HOME OF "PICTURES OF A STOCK MARKET MANIA" |
January 12, 2005
Samex Capital's Stock Market CROSSCURRENTS
Alan M. Newman, Editor
In the December 6, 2004 issue of Crosscurrents, we showed how the+3% average results for the first years of the Presidential Cycle since 1950 wereinfluenced by the great secular bull market of 1982-2000. In that era, the cycleaveraged a 22.7% gain. But in the previous secular bear market, the cycleyears were 1969, 1973, 1977 and 1981, in which stocks averaged a 14.6% annual loss. Our friend and colleague, Bob Bronson of Bronson Capital Markets, recently reminded usthat the first year of the Presidential Cycle leaves even more to desire than our bearishcase. Mr. Bronson points out that from 1929, the median return for all first yearsof the Presidential Cycle is -3.8%, clearly out of line with what most participants expectfor 2005. Furthermore, Mr. Bronson states, "...note there have been 10recessions during the past 56 years since 1948...and 32 since 1854 when business cycleswere first categorized. So the odds of one starting in any particular year wouldseem to be between 10/56 and 32/150, or 17% to 21%. But for the fifth year of aPresidency, like 2005....the odds are a huge three to four times higher with sixrecessions starting for the past ten two-term Presidents since 1854....starting withLincoln, then Grant, Truman, Roosevelt, Eisenhower and Nixon....each had recessions startin their fifth years in office during which the stock market declined a median 13% duringthose six post-election calendar years." Dow 13,000 in 2005? Whoops.
Valuations have been so far out of whack for so long thatprofessionals no longer believe that they are out of whack. What was inconceivablejust a decade ago is now routine. Even with five interest rate hikes and more on thehorizon, stocks can trade at literally any multiple and yield almost nothing in comparisonto bonds. Worse yet, because valuations have lost their meaning, sentiments aboutthe future have been enabled beyond all reason and optimism has risen to extremes as crazyas any ever seen.
Perhaps the echo of the mania is seen best in the activitygenerated on the OTC Bulletin Board. Monthly data was finally updated after a recessdating from August, but the data seem incorrect, showing a drastic contraction in sharevolume for September & October while evidencing an increase in dollar trading volumeand total transactions for the same period. Nevertheless, we’re reporting whatwe found. At the rates generated through the first 11 months of the year, totalshares traded have exceeded the manic peak of 2000 by a factor of 3.8 and have increasedrapidly since the brief fallout experienced in 2001. Apparently, the folks who buypenny stocks were no more discouraged by their experience than those professionals who arestill eager to "invest" in stocks at valuations that cannot possibly hold upover time.
The picture of bullishness amongst newsletter writers is as robustas we’ve ever seen, and is actually the highest ebullience seen since January of1987. Add on the fanatic shift towards the bull side for Rydex funds - the worstsince the beginning of 2001- and the scene is set for at least a hefty chunk to appear inthe market’s armor and as much as a 15% to 20% correction in stock prices.
Perhaps most striking is that those who play thegarbage penny stock market have increased their action dramatically versus trading on theNYSE and Nasdaq. Even in the mania’s most insane moments in 1999 and 2000,bulletin board volume was only a small fraction of the combined trading on NYSE &Nasdaq. Now it is 56.4% of the big two, up from 35.5% in 2003, and apparently headedfor equality. Remember, for Bulletin Board issues, “There are no minimumquantitative standards which must be met by an issuer….” Forgetearnings. Even sales are not necessary. If these two charts are notgraphic evidence of an echo of the mania, we are prepared to eatthem....
ABOUT ALAN M. NEWMAN
Alan M. Newman has been the Editor of CROSSCURRENTS since the firstissue was published in May of 1990. Mr. Newman is also a member of the Market Technician'sAssociation and has been widely quoted for years by the financialpress, media, and other newsletters and has written articles for BARRON'S.
The newsletter is published about 20 times per year and focuses oneconomic and stock market commentary, often covering controversial subjects. Severalproprietary technical indicators are usually featured in every issue accompanied bycurrent interpretation. Broad samples of our work can be viewed at
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