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The Changing American Economy

According to a recent Politico poll, the economy is voters’ top concern ahead of the 2014 midterm elections, ranking higher than national security. Yet campaign rhetoric is showcasing leaders unwilling to discuss the true state of the American economy. Incumbents point disingenuously to the falling unemployment rate as a positive, knowing full well it’s falling largely due to decreased labor participation. They probably also know that even if structural improvement were evident, they would deserve no credit. However, it’s not evident.

The Social Security Administration released wage statistics for 2013 last week. Among them, we find that half of all American workers earned less than $28,031 and that 39 pct made less than $20,000. The $20,000 line is a memorable one, as it’s the annual salary of a full-time worker paid $10 per hour with two weeks off. This did not used to be an especially difficult financial hurdle to clear, but well over a third of American workers were unable to do so last year. Plus, 72 pct made less than $50,000. The median household income of $51,939 is the same as it was in 1995. The once-feared lost decade is now the lost two decades.

No wonder both parents need to work full time to keep a family afloat amid rising prices outside the consumer price index. Have you seen the price of ground beef lately? The BLS says it averaged $4.10 per pound last month, up 17 pct on year to its highest level ever. The Food and Beverage index tracked by the BLS has risen from 40 in 1970 to more than 240 now, a 500 pct increase. Despite this, economic reports continue showing no inflation and the Federal Reserve keeps referring to this as a reason it can postpone raising interest rates. The decline in the price of oil has helped families via lower prices at the pump, but the overall cost of living is on the rise for most consumers.

This seeming disconnect between official economic reports and reality was discussed by Mike Bryan, vice president and senior economist in the Atlanta Fed’s research department, in a June 23, 2014 article on the bank’s macroblog, “Torturing CPI Data until They Confess,” from which:

“The Economist retells a conversation with Stephen Roach, who in the 1970s worked for the Federal Reserve under Chairman Arthur Burns. Roach remembers that when oil prices surged around 1973, Burns asked Federal Reserve Board economists to strip those prices out of the CPI ‘to get a less distorted measure. When food prices then rose sharply, they stripped those out too — followed by used cars, children’s toys, jewelry, housing and so on, until around half of the CPI basket was excluded because it was supposedly “distorted”‘ by forces outside the control of the central bank. The story goes on to say that, at least in part because of these actions, the Fed failed to spot the breadth of the inflationary threat of the 1970s.”

Bryan himself recalls a 1991 meeting of the Cleveland Fed’s board of directors, at which he was a scheduled speaker. He was welcomed to the lectern with “Now it’s time to see what Mike is going to throw out of the CPI this month.” He remembers, “It was an uncomfortable moment for me that had a lasting influence.”

So, the population’s income is stuck or shrinking, and the cost of living is rising but tracked in such a way as to hide the increase for most people. What about savings? Have people been able to squirrel much away? Given the above conditions, the answer would almost have to be “no,” and it is.

Wells Fargo surveyed more than 1,000 middle class Americans about their savings plans. About two thirds of respondents said saving for their retirement had proved “harder” than anticipated. One third said they won’t have enough to “survive,” a figure that rises to almost half among Americans in their 50s. A particularly sad finding of the survey is that 22 pct said they would rather suffer an “early death” than retire without enough money to live comfortably. Why don’t politicians pick up on this? It could be turned into a catchy slogan — “Why try? Just die!” — which even doubles as a rally chant.

Not everybody is doing as badly, which partially explains why the economy is the top concern this election. It’s one thing to feel we’re all in this together, quite another to feel the imbalance inherent in a meritocracy is reaching unhealthy proportions. The wealthiest 5 pct of American households owned 63 pct of wealth in 2013, up from 54 pct in 1989. That’s from the September 2014 Federal Reserve Bulletin, reporting on the triennial Survey of Consumer Finances (SCS). More from the SCS:

“Income also shows a strong positive association with education; in particular, incomes for families headed by a person who has a college degree tend to be substantially higher than for those with lower levels of schooling. Incomes of white non-Hispanic families are substantially higher than those of other families. Income is also higher for homeowners than for other families, and income is systematically higher for groups with greater net worth.” Related, the median net worth for white non-Hispanic families rose 2 pct in the 2010-2013 time frame, while falling 17 percent for the “nonwhite or Hispanic” demographic.

