What can Yogi Berra tell us about investing?
Do any bullish signals remain in the stock market?
Current trend indicators for Dow Jones Industrials.
It ain’t over till it’s over.
Those were the immortal words of Lawrence Peter Berra, aka “Yogi” the king of the malapropism. I was saddened by his passing and recalled I laughed so hard I was crying when I read “The Yogi Book: I Really Didn’t Say Everything I Said!” This article will not be about laughing or crying.
Yogi hailed from St. Louis’ Hill neighborhood and was known to confuse people with his brand of logic. The way he assembled sentences made you want to scratch your head but then when you thought about it, there was a glimmer of sense in his words. I am reminded of a commercial where Yogi is getting his hair cut and he throws out the following,
If you get hurt at work, it won’t hurt to miss work.
And they give you cash, which is just as good as money.
The duck and another patron in the commercial open their mouth slightly and tilt their head to the side. My brain froze, too, but then I understood.
Financial markets tend to do the same to investors. The reality is most investors understand as much about the markets as when they hear Yogi. There are nuggets of clarity but they are difficult to identify given the volume of information, opinions, and investor bias. (Yes, I realize I am contributing to the opinion category.)
You can observe a lot by just watching.
Yes you can. I will direct readers to various articles written over the past year discussing my market observations. In August of 2014, I introduced some indicators I use as well as geometric patterns, cycles and contrarian indicators. In that article I suggested that the market had not broken down yet but that we were closer to a top.
In February of this year, I discussed more warning signs particularly with respect to debt/credit. The stock market is not independent of these concerns as we will discover later in this article. In April, I provided a first quarter review once again highlighting extreme complacency in the stock market.
In July, I suggested the market was disguised in bull’s clothing and drew attention to the concept of secular bull and bear markets. On August 10th, I published an important article alerting my readers that a key bearish signal occurred the prior week. This medium term signal suggested a falling market that would be defined by weeks. In that article I mentioned that there had been only two such signals since the market low of 2009 and both defined pauses in the bull that lasted weeks. While the signal was significant, it was not in and of itself a suggestion the bull market was technically complete.
Last month’s article focused on the entirety of the market action in August and what might transpire. Of particular note in this article was the psychological boundary established by August’s trading range. Though no specific long-term signal emerged in August, I stated that the market was in a more precarious position on September 1st than it was on August 1st.
The following chart is the entirety of the Dow Jones Industrial Average from the major low in 2009 displayed in monthly bars.
(click to enlarge)
I want to draw your attention to the red line near the top of the chart. This line points to the market’s action for the month of August 2015. Please note the extent of the trading range compared to any other month since the major low in 2009. Trading ranges of this magnitude tend to be an attractor for future trades. For example, when the market crashed in October of 1987 it took until July of 1989 for the market to trade above the high of October. It took until the next month for the market to close higher than in October of 1987. So it took almost two years for the market to eclipse previous levels and that was during a secular and cyclical bull market that began in 1982.
For the month of September, my long term indicator on the DJIA flashed bearish. At no time since the low of 2009 has this occurred. So from the standpoint of trend indicators, all boxes are checked. The bearish indicator would be “cleaner” without the extreme range of August. I mention this since it is very likely the market could trade within this range for some time without falling below the low of August. The difference between now and 1987, however, is significant on many levels (secular and cyclical effects, extreme sentiment etc.). Could the market trade above its May high despite what the trend indicators suggest? Certainly. No indicators are foolproof. A move above May would simply make the subsequent fall that much more painful. My trend indicators along with other tools are instruments defining probabilities. These probabilities assist us so we don’t find ourselves in the middle of another Yogi malapropism,
We made too many wrong mistakes.
It is easy for investors, or for that matter policymakers, to make too many wrong mistakes. As psychologist Daniel Kahneman noted (winner of Nobel Prize in economics 2002) people tend to form judgments based on intuitive thinking that activates based on the information given. I discussed this in my books when addressing the limbic or emotional system in the brain. If you walk outside your house in the morning and see everyone deploying umbrellas, your judgment says you should go get yours. If your cerebral cortex kicks in, you might walk back into the house and check the local weather forecast. The second action requires more effort and as a result people tend to be lazy in its pursuit. Investing in these times requires much more of the second action. The markets are quite distorted due to intervention by the Wizards but most investors don’t recognize this. The Fed Wizards thought they had the antidote in 2002 and 2008 but really this is what happened:
- Fed lowers interest rates and increases the monetary base(1).
- Due to lessening credit confidence, lenders are more reluctant to lend and borrowers are more reluctant to borrow. Idle cash balances increase.
- Money circulation or velocity falls.
- Investors of all stripes seek yield and move into speculative ventures.
- Volatility enters the market.
- Investors become more risk averse.
(1) Monetary base is commercial account balances at Fed plus currency in circulation. This is considered high powered money.
You’ve got to be careful if you don’t know where you’re going cause you might not get there.
Investors are definitely showing more signs of being careful. A significant manifestation of this sign is evident in the spread between corporate bonds/Treasuries and high-yield bonds (high yield rate minus corporate rate/treasury rate). If spreads are low, investors are feeling frisky and throw more caution to the wind about the underlying high-yield credit issuer. When spreads widen, as they have been since mid-2014, investors want more compensation for perceived risk. That sort of risk perception extends to all financial markets, including stocks. Broader risk tolerance is what allows an overvalued market to continue to be more overvalued. Right now, the fuel for that tolerance is running short.
I wish I had an answer to that, because I’m tired of answering that question.
The ultimate question for any stock investor is the expected cash flow delivered by their shares. Investors are holding stock with the expectation of their cash flow coming by selling to another investor and not by virtue of expected dividends. We know this since dividend yields are near historic lows and for many high flying stocks, they are non-existent. And yet, investors continued to bid up stock prices. A share of stock is a claim on the future cash flows delivered to the holder over time. If you look at stock prices during the bull run since 2009 and compare that to the stream of expected cash flows, I anticipate a low rate of return over the long-term. There can still be price swings during this long-term horizon but in general, just buying and holding stock now will produce low if any returns. I used to ask friends and acquaintances about how long they would own a particular share. If they said they were in it for the long run, I asked them to define their time horizon. I know they got tired of me asking that question since it was difficult for them to come to grips with time horizon.
I won’t rehash other measures or indicators noted in previous articles since they have not altered my perception of the future trend. The market is officially in bearish territory. The only question is the extent of the bear. That time and price point will no doubt spur much debate in the months or years ahead. My expectation is that we will wave goodbye to the 2009 low on the way down.
The future ain’t what it used to be.
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