; the Dow from a bottom at 7197 called it quits at 14198, a gain of 97%. Folks, that took five years! So we are either on the dawn of a wonderful new era or those party hats are destined to end up with those Christmas trees you toss in the trash every January 2nd.
So let’s look at the absolute worst case scenario. This one is likely worse than the Great Depression bottom. In May 1942, France was conquered as well as most of Europe. Hitler was advancing on Moscow as well as Egypt. The Japanese were raging throughout the Pacific. Conditions were really bleak. Most Americans didn’t realize it but there were actually U boats off the coast of Long Island. The only people that realized change was upon us were the military. They knew that Hitler’s war machine was at full capacity and our capacity was at 20 or 25%. This was as good as Hitler was ever going to be and we were just getting warmed up. You can look this up, as the information was released to Time magazine that summer.
From a low at 92.70 in spring of 1942, the Dow rallied to 146.40 by the summer of 1943, a gain of 57.9% which materialized over a 64-week period. Okay, the Dow is a laggard and up about 55% in this sequence. It has almost already matched the gain of one of the bleakest periods in American history. What does that tell you?
I guess the question I have is what is the wonderful news coming down the pike that is comparable to Hitler’s war machine maxing out? The only thing that comes close is some secret knowledge that Al Qaeda is toast. Other than that, I don’t see it. Do you?
Someone had to put this sequence in historical perspective for you and it might as well be me. That brings us to the present. We’ve seen instances where the public was allowed to be euphoric for short periods of time without major corrective activity but these sequences are few and far between.
Currently, we have conditions in the U.S. dollar which could only be more bearish if the parties involved actually follow through on their threats to do their oil dealings in a currency other than the greenback. The dollar is desperately trying to bottom and conditions could not be more ripe for a turn. We are now in the 161-day window off the March high and 127-day window off the April secondary high. I’ll cut it some slack to the end of the week just because the greenback has proven in the past that it does respond to calendar days as well or better than trading day cycles. As it stands right now, we are 229 calendar days off the high. In case you forgot or depend on me to look this stuff up for you, from the low on July 15 last year to the March high was 232 calendar days.
In other words, this is it. This is the best chance for the Dollar to reverse, perhaps in the whole year. Perhaps forever and I’m not kidding. If for some reason the dollar can’t reverse with these conditions, something is wrong. If for some reason the dollar were to use this window as acceleration as opposed to a reversal, I don’t see how that could be good for stocks, even with the inverse relationship. Maybe that’s why Cashin wasn’t smiling.
But the greenback was coming on strong on Sunday night which suggests this time it might be for real. We can get into all kinds calculations on different sectors but they are going to be secondary to the dollar. So let’s consider that the inverse relationship continues to work with a dollar rally. That is yet another reason why Cashin didn’t like those hats.
Okay, gang this is it. The big webinar is next week. We are expecting a great turnout and as grateful as I am for the wonderful sponsors of this event, here’s a thank you in advance to those of you who have signed up. I am going to show you calculations in the Russell that I’m almost certain nobody has seen or are even aware of. So if you still haven’t signed up, what are you waiting for? I’m sure you’ll agree that prices travel fast on an intraday chart. When the action is coming to an important support line, can you trust it? While nobody ever knows for sure I’m going to show those of you who are intraday traders one way of knowing when to trust a support line.
Did you see the full page ad in the October issue of the magazine? Turn to page 19. It’s an honor I don’t take lightly. The webinar has some great sponsors and because of that, it won’t be your average ‘free’ webinar that goes long on promotion and gives you some content in the end. This one is rich in content. It’s going to be like the U2 show I’m going to see this month. Its starts with a bang and ends with a bang. Every slide has valuable information.
All you have to do is click, sign up and show up.