Monday , 24 October 2016

We’re On The Cusp Of A Significant Market Downturn – Here’s Why

Reasonable people understand that the stock market can go down as well as up so after a six year run that pushed the Dow Jones up 180%, maybe it’s time to stop looking for reasons to buy stocks and begin looking for reasons to sell. This article presents 7 sound reasons to do the latter.

The above edited excerpts, and what follows, are from an article* by Mark J. Lundeen ( originally entitled Seven Months After Dow 18,000 The Bull Is Exhausted which can be read in its entirety (with charts) HERE.

I believe we are on the cusp of another significant market downturn that will overwhelm the best efforts of the “policy makers” to prevent it.

1. Geopolitical Events

The imminent advance to Dow Jones 19,000 may be the thinking of many retail investors, but with the bearish market events now occurring in Europe and Asia, I expect market professionals have already distanced themselves from the American stock market. [See chart HERE.]

2. Market Stability

The Dow Jones hasn’t suffered a single double digit correction since August 2011.  After four years it’s about time for the stock market to clear out the dead wood. [See chart HERE.]

3. Margin Debt

With NYSE margin debt now at record highs, this alone is more than sufficient reason to take profits and exit the stock market now.  Bad things happen at peaks in margin debt.   There have been many times in market history when exiting the stock market for a few years was the smart move, I think July 2015 will prove to be one of them. [See chart HERE.]

4. 2% Days

Frequent large daily moves on the Dow Jones (2% days) are a dependable indication that one should exit the market. The number of days the Dow Jones has a 2% or greater move (up or down) from a previous day’s close within a running 200 day count…is a measurement of stock-market volatility, and a rising 200 count is a sure sign that Mr. Bear is feeding on retail investors’ net worth. Except for the April 1942 52% bear market bottom, every market period in which investors would have profited by exiting the market rather than keeping their positions since 1900 can be identified by the 200 count increasing from low single digits to above 15 – and the current 200 day count is 32. We’ve seen no Dow Jones 2% days since last December 18 (140 trading days ago) so things appear relatively calm on the Dow Jones 200 count chart but a look at the same numbers in percentage terms (i.e. volatility) suggest otherwise. [See both the 2% & volatility charts HERE.]

5. Dividend Payments

Corporate America is currently assuming trillions of dollars of unpayable debt it can never repay, and using it to buy back shares on the open market.  Once the economy takes a turn for the worse, management will be forced to cut dividend payments in order to cover this ill-considered increase in borrowing costs or be forced into bankruptcy.  In such a business environment bond yields will be increasing, taking dividend yields up with them.  The tale of coming market woe is best described in THIS chart.

During the Great Depression the Dow Jones’ dividend payout declined by 77%; call it $100 in the table HERE.  That dividend payout along with the Dow’s July 1932 dividend yield of 10% would take the Dow Jones all the way down to 1,000; a 95% market decline that would actually exceed the 89% decline seen during the Great Depression.  My crystal ball isn’t any more accurate than the next guy’s, but just looking at the brutal mathematics of bear-markets possibilities HERE is ominous.  If one really understands the utter recklessness of “monetary policy” since the Greenspan Fed of 1987, none of the above can be ruled out.

Looking at the trend lines of the Dow Jones since 2000 I certainly can’t rule out seeing the Dow Jones deflate below 5000.  That would be a 72% decline from last May’s all-time high.

Is such a drop likely to happen?  Whether one see this as likely or not depends on one’s opinion of how effective the “policy makers” will be in “stabilizing” current market valuations with their infernal-monetary inflation and bizarre zero interest rate policy (ZIRP).  Keep in mind the “policy makers” are the same incompetent-bumbling buffoons who poisoned the global economy by creating unpayable debt on a massive scale at attractive low interest rates so I see a catastrophic deflationary bear market, with all humanity fleeing for their lives from counter-party risk as being highly probable.)

6. Daily Volatility

Market volatility bottomed early last December with the 200 day M/A at 0.46%.  Dow Jones’ daily volatility has increased to 0.62% over the past seven months; nothing to get alarmed about – yet – but since August 1971, whenever volatility has turned up from a bottom, it typically continues increasing until it rises uncomfortably above the 1.00% line. [See chart HERE.]

7. NYSE 52Wk High – Low Ratio

The ratio is the net percentage of 52Wk Highs–Lows to total shares trading daily.  There’s no direct relationship between the Dow Jones making new 52Wk highs or lows and the NYSE 52Wk High & Lows data.  However, in good markets, when the Dow Jones reaches a new 52Wk High, about 10% to 20% of NYSE listed companies will come along for the ride.

We should take notice if this doesn’t happen, because it could mean that something interesting is happening.

  • The last time the Dow Jones made its 52Wk High (October 2007), 52Wk Lows on the NYSE soon overwhelmed 52Wk highs and continued to do so for the next twenty-one months. [See chart HERE.]
  • Since July 1of last year, however,
    • the Dow Jones has made thirty new all-time highs but note [in THIS chart] how, for more than a year, the NYSE has failed to produce sufficient 52Wk highs to drive the 52Wk H-L Ratio above its 10% line.  (The last two Dow Jones all-time highs (18 & 19 May 2015) saw the 52Wk Ratio peak at a pathetic 2.65%.)
  • Since March 20 of this year:
    • the 52Wk H-L Ratio has collapsed. It is now easier to make new 52Wk Lows than 52 Wk Highs because the smart money is slowly exiting the stock market.

Predicting whether or not this trend in the NYSE 52Wk H-L Ratio will continue would require a better crystal ball than mine, but if a massive bear market is at the door, this is what I expect to see happen.


[All in all,] considering the deteriorating foreign markets, and the increase in bond yields the world over for the past four months, I believe:

  • we are on the cusp of another significant market downturn that will overwhelm the best efforts of the “policy makers” to prevent it and,
  • with gold and silver’s bear markets now four years old, the prospects of a financial collapse causing a major rebound in the old monetary metals are looking better and better.