An established explanation isn’t agreed upon yet. One view is that the political system is so thoroughly owned by entrenched business interests that everything is skewed toward feathering wealthy nests. Those taking this view point to the bailout of bad banks with tax revenue, without sending a single suit to jail. Another view is that the wealthy actually exert no more influence over policy today than they did at any point in the past, but are naturally shrinking as a percentage of the population as the less wealthy demographic groups grow more quickly, creating the impression that the wealthy are taking more when in fact they’re just ending up with relatively more. Those taking this view point to unqualified home owners triggering the collapse of 2007-08.

The truth undoubtedly lies in the middle. Banks did dangle tantalizingly low-rate, low-down-payment loans to the unsophisticated NINJA crowd (no income, no job, no assets), knowing full well that most wouldn’t navigate the fine print successfully and would eventually default. This was mean-spirited, cynical, and ultimately bad for banking as well as the rest of the economy. A few bad apples looking to pad their closed-loan lists turned into a crop of bad apples following entrenched industry protocol. On the other hand, why is it that in an age of information abundance, so many financially stupid people exist? Understanding a 30-year monthly payment schedule, and where it’s vulnerable to a spike due to variable interest, should not be a rare ability.

We may face the worst possible combination of factors, taking a page from each side of the argument. If we grant that big banking and other parts of the financial business are out to profit off people in whatever way they can, and we grant that the percentage of the population growing the fastest contains the people most vulnerable to falling for scams, we have a real problem. The result would be not just another housing crisis on the way, but a steady widening of the gap between the haves and the have-nots as the economy’s good jobs become suitable only for the best-educated applicants, who are shrinking as a percentage of the population.

While the falling labor participation rate could be indicating just such a trend underway, most economists attribute it to an aging population. This is a legitimate factor, but doesn’t explain the whole story. Another way of looking at involvement is by tracking the economically inactive population, which the OECD defines as “all persons who were neither employed nor unemployed” during the reference period due to attendance at educational institutions, retirement, engagement in family duties, or some other reason for being economically inactive.

Focusing on US males age 25-54, we find that the figure has risen steadily since 1980, from 2.3 million to 7.3 million. The total pool of American males age 25-54 was 41 million in 1980; it’s 61 million now. Thus, the proportion of inactive people has risen from 5.6 pct to 12.0 pct. Why economists at the Fed and elsewhere refuse to acknowledge this when discussing the potential reason that labor force participation is falling, is a mystery. The only reason we’re ever offered is that people are retiring, but there’s more going on.

While government has been largely asleep at the switch, the central bank has been trying to repair the economy through monetary machinations. Low rates and asset purchases were intended to pack banks full of money that they would lend to businesses, home buyers, and consumers, which would then presumably invest in growth, improve the value of homes, and purchase goods in the economy. This has not happened to the extent desired. While some are quick to blame banks for not lending, the banks say they would have lent more if they’d been approached by more qualified applicants. As they’re being told to pay billions in damages for their role in the last round of lending to unqualified borrowers, banks have hesitated to join in again.

It seems government has given up addressing the real problem, which is that the modern work force is not the same one America had in the past. It is not as well-educated, and the poorly educated, less wealthy segment is growing at a faster rate than the educated, wealthy segment. Rather than meeting this challenge head-on by designing dramatic changes in education, immigration, vocational training, social spending, and tax benefits for employers, politicians have accepted that the population isn’t as well-off as it was in the past, and that the middle class is in danger of extinction. The rich are rich, so they’re fine; the poor are helped by tax revenue; but the middle class are seeing their resources drained.

Just in time to bolster the view that government is giving up on improving the financial situation for most Americans, we received the FHFA’s mortgage overhauls last week. Its current director, Mel Watt, has been in place since January. His confirmation sparked long battles due to some conservatives believing Watt would move to immediately broaden access to mortgage lending, thereby lowering the average credit score of successful applicants, which could spark another subprime crisis.

