Last week the Dow Jones closed with its BEV value at around -7.5% and I wondered whether it would first breach its BEV -5% or -10% line. Five trading days later it appears the -10% line is next, and what follows after that?
The factors the bulls have working against them are growing:
Rising bond yields.
The Federal Reserve is draining “liquidity” from the economy via its QT program.
For the first time since April there were more NYSE 52Wk Lows than Highs at the close of every day this week.
Also the Dow Jones Total Market Groups’ (DJTMG) top 20, or the number of the 74 groups in the sample used in the table below within 20% of their last all-time high, closed the week at 49. This isn’t a market shattering event, not so far anyway. But should the top 20 continue declining, at some point it will be.
Will the top 20 continue declining? I expect the 53 seen in Barron’s March 12 issue will prove to be the high for the March 2009 – January 2018 advance, and it’s all downhill from here. Whether the top 20 experiences a crash down to single digits in a few months, or slowly deflates in the year(s) to come is a mystery. But in the fullness of time all will be revealed.
Here’s the chart of the DJTMG’s top 20 going back to 1992.
No bull market advances forever. And seeing the Dow Jones advance over 20,000 in the past nine year period suggests, to serious students of the market, that maybe the best of what was to come has in late-June 2018 now come and gone.
The following chart plotting the Dow Jones’ daily Open, High, Low and Close bars is looking very bad for the bulls. The Dow Jones hasn’t seen a good week since early June, four weeks ago.
Markets don’t move in a straight line for long. That the Dow Jones has done little but decline for the past three weeks suggests we may see some good gains in the week(s) to come. Assuming the next trend in the Dow Jones is up, it had best break above that 25,400 line in the next month or so. If not, we may have some problems come this autumn. But up or down, the stock market is only a spectator sport for me. Gold, silver and the precious metal miners are where I want to be.
Another factor working against the bulls is the DJTMG’s Home Construction group is down over 20% from its highs of last January.
Home construction was a hot group during the 2001-2007 housing bubble. Seeing this group peak in mid-2005, more than a year before the problems in the sub-prime mortgage market were visible provided a timely warning to those who followed the markets a decade ago.
As the “policy makers” have again inflated a massive bubble in the housing (mortgage) market, seeing this group’s post January decline could very well be an early warning of what’s to come as it was a decade ago.
Looking at mortgage rates in the chart below, it’s interesting how most of the gains seen by the Home Construction group above occurred since January 2012, as mortgage rates increased from 2.43% to just under 4%. But in the past six months when rates approached the 4% line, and then broke above it, the Home Construction group (above) began its current 20% decline.
That’s another way of saying no one cared about rising mortgage rates, until one day they did as rates broke above an unknown threshold, in this case 4%. I expect the same will be proven to be so for the general stock market when T-bond yields break above a similar, yet currently unknown threshold yield. And like mortgage rates, T-bond yields have been rising since July 2016.
Housing permits (chart below) have recovered nicely since March 2009, though not up to their sub-prime mortgage bubble levels.
There’s a lot of history in this chart. The 1973-74 bear market, the first 40% decline in the Dow Jones since April 1942 was accompanied by a collapse in housing permits. This was also true for the sub-prime mortgage bear market, the next time the Dow Jones saw a 40% or greater decline.
