Bulls and Crises

The following is excerpted from yesterday’s Kelly Letter:

One outfit thinking we’re entering a bullish half-year at least is Birinyi. They fired off two bullish notes on Friday, one showing that the S&P 500 is up more than 20 pct in the past 78 trading days, a situation that’s happened only 15 times since 1945. In the six months following the 78-day, 20 pct gain patches, the market has fallen only twice and gained an average of 7 pct. The second note flagged the market preparing to pull off a Golden Cross, that magical feat of crossing its 50-day moving average over its 200-day. It’s happened 26 times since 1962, and flagged a positive six months to follow 81 pct of the time, with an average gain of 6.6 pct. Basically, then, Birinyi thinks the S&P 500 is on its way to 1400.

Exciting stuff, but not really new to us. We used a simple point-and-figure chart to identify a triple-top breakout on Jan 3 spawning an even more bullish forecast for the S&P 500 to get all the way up to 1460. I called it “probably the most bullish forecast going, implying as it does a 13-pct gain from here. The head-and-shoulder guys are talking about a minor breakout from an inverse pattern that targets 1360ish, a gain of 6 pct from here.” From today’s level, the implied gains from each camp are now 11 pct and 3.3 pct.

To me, new bullish forecasts aren’t at all new and are just playing into our idea that we’re about to get another push higher on January Effect cheer and other exuberance that can sound so official when couched in market historical terms. “This has happened only x times in the past y years” is like catnip to those looking for an edge. Too bad mileage varies. One wonders, for instance, how many times the market has risen 20 pct in not 78 days, but 76 or 80 or 43 or 111. I’d like to talk to somebody who acted on the 78-day advice on one or both of those two times since 1945 that it didn’t work.

Also, wasn’t it just a little while ago that chatter centered on not a Golden Cross but the Death Cross, when the 50-day goes under the 200-day, and aren’t we supposed to be watching the market now from under singed eyebrows courtesy of Armageddon? I seem to recall that. We’re not only unsinged, we’re already talking Golden Crosses.

Chart chatter is always fun, but what’s less fun is that darned deteriorating backdrop we keep failing to ignore despite the media’s persistent suggestion that we do so.

For instance, remember that weaker-than-expected GDP last quarter, two thirds of which was actually a byproduct of inventory build-up? A sharpie like you will note that if two thirds of 2.8 pct GDP growth came from inventory, then just 0.9 pct came from real sales. That suggests to my old buddy Charles Dumas, who does a little economic declaiming for Lombard, that GDP this quarter will toe the line of recession as closely as it can without actually crossing it. That is, he thinks we’re in for zero pct growth this quarter and the realization that government outlays are actually hurting rather than helping economic growth.

Another old buddy, Steve Roach of Morgan Stanley Asia, told Business Insider he expects “Japanese-like outcomes in the developed world, from Japan in its third lost decade to stagnation in the US to recession in Europe. And I say Japanese-like because these are not temporary slowdowns. They are going to be lasting because of the damage done during these massive credit, property — and in the case of Europe — currency and interest rate bubbles for Southern European economies. … we’ve had 11 crises in the last 30 years, roughly one every three years. … I think the odds suggest there will be another crisis, especially with excess liquidity and reckless fiscal policies in place.”

Separately, he told Bloomberg he thinks the Fed is “betting the ranch” on open-ended QE and zero interest rates. It worries him because it’s a framework for rescuing an economy in crisis, not one for sustaining organic growth.

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  1. John in Oregon
    Posted February 14, 2012 at 4:43 am | Permalink

    Did anyone notice the cover of Barron’s this weekend? DOW 15,000 and article says it could easily go to 17,000. I think it’s time to sell.

    • Posted February 15, 2012 at 10:46 am | Permalink

      I did, I did! Here it is:

      • John in Oregon
        Posted February 15, 2012 at 2:41 pm | Permalink

        Jason, Thank you for the confirmation. Is that Bearish or not? I always look forward to your weekly letters and your knowledgeble input. I read many newsletters, but I make money with yours.

  2. Edward Dillon
    Posted January 31, 2012 at 6:06 am | Permalink

    I remember the Death Cross. Just last year wasn’t it? ECRI has projected a new recession coming this year. They are saying that all the major economies are slowing down. It sounds like your buddy Charles is right on. I’d like to hear more about the “reckless fiscal policies”. I’ve been operating under the assumption that the fed has approached the fiscal crises properly in that they threw a bunch of money into the bond market. Didn’t Japan use the just the opposite approach some years back when they started to stagnate? If I understand it correctly Japan became very conservative making money more expensive at first then finding out that their economy just got slower and slower until they reached the state they are in now. Cheap money.

    Anyway thanks for the information. Always interesting. By the way i bought your Financially Stupid People……..book. Good stuff.

    • Gregory Iwan
      Posted January 31, 2012 at 6:39 am | Permalink

      Twas cheap money that got us into the fix we find ourselves in. The structural problems in the economy were noted afterwards, and were more a RESULT of the huge financial screwup than a cause. As for “Charles,” I would counsel against taking very seriously any comments from someone who has an axe to grind. I was an economist, and many of that ilk get laid off and become weather forecasters. Does that give you any idea how good they are?

  3. Gregory Iwan
    Posted January 31, 2012 at 12:52 am | Permalink

    Dumas? Birinyi? Maybe credible to some. I think it best not to listen to ANY pundit(s). If they were so smart, wouldn’t they have ALL the money? I’m well aware of the tried and true schemes of “pump and dump” and “poop and scoop.” As for “growth,” organic or otherwise, is that paradigm still worthwhile? Growth at any price appears to be the new “GARP,” but that exists only to insure that one can sell his equities for more than he paid for them. Or can he? There is not one certainty in this game, economic or investing. If one thinks there is, then it’s time for him to go to all cash and turn off all electronic devices. Hmm; that sounds a lot like 1842! Remember Vince Lombardi, though (one fellow worth listening to, in my view): “Fear makes cowards of us all.” Or was that “pain?”

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