Yesterday's Big Reversal of the Reversal
Had you considered yesterday's "reversal" in the stock market in the late morning, early afternoon, you'd be looking at a reversal of the terrible drops on Friday and Monday. On the other hand, had you waited until later in the afternoon, you'd be looking at a reversal of the reversal. Indeed the market peaked a bit after 11 AM. And in the last hour the 517 point descent from the day's gains might have produced vertigo if you happened to be staring at a screen. All the happy faces of the morning began to distort into twisted smiles. And the positive thinking mantras chanted to get you to buy the dips began to sound like a 78 RPM vinyl record played at 45 RPM. (Who of you out there knows what "record" and "RPM" means?)
So let's step back and note this: Whatever has been happening in the stock market will not be understood after a day or two. Yes, we noted yesterday that Dow Theory gave us a bear market signal. And that's nothing to sneeze at. But if you're not familiar with Dow Theory, or choose to ignore the signal because you believe the Fed's easy money policy has distorted the pricing mechanism function of the markets such that we can't count on any pricing anymore, you can still apply a relatively good rule: Watch the market action in the coming weeks to see whether this was a "correction" in a healthy market, or whether this is the sign of sick market.
But more important than that, if it's a sick market, we've really got to ask whether serious trouble lies ahead for the U.S. economy. Yes, most commentators still trumpet an economy showing growing signs of strength. Yes, they can roll out statistics to back up their views. But remember that's always the way it is before a recession. Certain statistics peak before, even after, a recession begins.
Now, we're not yet convinced that a recession lies around the next bend in the road. We're just saying that caution is warranted at this point. Maybe in a few weeks, things will so ease up and turn around that the good times will continue to roll. But don't lay your bets right now.
One last point, regarding those "good times." Good times may be a gross exaggeration. Even the cheerleaders telling us all is well and getting better haven't really crowed about "good times" out there. Personally, I can't say those with whom I come into contact believe they're enjoying good times. Rather, most feel things aren't that great and definitely aren't getting any better. And, frankly, I can't argue with that.
So let's step back and note this: Whatever has been happening in the stock market will not be understood after a day or two. Yes, we noted yesterday that Dow Theory gave us a bear market signal. And that's nothing to sneeze at. But if you're not familiar with Dow Theory, or choose to ignore the signal because you believe the Fed's easy money policy has distorted the pricing mechanism function of the markets such that we can't count on any pricing anymore, you can still apply a relatively good rule: Watch the market action in the coming weeks to see whether this was a "correction" in a healthy market, or whether this is the sign of sick market.
But more important than that, if it's a sick market, we've really got to ask whether serious trouble lies ahead for the U.S. economy. Yes, most commentators still trumpet an economy showing growing signs of strength. Yes, they can roll out statistics to back up their views. But remember that's always the way it is before a recession. Certain statistics peak before, even after, a recession begins.
Now, we're not yet convinced that a recession lies around the next bend in the road. We're just saying that caution is warranted at this point. Maybe in a few weeks, things will so ease up and turn around that the good times will continue to roll. But don't lay your bets right now.
One last point, regarding those "good times." Good times may be a gross exaggeration. Even the cheerleaders telling us all is well and getting better haven't really crowed about "good times" out there. Personally, I can't say those with whom I come into contact believe they're enjoying good times. Rather, most feel things aren't that great and definitely aren't getting any better. And, frankly, I can't argue with that.
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