Sterne Agee analyst Jay McCanless wrote in May that Watt’s comments indicated a new approach for Fannie Mae and Freddie Mac, in which they would shift from “a capital preservation, bunker-like mentality to an amenable and active buyer of mortgages at and potentially below the credit score averages of the last two years.” Robert Sichel, professor of business law at Kennesaw State University in Georgia, said in January that he expected Watt to change policy “from the goal of stabilizing the mortgage market from the lender’s perspective to a focus on addressing the difficulties existing on the borrower’s side of the market. The emphasis will shift from protecting the lenders to protecting borrowers.”

Last week’s announcement confirmed these predictions. The FHFA is, indeed, swinging the pendulum away from the strict lending rules that followed the Wild West lack of rules that preceded the crisis. The question is whether the pendulum missed the middle territory and already swung all the way back to the Wild West. Reducing the down payment requirement from 20 pct to 3 pct would seem to indicate “yes.”

This bears watching.

In the meantime, beware the campaign rhetoric. Republicans are wrong when they say America’s economic troubles began with the inauguration of President Obama. Democrats are wrong when they say policies under Obama have greatly helped the economy. No, the president has been all but irrelevant to the economy, which is possibly the most discouraging comment of all. The trends underway are independent of whomever wins the popularity contest. The job of a politician is to get elected, then stay elected, with policy solutions remaining strictly optional. The real show is run by unelected parties, hence little changes from one administration to the next.

Nonetheless, I wish more candidates would talk openly about the demographic crisis taking place in plain sight, and propose programs that would help people receive the education that interests them and is appropriate for their aptitude, and apply tax incentives to encourage employers to hire such qualified workers. Perhaps then people would be able to meet what was once considered the bare minimum down payment of 20 pct on a new home, and understand the rest of the payments involved after signing. Getting the population better educated and more economically active would produce stronger families, higher incomes, lower crime rates, and the ability of more citizens to pursue happiness, as the Founding Fathers intended.

Then again, why bother? Just give them mortgages.

Posted in US Economy | Tagged | 1 Response

Ebola Alert: Curtail Blood, Urine, and Vomit Play

With America’s nationwide Ebola death toll up to one and possibly rising, public health officials warn it’s not too early to take personal precaution. A recent survey by Boston-based Hitseeker Group found that six of nine people who’ve heard Ebola mentioned at least three times since Oct 6 believe they know somebody who comes into frequent physical contact with Ebola-infected blood, urine, saliva, stool, and/or vomit, and are therefore at risk of contracting the deadly virus themselves by handling said fluids among their friends.

Worse, this is under current circumstances. Should the American hot zone spread, the incidence of thinking one knows a person at risk of contracting Ebola is likely to spread, too. Officials point out that should authorities in Dallas fail to contain the disease, it could get as far as Plano and Fort Worth. Pressed for details, they project the maximum possible death toll in the United States to lie between 316.1 and 317.9 million people accounting for those who die prior to contracting Ebola due to heart disease, cancer, or stroke.

A spokesperson for the new Homeland Quarantine Coordination Agency cautioned against distraction from the Ebola threat by reports that, every day, an average of 1,973 Americans suffer a heart attack. “This is old news,” he said. “We must face the new threat head-on while there’s time.” Citing a statistics book, he illustrated how easily the Ebola death toll could double. “With one more death,” he said, holding up a finger and pausing, “just one, we would double the number of people who have died from this terrible disease. Think of what two more would do to the growth rate. Then … three. We could see the number of deaths rise tenfold in no time if we don’t nip this in the bud.”

The agency has devised a color-coded Ebola alert system to help guide behavior. It’s currently flashing bright red, leading some to wonder what color will be used should the rate of expansion increase, but the issue has been tabled for a less pressing moment. The simplest cautionary procedure during a bright-red alert such as the current one is to limit blood, urine, stool, and vomit play to people one knows well and trusts, an admittedly daunting task in a society as friendly as America’s, but well worth it in the short term.

