Tuesday, July 24, 2007

Desperately Seeking The Bear

It is hard work slogging to the top but gravity gladly assists the journey back down, sometimes faster than expected. Stocks from every single segment of the economy participate in a massive sell off today and everyone is looking for signs that the end of the world is upon us. The people who love charting are all pointing at their charts.

Bearish Divergences Abound: Something is very wrong on Wall Street. As we have pointed out these late eight weeks, the bulk of the global stock market rally has slowly been coming to an end. How do large and elongated stock market rallies terminate? The answer is they always end up with a wide variety of bearish divergences.

For the broad market, the Daily Advance-Decline Line is one method of measuring overall participation and is computed by simply accumulating the NET number of advancers less decliners each day. When the figure is positive, the cumulative total rises; when the number is negative, the cumulative total declines. … the Daily A/D Ratio peaking on June 4th and the indicator unable to best those levels ever since. Just recently, on July 12th and 13th, when the S&P roared to new all time highs, the A/D Line failed to make higher highs producing a bearish divergence. Since then, the A/D Line has slipped backward and is now below both the 20-day and 50-day moving averages.

Since lots of people are looking for similarities to the Great Depression triggering market crash of 1929, a good place to start is this online book: Only Yesterday: An Informal History of the 1920's. Of course, similarities alone will lead to false conclusions. Any hope for accurate understanding also requires fully vetting the differences. The prolonged economic damage following 1929 resulted from many factors, most importantly the political mishandling of situation, as TCS Daily explains.

What Roosevelt Didn't Know: Keynes stimulated economists to clarify the relationship between asset markets and goods markets. In asset markets, such as the stock market and the bond market, traders exchange claims on real assets. The claims are mere pieces of paper that represent the title to the underlying assets, which might be power plants or factories. The paper claims do not use up real resources.

The real assets of the American economy were all fully intact despite the paper losses that ruined the personal finances of a great many individuals. Roosevelt did everything wrong and managed to turn personal tragedies from a national shock into a national tragedy. We have enough knowledge not to repeat these mistakes. Unfortunately, we have political leadership fully capable of repeating them all again.