Dow, Three strikes and your out!

The Dow has topped out with major events, the current virus could be the third strike!


2001 - 9/11 Twin Towers
2007 - Bear Sterns
2020 (?) - C19 Virus


Chart explains all. Dow Jones Industrial's comparing market tops 2000, 2007 and 2020.

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Oil cycle leads the stock cycle

Sure correlation is not causation, but this chart should be known by you.


We all know the world economy was waiting for a pin to prick the 'everything bubble', but no one had any idea of what the pin would look like.

Hence this is why the story of the black swan is so relevant.

There is massive debt behind the record high stock markets, there so much debt the political will required to allow central banks to print trillions to cover losses will likely effect elections. The point is printing money to cover billions is unlikely to upset anyone, however printing trillions will. In 2007 it was billions, in 202X it will be trillions. Yeah, get that passed the community who wants a roads or hospitals versus bailing out investment banks for a second time in a few decades. 

The 2020 virus may not be the Spanish flue (lets hope so), however its effects on highlighting how weak the world supply chain is as well as the increased risk of a human deadly virus is more prevalent and more so how poorly the health services react to a crisis. This means there will be a 'structural change' on how things go forward. Supply chains will become more local, less centralized, consumer physical goods may require virus protection manufacturing process. This will all cost more, therefore higher prices and maybe even a inflation shock is in the future.

Inflation is the one thing which can rock the 'bubble' world. Why? Who can control the long end of the bond market, well no one. Remember when the US 10 year hit 3.2% (Nov 2018) and the world could not handle it, forcing the FED to stop QT and start QE (via repo market).      

A famous quote, highlighting the power of the bond market:

In the 1990s, the Democratic political adviser James Carville said: ...“I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”...

Stock market cycle matching to oil (at a lag of 144 months). Energy is in everything.

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Date Found: Tuesday, 01 October 2019, 02:18:22 AM

Comment: Wall of worry, or cliff of despair!

Date Found: Tuesday, 01 October 2019, 06:54:30 AM

Comment: Interesting.. Hitler good for the German DAX when he was winning! They believed .. until they didn't!  Just a confidence game, as all markets are!

Date Found: Wednesday, 02 October 2019, 10:38:04 PM

Comment: Oops .. the FED has not cut rates fast enough !

Date Found: Thursday, 03 October 2019, 03:33:04 AM

Comment: @Schuldensuehner6hUS recession risk has risen. When measured by latest econ data, probability of recession within 12mths is at >40%, yield curve signals probability of 60%, only stocks and corporate bonds do not signal increased risk. (Chart via JPM)

Date Found: Thursday, 03 October 2019, 06:06:48 PM

Comment: @TaviCosta7mThe recession clock is ticking faster. 5-yr vs. 3-m spread now inverted for almost 8 months! Only happened 4 other times: At the peak of the housing bubble. In the midst of the tech

Date Found: Saturday, 05 October 2019, 02:31:30 AM

Comment: @crescatkevin Credit bubbles build up when private sector debt growth rapidly outpaces GDP growth in a economic expansion. World’s biggest financial crises have followed from this unsustainable pattern. China, Canada, Australia pose serious risks today!

Date Found: Saturday, 05 October 2019, 05:34:32 PM

Comment: CEO confidence effects spending in economy, looks like US economy is about to freeze up before 2020 election

Date Found: Sunday, 06 October 2019, 05:16:52 PM

Comment: Interesting, Consumer confidence dent, or political play!

Date Found: Friday, 11 October 2019, 04:46:44 AM

Comment: A Recession Is Coming (Eventually)

Date Found: Friday, 11 October 2019, 05:15:54 AM

Comment: AAII falls down! Ooops! The FED did this!

Date Found: Friday, 11 October 2019, 10:46:54 PM

Comment: Germany near recession!

Date Found: Monday, 14 October 2019, 04:31:43 AM

Comment: Similar breakdowns from major support lines also occurred right in 2000

Date Found: Monday, 14 October 2019, 09:00:40 PM

Comment: ZH:US consumers spend less on critical household purchases when their economic situation deteriorates

Date Found: Tuesday, 15 October 2019, 02:05:04 AM

Comment: QE forever!

Date Found: Thursday, 17 October 2019, 07:45:48 PM

Comment: Recession when, not if! Soft or hard landing while there is massive corporate and  consumer debt around! Place your bets!

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Dow theory warning from the Utilities Index

Charles Dow died in 1902, and the investors should thank him for his ever lasting Dow Theory Analysis.


Carrying on this blog theme looking at the Utility stocks. Previous post.
Dow Jones Utility index could trade like the FANGs
Formula for when the Great Stock Market Rally ends



You can learn about Dow Theory here

This post is concerned with the 4th tenet.

Stock market averages must confirm each other

In Dow's time, the US was a growing industrial power. The US had population centers but factories were scattered throughout the country. Factories had to ship their goods to market, usually by rail. Dow's first stock averages were an index of industrial (manufacturing) companies and rail companies. To Dow, a bull market in industrial's could not occur unless the railway average rallied as well, usually first. According to this logic, if manufacturers' profits are rising, it follows that they are producing more. If they produce more, then they have to ship more goods to consumers. Hence, if an investor is looking for signs of health in manufacturers, he or she should look at the performance of the companies that ship their output to market, the railroads. The two averages should be moving in the same direction. When the performance of the averages diverge, it is a warning that change is in the air.

The above is correct in saying the transports should confirm the industrial index, also the utility index ideally should not out perform the transports, this is because the utility index is considered a safe harbor in times of great risk.

If the utilities out perform transports and/or industrial's then the smart money favor safety which indicates they favor water or electric dividend paying companies over trucking, rail road, consumer, technology or financial companies.

This is major sector rotation which signals great risk in the wider market is upon us or very nearly upon us. 

The chart below considered the performance of the Dow Utilities Index vs Dow Transports Index next to previous Dow Industrial major market tops. Conclusion is in black text.

This Charles Dow quote suits the modern day passive investing theme (ie ETFs gone crazy, for more  go here to Mike Green)

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Dow Jones Utility index could trade like the FANGs

The world is changing because the US FED is considering capping the US 10 yr interest rate under the US inflation rate, or negative real interest rates forever. Further massive destruction of the US dollar purchasing power.


Previous Post: Formula for when the great stock market rally ends

In the previous post this blog said:

When valuations for the boring water company or the boring electric company is trading like your Facebook, Apple, Amazon or Netflix or Google (ie FANG) you know something is wrong.

This is when a seriously over valued market is screaming at you.

Of course the reader must understand in a world where money printing goes super nuts (Zimbabwe style) the stock market may go hyper inflationary and picking a time frame for a top is never a good idea, but we are not there yet. There is no Ben Bernanke helicopter money to the masses yet (ie MMT).

We may be there, 'helicopter money lite'. If the intention is to cap interest rates under inflation, this is a form of massive easy money (or easy debt). 

Of course the effect of negative real interest rates is the US 10 yr is now broken because it does not protect you from inflation, this is interest rates suppression, of fake. The US FED has enacted this policy before, during WW2, are we in WW3? No. Yet the debt levels as a percentage of GDP suggest we are. Crazy.

This means investors will hunt for a UST 10 yr alternative, hence utility stocks with their high dividends will attract a lot more investor interest. Yes a water company may go to a P/E of 40. 

This means demand for quality utility stocks around the world will be strong, and if the US dollar falls, utility stock in other parts of the world will be attractive. 

A good place to hunt for Wyckoff, cycles and Gann angles.



Long term channels

Close up of the above chart.

Of course nothing moves in a straight line, corrections of 10% to 20% along the way are likely.





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