Be careful out there.

Posted in Society | 16 Responses

Just Normal To and Fro

The Kelly Letter Excerpt
The following is from this year’s Note 29 of The Kelly Letter, which went out to subscribers last Sunday morning.

The simple allocation in our three tiers works well through various market environments because we own asset classes that do not correlate. This is the only distinction that matters. Diversification among different types of stocks, for example, is not useful when the market crashes because they all go down together. This is especially true in modern markets, which are so manipulated by central bank tinkering. Fed policies target major asset classes, not individual companies. Stocks are helped or hurt as a block by QE and rate changes. However, stocks and bonds behave differently. They are the most fundamentally different primary asset classes, and we own them in a target mix proven to work best through all environments.

I venture no guess as to where the market will go next, and I don’t need to do so. A further sell-off — which is, of course, the warning of the weekend across all commentator lips — would see our bond allocations grow as a percentage of our total portfolio, leaving them nicely poised to buy the cheaper stock prices. A recovery would see our positions appreciate again. This is all normal to and fro, not to be feared or ogled, but just to be monitored and used properly. …

If you’re moving a large amount of money into the automated plans, I suggest breaking your allocation to the growth fund into multiple buys to take some of the pressure off yourself to time it right. Eventually, your initial cost won’t matter much once you get several quarterly rebalancings under your belt, but everybody naturally tries to time their initial entry. While waiting, put all of your capital in the bond fund. Move the portion into the growth fund over two, three, or four orders. This way, you’ll feel fine no matter where the market goes in the short term, and in the long term it matters far more that you started the system at all than the initial cost basis at which you did so. This is counterintuitive, but true.

We can see evidence of this even in recent times. In last year’s Note 62 sent December 22, Tier 1 was worth $719,652 and its growth fund traded at $108.10. This weekend, Tier 1 is worth $717,314 and its growth fund is at $105.63. The overall tier is down only 0.3 pct even as the growth vehicle fell 2.3 pct. If the growth vehicle keeps falling in price, the 3 percent signal system will continue moving more of its capital from the safety of bonds into the bargain prices of stocks. When a recovery eventually kicks in, the tier will grow its outperformance margin even more. Through successive cycles, the system widens its lead over its growth index, which itself beats the majority of active market managers. In this way, the elegance of mathematics upstages the exertions of zero-validity managers and commentators.

Not that this will ever deter the z-vals from guessing publicly about the future direction and timing of price movements.

Former Fed Chairman Alan Greenspan said on Bloomberg Television’s “In The Loop” that “The stock market has recovered so sharply for so long, you have to assume somewhere along the line we will get a significant correction. Where that is, I do not know.” The problem with this type of open-ended warning is that it offers no practical value. Of course the market will experience a significant correction “somewhere along the line” — just as it will experience significant rises and long flat periods, as well. It fluctuates up and down on a long-term trajectory higher. There is no reliable way to time entries and exits ahead of the fluctuations, so musing on their inevitability is unhelpful.

Ron Paul, the former congressman from Texas who is an outspoken critic of the Fed’s monetary policies and the nation’s fiscal ones, warned that runaway inflation is on the way due to Fed stimulus. He said on CNBC, “I think there’s plenty of inflation, but my definition of inflation is a little different than the rest, because I think prices going up in the different areas is a consequence of inflation. There’s a lot of inflation in the stock market. I think there’s a bubble there.”

His chief concern is that stock price appreciation has outstripped economic performance. “The growth isn’t there. The only thing that grows is the debt, and just think about how much money they have to create value in the stock market. The unemployment is very, very bad, despite some of the optimism that is expressed with Wall Street, but that’s all deception. I think you still have to see a healthy economy and people aren’t complaining about structural employment, which is really insidious.”

