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Was The Market’s Down Week Of Any Importance?

  • Written by Syndicated Publisher No Comments Comments
    September 16, 2014

    The market’s winning streak paused this week. It confirmed the short-term sell signal triggered by our technical indicators.

    But is it of any importance beyond the short-term?

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    It probably depends on where we are in the investor sentiment market cycle, and when we get the next short-term buy signal.

    We can pretty much know from the extreme bullish sentiment readings of the VIX Index, Investors Intelligence Sentiment Index, put/call ratios, record margin debt, and so forth, that we’re at least somewhere between the ‘thrill’ and ‘euphoria’ stage.

    But if we’re already at the euphoria stage, how big a short-term pullback so soon after the recent one would it take to perhaps move the cycle on to the ‘anxiety’ stage?

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    That would not be good.

    But we can know that the large Wall Street firms that dominate the trading with their program-trading activities, especially in the final hour each day, will do all they can to encourage buying the dip. They are well aware of the importance of preventing a slide down through the other stages of the cycles.

    The problem is that, with 25 bear markets over the last 114 years, or one on average of every 4.5 years, they obviously don’t always succeed.

    Consumers are on the march?

    That was the consensus take on this week’s economic reports.

    The University of Michigan’s Consumer Confidence Index rose from 82.5 in August to 84.6 in September.

    Retail sales were up 0.6% in August, their highest level since April. The consensus opinion was that the reports confirm the strength of the economy.

    Really? I prefer to look at trends not the excitement of individual reports.

    Did August’s positive report of a 0.6% increase change the multi-year downtrend in consumer spending since 2011? Does the trend still not have the same troubling appearance of how slowing retail sales led the way to the 2001 and 2008 recessions?

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    Gold and inflation expectations.

    Gold, the red line in the next chart, surged up from $250 an ounce in 2001, to just over $1,900 an ounce in 2011.

    The fuel for the 10-year spike up was primarily a conviction that the easy money policies adopted by the Fed, first in response to the 2001 recession and then the 911 terrorist attacks, which were then left in place, and dramatically increased after the 2008 financial meltdown, would create a huge inflationary spiral, similar to that of the 1970’s that had inflation running above 14%.

    The next chart shows what has actually happened with inflation (the blue line in the chart) in relation to the inflation-adjusted price of gold (the red line).

    Gold vs. the CPI. As you can see, gold has done extremely well, even though inflation has been moderating for a long time.

    It’s something to keep in mind when you read what some folks write about the stock market actually being cheap when valued in gold rather than dollars.

    Obviously that does not mean that the stock market will soar to catch up to gold’s value. Is it not just as likely to indicate that gold may tumble to catch down to the reality of inflation and the level of the stock market?

    The Fed, and central banks in Europe would like to see an increase in inflation, needed to give economies a boost. You can see from the chart why they would be nervous with current situation of benign and even declining inflation, given how declining inflation (the blue line) has so often been associated with recessions (the vertical grey lines).

    Apple’s iPhone intro is great example of the power of hype.

    The new iPhone is out! The new iPhone6 is out. And it’s fabulous!

    OMG, it has a 4.7-inch screen! It . . .

    But wait a minute, is Apple blazing new ground or finally beginning to catch up to the competition?

    I used iPhones for a few years, but switched to Android phones when their technology leaped ahead of Apple’s. I’ve had a Samsung Galaxy S5 for quite some time now. It has a 5.1-inch screen.

    Yeah, but a bigger version of the iPhone 6 was also introduced at the same time, the iPhone 6 Plus. It has a 5.5-inch screen.

    Okay, but Samsung’s larger version of its Galaxy S5, the Galaxy Note 4, out for a year now, has a 5.7 inch screen.

    Oh. . . . . Well, the iPhone 6 now has much longer battery life than before, up to 14 hours for talk, and 50 hours for music.

    Okay, but my Samsung Galaxy S5’s battery is rated for up to 21 hours for talk and 67 hours for music.

    Oh. Well, the new iPhone’s camera is improved to 8MP on the primary camera and 1.2 MP on the front-facing camera. 

    Okay, but my Samsung Galaxy S5’s camera is 16 MP on the primary and 2MP on the front-facing.

    Alright. But the iPhone 6 is only $199 with a 2-year carrier contract.

    Ah, you got me there. The Samsung Galaxy S5 is $199.99.

    And there are more than a million apps (applications) available on the iPhone.

    Well, as I understand there are more than a million apps available on Android phones too. So both suffer the same over-abundance. By the way, iPhones don’t run widgets, which are clever extensions of app’s, a choice that is on an Android phone’s home screen.

    Meanwhile, I don’t have much interest in social networking. But I see that reviewers are complaining that the iPhone is still not capable of browsing easily through sites like Facebook and Twitter without “diving deep” into add-on apps. All the newer Android phones have Facebook and Twitter widgets (as noted iPhones still do not have widgets), allowing easy browsing without first launching an app.

    Oh. . . .  Well you have to admit the new ‘Apple Pay’ feature that let’s you pay in stores using your iPhone instead of a credit card is a great feature.

    Yes, it is. It works on a technology called ‘near-field communication’, which has been in many Android phones for some time, used in phone-pay systems like Google Wallet, which are similar to Apple’s new Apple Pay. But the Apple Pay system does seem to be better, and has more security, for instance using fingerprint identification. 

    I mean, I don’t know which smartphone is best. There are quite a few, all with their individual fans, none probably as loyal as Apple users.

    But none have had so many features that still don’t meet the competition, so successfully hyped. The iPhone 6 Plus was completely sold out in a couple of days, and the Apple store website crashed from the volume of buyers trying to get on it?

    Speaking of successful hype, I see that the investment banks running Alibaba Group’s upcoming IPO are so pleased with the institutional response from its global marketing road show, that they are closing the order books early (next Tuesday), and hinted they may raise the initial offering price to the public as a result of the demand.

    To read my weekend newspaper column click here:  Last Stand Approaching for Gold

    Images: Flickr (licence attribution)

    About The Author – Sy Harding, Street Smart Report

    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

    It includes our research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s.

    It provides two model portfolios as guides. One is based on ourSeasonal Timing Strategy, one on our Market-Timing Strategy.

    In depth updates are provided every Wednesday, with interim ‘hotline’ updates every time we make a trade. An 8-page traditional newsletter Street Smart Report is provided on the website every 3 weeks, in pdf format for viewing or printing out.

    There is the Street Smart School of online technical analysis ‘seminars’,commentaries to keep you ‘street smart’ about Wall Street, and much more. 

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