Back in the day, my old friend Sinclair Noe of KFNN used to celebrate each new high in the Dow by having the staff bring in milk and cookies. For a while, it became a weekly celebration. Then we had a drought for many years. But that drought is over. This time I celebrated in a big way as last week I had the opportunity to have a café mocha and giant size black and white. The Dow is making new highs. I might have a few more café mochas along the way; however, it’s not a case of Happy Days Are Here Again.
Instead, the media has flooded us with articles about bubbles and how bad the economy is. Richard Russell, bless his heart, went so far as to tell us he didn’t trust the new Dow Theory buy signal since the Transports and Dow both made new highs together. To be sure Mr. Russell has been bearish these past years so there’s lots of unbelief. But I bring up Mr. Russell since he is a stock market icon and his opinions do represent the passions of the many.
By now, we can discuss the litany of financial and political problems at this snapshot in time. There’s no shortage of people to remind us as I’ve seen reports on all the business channels, Huffington Post, The Wall Street Journal and others. Here’s the problem. This generation is not used to seeing markets make new highs under less than stellar conditions. We’ve seen highs under euphoric, bubble-like conditions at the turn of the century and again in 2007. Yes, it’s true the Dow produced a bubble in 1929 and it took 25 years to get back to that level. What’s throwing people off is the fact the Dow has taken back all of the territory lost in the financial crisis. But the NASDAQ has not yet recovered from its old bubble and it won’t for a long time. Markets are more complex now than in the '20’s. But here’s the point.
If the Dow can be at a new high right now under mediocre market conditions, how much higher can it be when the economy is humming on all cylinders? The first time we had this discussion was a year or two ago when McDonalds had that big hiring campaign. In fact I forgot when they ran the campaign but I Googled it and found they ran a campaign to hire 50,000 workers back in April 2011. If you remember the campaign attracted thousands of people in every city from all walks of life. That’s fine; those who need a job should have it. But ours is a perverse business and we have to look at psychology with cold, hard objectivity. I remember when I was 14 years old my cousin Davey was a sophomore in high school and he got his first job. He came home with that McDonalds uniform and I looked at him mostly with awe since all I’d ever done was have a paper route. McDonald’s traditionally is a place we go for employment when we are in school. So it stood to reason if people from all walks of life were trying to land at McDonalds this was in no way history replicating prior peaks in the market. As you’ll recall the markets were in the process of topping in February and May of 2011. At the time I told you the real top in the markets were still light years away. For the record the Dow high in May 2011 was 12876. The all-time high today is 14413.
See, when we have a real top cab drivers, Aunt Blabby, Ma and Pa Kettle are buying stocks. Everyone is obsessed! But you know that! We’ve all lived through it. Market conditions are nothing like that right now. Yet the crowd is getting fooled again. That being said it doesn’t even make sense to me that anyone would pour cold water on these peaks. The fact of the matter is the true top in the stock market is still years away. All you have to do is compare this top to the prior two we’ve seen in this generation and draw the obvious conclusion. But people don’t and the reason is the herding complex. People are reasonably smart in many instances but somehow when it comes to financial markets they lose the ability to think for themselves. But there’s plenty of precedent for the current condition. All you have to do is look back to the 40’s, 50’s and 60’s. Don’t want to go back that far? Fine, look at the 80’s.
I don’t come here as the contrarian just to play contrarian. What a waste of time! One thing you’ll always get out of me is an opinion based on sound foundation. If you recall, one fund manager after another got paraded on television in 2009-11 and they were all asked whether they thought the bottom was in. Most were guessing and you could tell because 99% of them had no good independent reason for their projections. Here, we’ve always discussed 2009 as a generational low because of all the price and time symmetry we found at the bottom. We may not always be right, but we’ll always back up what we write. So here it is. I could pull out charts from the post WWII era but let’s confine the discussion to the modern stock market era. Here’s the Jimmy Carter/Ronald Reagan era. As you can see the market came back near all-time highs in the late 70’s under some of the lousiest economic conditions of the 20th century. Then the market went to new highs in 82-83. I have news for you; the economy stunk as late as 1982 and really didn’t start humming until 1984. In fact, if you remember the early campaign for Reagan’s 2nd term, it was not at all certain he would win. Yet there it was, the market was consistently making new highs. We were still recovering from high unemployment, stagflation and a generally poor confidence in ourselves as a nation. Economic conditions were nothing like they were in the mid 60’s when the market hit its big peak.
The lesson here is just because the market hits a level where it formerly had great conditions and euphoria does it mean the same thing now. If it did then markets would never have taken out the 1929 high. As long as they have a sour mood towards this market it will go higher. Maybe not today but eventually. To be sure, we have problems with the markets right now. The VIX is in a bad place and on the 7th another stock market guru went on CNBC and told viewers the VIX had become irrelevant. It’s not irrelevant as some more history suggests the VIX can be a leading indicator of a major turn at least 6-9 months ahead of time. This month is the Gann Master Time window at the seasonal change point and we’ve had turns this time of year in each of the last 3 years. In fact the past 4 years if you count the bottom in 09.
Just because the market is bound to go much higher in the longer term its way overdue in the near term. I’ll be watching for the Gann/seasonal change point. I’ll be watching for the SPX to test the high. I’ll even be watching Europe which last week I told you was at key inflection and it burst through. Europe is still leading and until that changes, chances are our markets keep rolling as well. Conditions haven’t changed yet but we move on towards the seasonal change point keep following the tape. Just don’t be the last man in. By all means, enjoy that café mocha while you can.