These are valid points, but they’ve been valid for the past six years and have yet to come true. They still might, but we can see that they’re useless as market forecasting tools. Investing defensively against a comeuppance far in the future guarantees underperformance. The desire to profit from the stock market must include a willingness to experience its fluctuation. This is all we’re discussing here. Investing strategies predicated on avoiding downside while capturing upside will fail. Dismissing occasional good luck, the best an investor can do is mitigate downside and magnify upside, which is what our signal system does. …

As for stocks and bonds, we’ll keep automatically transferring capital back and forth between them in the fluctuations ahead. One advantage of relying on reactive arithmetic is that it disregards all guessing as to why prices went the way they did, and just signals times to buy and sell based on where they ended up after all the pressures were applied.

Yours truly,
Jason Kelly
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The Rise Of The Emirates

The Kelly Letter Excerpt
The following is from this year’s Note 19 of The Kelly Letter, which went out to subscribers last Sunday morning.

The first thing one notices on an Emirates flight is the lack of Emiratis among the cabin crew. Beneath the uniform’s exotic red hats and white veils are black, white, and yellow faces from around the world. A flight attendant from South Africa told me on my flight to Dubai from Tokyo that Emirates boasts the most diverse staff of any airline in the world. All of them speak English, and there’s somebody on staff who can handle any major language needed by passengers. The amenities on the flight are famously luxurious, featuring headliners like an in-flight shower spa and gourmet cuisine on Royal Doulton china, and the service is superb. Everywhere I turned, somebody smiled at me and pre-empted my requests with uncanny powers of prediction.

The airline is headquartered at Dubai International Airport, and serves as proxy for why Arab business influence is rising. The United Arab Emirates (UAE) has oil reserves that are the seventh-largest in the world. The country is redirecting this profit into impressive national development and global investment projects. Dubai is home to the world’s tallest man-made structure, the Burj Khalifa, which tops out at 2,722 feet at the tip. The top floor is 1,918 feet high. Around it are other modern structures along the Sheikh Zayed Road, which lights up beautifully at night.

Given the international leaning of the culture and its focus on quality and service, it makes sense that Dubai is a major global city and important business hub. Passenger traffic at Dubai International Airport is growing at a rate of 15 pct annually, with more than 70 million passengers per year. The only airport that handles more international passengers is London Heathrow. Narita in Tokyo sees half as many as Dubai; JFK in New York sees a third.

According to Babu Das Augustine, Deputy Business Editor of Dubai-based Gulf News, the UAE economy grew 4.7 pct last year, its fastest clip since growing 9.9 pct in 2006. Credit goes to higher oil production and a resurgence in domestic demand. The Institute of International Finance (IIF) expects the growth to continue throughout this year. The mixture of revenue is changing, too, underscoring the general sense that oil profit needs to be parlayed into non-oil lines of business, usually dubbed “non-hydrocarbon growth.” This year, for example, oil revenue is projected to decline while the non-oil sector grows 5.2 pct.

The director of IIF Africa/Middle East, Garbis Iradian, told Gulf News last week, “The completion of major infrastructure projects and the preparations to host the Expo 2020 should keep economic growth in Dubai above 5 pct in the coming years. In the context of moderating growth rates in emerging economies and relatively slow growth in the developed economies, the UAE growth rate ranks among the most robust around the world.” The government is being careful to shepherd growth in a way that avoids repeating the credit bubble trouble of 2007 by enforcing regulatory limits on loans and demanding healthy loan-to-value ratios on property debt. Current growth is not the vaporous variety emitted by excessive credit.

Indeed, major financial indicators including stock and real-estate prices, business confidence, and declining spreads on sovereign credit default swaps (CDS) indicating faith in government debt, all point to a healthy deployment of oil wealth into non-oil enterprises.

This hasn’t been lost on the world’s wealthy. NatWest International Personal Banking issued a report called “Quality of Life” in which it concluded that Dubai is attracting thousands of young British professionals for a variety of reasons, not least the zero income tax. Couple the absence of the tax man with plenty of high-paying jobs in the booming business sector, and Dubai becomes cat nip for the aspirational. It’s thrown open its arms to the wealthy and the wannabe wealthy, and they’re showing up by the limo load. Just after Australia and Canada, the UAE is the third most popular destination for British expats. A recent headline in the Daily Telegraph asked, “Is Dubai the new Spain for British expatriates?”

