Tuesday's huge rally was the second call to arms for the bulls. Both the rally just after the Bear Stearns episode, which was also a near 400-point move in the Dow, and this latest rally were what are called 90 percent up days. That is, the up volume was over 90 percent of the total volume for the day. This kind of day is hugely bullish and is often indicative of a bottom being established, a slow but sure turning of the ship to a new direction.
Now, before I go any further, let me repeat that my Super Chart is still signaling a bear market. Its current Keyline reading is still at 1,415 on the S&P cash index, and we are a long way from there — currently near the 1,370 mark — as I write this. But, that said, I have felt all along the way that this current Super Chart sell signal may be one like we experienced in 1987, a false signal.
The key economic indicators, except for the very visible housing and banking sectors, are not supporting a deep recession or depression. What is it that makes this market so stubborn when it is just supposed to roll over and play recession?
For the answer to this question, I think we need to take a slightly more retrospective look at the recent turmoil in the stock and bond markets.
To begin with, this was not a downturn that was the natural result of a rally just running out of steam, as most past recessions have been. Nearly all past recessions occurred as consumer propensity to spend for hard and soft goods and overdone investing in stocks just began to wane. They were economic rallies that were just finally over-extended.
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Consumers began to slow their buying, and business inventories started to build up. In turn, businesses responded by cutting back production, which hiked unemployment. Fewer working people meant even less spending, and the pullback or recession took the reins and eventually ran its course. At the end it just petered out as consumers again began slowly to buy and the economy's wheels began to turn again.
That is the usual pattern. What about today's scenario? Well, it just doesn't match the past pictures at all. This downturn was the result of, well, fraud in the market place. That is not a usual market component. This vagary will need to be excised out of the market stream and some sort of long-term regulatory measures put in place to correct the obvious problem.
But this sell off was not the result of the markets just running out of steam. If it were, the numbers regarding economic activity would be completely different.
Today, production is rising fast for export and military needs of the country. While unemployment is a bit higher, it is absolutely nowhere near usual pre-recession levels. Economic activity is rising, especially when measured by one of the most sensitive of all measures, the shipping of goods around the country.
[Editor's Note: Why the Dollar May Have Hit Bottom. New Actions to Take Now.]
This particular measure is best seen in the Dow Transportation Index, an index originally called the Rail Index. That changed when trucking became the U.S.'s major transporter. Today, the Dow Transportation Index is racing towards an all time high of 5,369, recorded the week of July 13, 2007.
We are at 4,975 as I write this, just short by only 400 points. And yet, the Dow Industrials is still over 1,600 points from its old closing high of 14,164 recorded on Oct. 9, 2007. What do the shippers know that the industrial manufacturers (which are reflected in the Dow Industrials) don't?
First, the Dow Industrial index is really not all industrial. A good part of the Dow Industrials today is service oriented. For example, American Express, Home Depot, Verizon, Citigroup, Bank of America, and American International Group (insurance) don't produce anything. They just sell services and stuff somebody else made. In 1956, only AT&T in the Dow Industrials was basically a service-oriented company. The rest were all, I repeat, all big manufacturing companies.
The point here is that the Dow Industrial index is today much more quickly responsive of consumer activities, much more so than in the past. In 1956, it would have been a number of months before the production slowing would have been registered in the Dow Industrial index price.
Now, while the Industrials are far less industrial today, the Dow Transportation index is completely concentrated in transportation companies. If goods are in demand somewhere in the U.S., these guys are working to move it there. Or if, on the other hand, inventories are getting too high for companies to buy more and thus cause trucks and trains to run less, then the Transportation index suffers quickly, too.
So, what we see today is an expected outcome. While manufacturing is going great guns making stuff for export and domestic usage and needing to ship it all over the U.S. (reflected in the solid rally of the Dow Transportation index), the service industries are backing off, especially the banking and finance sector, and it shows in the weaker Dow Industrial index price.
Now that we know all that, what can be deduced from the activity of the two indices? First, employment is not going to tank — too much manufacturing activity is going on, as revealed by the Transportation index.
Second, the recent two huge stock rallies for the Industrials are recognition by investors that the worst, barring some totally unexpected disaster, was likely discounted in the January lows. The bears have tried twice to send prices into a new downward spiral and failed. I suspect that they will try one more halfhearted sell off, but the bears are running out of sellers, who were squeezed by the two huge rallies. There are more bulls that are beginning to test the waters.
The result will be that the bears will retire at some point soon and the bulls will begin another rally. But, this one may be a bit more subdued in its early stages, as the financial markets still have a lot of sorting out to do.
[Editor's Note: Which Stocks Should You Dump Immediately]
When that sorting is considered pretty well worked out, I expect investors will then begin a rally that will be more aggressive. You only need to look at all the "pump priming" that is going on to see the very positive impact it all could have down the road.
And there is one other good technical reason to expect all this to come to pass. We began the larger decline in prices on Oct. 9, 2007. Since then, we have had six declines and six rallies within the one overall big decline. Each rally top of the six was lower than the previous rally top, a sign of bear strength and bull weakness.
Last Tuesday, the close of the latest rally was, for the first time, higher than the last rally high. That is very often the kiss of death to bears. We shall see. However, eclipsing the last high signals bull strength and bear weakness. I said last week, I surely would not want to be a bear in this market!
So, I come back to the first comments I made today. While my Super Chart Keyline is saying bear mode, I expect, again with the caveat that no totally unexpected disaster develops, that my Keyline will be crossed up by summer and we will be back in bull mode. When in summer? From what the charts are saying, it could be by late June or July.
Finally, what does all that mean you should do? My suggestion is that you begin to use at least 50 percent of the cash you should have in your portfolio from taking protective steps in January/February and start by adding to strong positions already in your portfolio. Keep the other half for when we get the "all-clear" by crossing up my Keyline.
Well, that's all for today. Just felt you should be making some plans for a bottom to the market in here and begin preparing for a resumption of an up move in stocks in the next three to five months.
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So for now, hope your investment week is a good one. Meanwhile, you keep in touch. I do! See you next week.
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