3 replies to this topic

[dcengr]

I've been struggling between these two patterns because they both fit the price data so far. 1946 and 1986 show a stall around at these levels, but while 1946 tanked and went into a bear market, 1986 went up to form the 1987 crash. I've been going under the assumption that 1946 is a better fit because of economic conditions, but am I right? 1. There's a housing bubble of enormous proportions. 2. Huge consumer debt. 3. Huge trade deficit. 4. Huge budget deficit. But the contrary to that is 1. Record company earnings (yes 1929 also had a record, which is why I think it can go even higher). 2. Tons of liquidity. Now I don't have the A-D cumulative line for NYSE going all the way back to 1929, so its hard for me to tell.. but I do have it going back to 1966. The 1966 pattern is also sort of a fit of 2006. But in 1966 (and in 1946 I'm told by Fib), the A-D line stopped advancing months before the top. So far, in 2006, the A-D line is still advancing strongly. If I look at 1986 pattern, at the start of 1987, the A-D line flat lines with price. It never decreases, it never diverges. That's about how it is now. One thing that's on my mind is the fact the housing bubble and commodity bubble $ amounts are flowing into the stock market. This could continue to fuel the stock market higher. I believe there was also a housing bubble in the 80ties, but it didn't pop until 90ties, and it was no where near the magnitude. I'm not sure about the commodities situation. Right now I'm tracking the COT and noticing something I don't like as a bear. As large traders are reducing their long positions, price is not moving. If this continues and they turn fully short while prices stay same, I believe an 87 style melt up is on the way. This would be a testiment to the large amount of liquidity that's not allowing the market to drop. I'm still expecting at least a correction to relieve overbought levels, but if the rise after that does so with just as strong breadth, then I have to say 87 is a better fit. There are, ofcourse, other technical arguments. For instance, economically sensitive issues, like the transports and semis, are not leading. The bull market is being lead by defensives, not speculatives. In 1987, the final leg was lead by defensives while speculatives lagged. More discussion on this would be appreciated.

[arbman]

One thing I am pretty sure of, that's the ton's of liquidity argument is about to disappear evident from the trend of the yields and the USD despite the declining commercial credit growth and the retail home equity extraction rate. There might be a somewhat increased liquidity flowing into the markets due to the still growing labor market, but that's like the peanuts compared to what will be extracted out of teh equity markets through the institutional and insider selling (soon).

The summer rally came out of the liquiditation in the commodities and the devalued USD prior to it which boosted the earnings. In my opinion, the market has spent almost all of its buying power of the intermediate term importance and there is a liquidation happening into the rising prices since December.

The only way a new wave of liquidity of intermediate term importance can show up is whether the commercial credit rate improves from here, it will not happen before the interest rates become more favorable imho. The Fed is certainly waiting for the USD to reach to the comfortable levels that they will not have to deal with hyperinflation in 2008-2009.

So, any mild pull back after January that doesn't meet with a robust credit growth at the lower prices will turn into an intermediate term correction, imho...

- kisa

[dcengr]

Thanks for that outlook. I'm more concerned about total money supply and it sloshing between housing/commodities to stocks (even more). As you saw the last few days when oil cratered and nasdaq went up.. Home prices are relatively stable at the moment, or at least the decrease is in slow motion. I'm wondering what will happen if prices start to accelerate the decline because of rising rates. If it does, that money may find its way to the stock market. Since the amount of $ is HUGE, it could blow the market way the hell up.. What do you think?

[arbman]

The commercial credits is one of the largest component of the M3, or money supply. Treasury pushed about $6B liquidity today as well as the increased Fed's temporary repo activity. I expect 1 or 2 POMOs through the rest of the month, then we should see whether the declining credit growth will start to weight toward the cycle lows due around the middle of March... In my opinion, the spring is upon us and the home prices should find some footing, however if the Fed can not cut the rates by the end of the summer, the inventory will build up. My guess is the Fed will be able to cut even though the housing inventories might continue to build up through 2008 despite the stable to rising home prices (due to lower rates). I still expect the top home prices to tick in 2008. The declining sales with the increasing prices usually mark the tops, so far we only saw the demand peaking and the prices moderating. If the Fed can not cut in 2007, then you can certainly see an acceleration in the housing lower... I also expect a blow off (for equities) in the later half of this year after a correction, the 80 wk cycle lows due around summer, I suspect the Fed will cut to prevent a housing melt down even if the businesses do not slow down considerably, 2008 is also an election year...

Edited by kisacik, 12 January 2007 - 01:49 PM.