Beyond the financial appeal, what do the Brits find so appealing about Dubai? Its high rankings across a number of lifestyle indicators, according to the NatWest study, including availability of consumer goods, entertainment, food, law enforcement, public transportation, sanitation, housing, public services, the school system, and so on. In other words, it’s a darned comfortable place to live while amassing or enjoying a fortune.

In some ways, it’s more tolerant of diversity than its Western counterparts. I asked an African Christian living in Dubai if she experienced any difficulty coexisting with Islam. She said no. I asked how a Muslim in Dubai would react if I wished them a Merry Christmas. She said they would wish me one as well. This I found interesting, considering that I’m reprimanded for wishing people a Merry Christmas in America, and advised to stick with “Happy Holidays” instead. “Everybody knows holidays are just cultural differences,” she told me. “Nobody should feel proselytized when being wished a pleasant holiday from any background.” Right! Pass the word.

Among Dubai’s non-oil endeavors is gold refining. Commodity trading is in the region’s DNA, evidently. In the desert just outside of the city, one of the world’s largest gold refineries is under construction. With demand for the metal moving toward Asia’s growing economies, other places are becoming more interested in catering to the buyers rather than buying the commodity itself. Call it the old pick-and-shovel strategy of winning a gold rush. Kaloti Precious Metals is spending $60M to help move Dubai beyond just trading the metal to refining and clearing it. The Dubai Gold and Commodities Exchange will introduce a spot gold contract next month.

Analysts are characterizing this transition as a brilliant use of Dubai’s portfolio of assets. It’s close to consumers in China and India, maintains a low-tax backdrop, and runs an efficient transportation system. Pair gold with these factors, and it’s easy to see why Dubai thinks it can carve out a niche for itself in an industry long dominated by Switzerland, which refines more than 3,000 tons of gold per year, about half of the global market. By comparison, the UAE refines 800 tons. Last year, almost 40 pct of the planet’s physical gold trade passed through Dubai, but the area has lagged in the refining business.

Kaloti and others are hoping to change this. The new refinery will deliver an annual capacity of 1,400 tons of gold and 600 tons of silver, more than trebling the output of any of the UAE’s current refineries.

The UAE is working hard to diversify its wealth beyond the oil industry that made it rich. It’s luring worldwide talent to its economy with generous compensation, low taxes, and a pleasant lifestyle. It’s spawning investor groups that troll the world for new businesses boasting high returns on investment. All throughout Europe, the influence of Emirati investment capital is being felt.

There’s an opportunity for some investment group in Dubai to get a leg up on the competition by sending envoys into target markets. If I were in charge of the operation, I would instruct the envoys to live in and love the destination, to learn the language, make friends, and send me letters explaining everything they’ve come to admire about their new home. Once those letters glowed warmly enough, I would fly to meet the envoy and discuss together what type of business the market needed and how our capital could best be used to make it happen. I would send gregarious people, not analytical ones. The analysis comes later.

From what I saw in Dubai, from what I experienced on Emirates, I have a feeling somebody in the UAE is going to catch on to this. Profit arises from a combination of heart and head.

Yours truly,
Jason Kelly
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Ignore All Forecasters

The Kelly Letter Excerpt
The following is from this year’s Note 17 of The Kelly Letter, which went out to subscribers last Sunday morning.

Two weeks ago in this space, we got a kick out of Dennis Gartman of the Gartman Letter saying on “Fast Money” that he became scared ahead of what he saw being a “long-awaited and much-needed correction.” He even pinpointed the market’s flip from bullish to bearish to a 15-minute window on the morning of Friday, April 4. “I’m not sure what happened, but something happened between 11 and 11:15, that everything turned on a dime,” he said, and mentioned that he was hunkering down in cash and gold.

The irritating thing about 15-minute increments of game-changing magnitude is that they come up so darned often, Gartman has discovered. With his particular brand of prognostication, the world can change four times an hour, thus 96 times per day. At this frequency, the longevity of a Gartman forecast based on a previous 15-minute revelation is not ample. Along with mayfly lifespans, eclipses, and the rapt attention of voters, Gartman forecasts appear on the list of things to enjoy quickly before they’re gone. While it lasts, then, you’ll be pleased to know he’s bullish once more.

He advised in his newsletter that it’s time to be a buyer of equities “generally,” describing his portfolio as being “pleasantly long” stocks. What did it for him? Mainly the market’s refusal to go down as he warned it would. He didn’t describe it that way, of course. He said it was the market’s ability to bounce off strong support. He said that “after a good two weeks’ decline, after 50 big handles in the S&P, after barely going through but holding the 100-day moving average, you have to understand: it’s still a bull market. So it’s back to being pleasantly long again.” He advised that if his letter changes again soon — and why not? — it would be to “increase exposure to equities rather than to decrease it.” Another 15-minute epiphany could do the trick.

A convenient aspect of advice like Gartman’s is that you never have to worry about missing something he says. Just wait. Fairly quickly, he’ll come around to aligning his forecast with whatever posture your money’s in. Worried, and hiding in cash? No problem, Gartman will suggest it soon. Aggressive and buying hand over fist? He’ll get there before you know it. We could even automate Gartman’s appearances on CNBC with a simple algorithm. If the market goes down, the Gart-voice warns of going down more. If it goes up, the Gart-voice says it has further to run. Just plug in the Chatty Garty and fill the air time.

Gartman’s recent instability serves as proxy for something bigger at work, which is the desire of z-vals (zero-validity forecasters) everywhere to ring the bell at the top of the market. In fact, most major market tops are a process rather than an event. They generally take longer than, say, 15 minutes, to fully form. They take months and involve lots of to-and-fro, chartist chatter about confirmations and non-confirmations and divergences, and bouts of relief in the wake of quick scares.

Those on the lookout for a sea change in the market’s direction are paying close attention to how the Nasdaq and Russell 2000 broke their recent uptrend channels. They represent technology and small-caps, of course, and small-caps power our growth vehicle in Tier 1. Market watchers think small companies lead the market, so pay special attention to the Russell. When the broad market, defined as the S&P 500, never broke support after warnings from Gartman et al., analysts turned attention to the Nasdaq and Russell. They did break support, but then bounced back. The new area to watch is the overhead resistance on these two indexes.

Specifically, chartists advise that we’ll know the bull market is still kicking if the Nasdaq 100 can clear 3600 and the Russell 2000 overcomes 1190. They closed Friday at 3533 and 1123 respectively, meaning that a green light on further market gains lies another 2 pct gain away on the Nasdaq 100 and another 6 pct away on the Russell 2000. In a different manner, much more studious and believable, these wise oracles of the moving lines tell us the same thing Gartman tells us: we’ll know the market is moving higher if it moves higher, and should beware a move lower if it moves lower.

They do it with a straight face, though. Here’s Mark Arbeter of S&P Capital IQ, from his Friday note: “Selling pressure from these levels, resulting in a failure of the leading indices to sustain any new highs, would be a bearish signal and could create the type of divergence and non-confirmation that is often seen at market tops.” He clarified that the scenario is built on “a lot of ‘ifs’” so his firm intends to “remain prepared to identify and take action given a multitude of potential paths the markets could take. This scenario is one that we feel merits consideration, discussion, and ultimately preparation [in case] things begin to unfold in this manner.”

Let me remind you that the market can only go in three directions: up, sideways, or down. That’s it. Since the z-vals are just guessing, anyway, why would any of the three merit more consideration than the others? Why should any market forecast merit any consideration at all? We can’t know which of the three directions will unfold next, nor for how long, so all we can do is wait and react. Given this, the energy of consideration should be reserved for arenas in life where it matters, like choosing a place to work or planning a family vacation. These are worth researching. Future market direction? Not really.

Yours truly,
Jason Kelly
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