The Contrarian's View is published 11 times per year on a mostly-irregular schedule, and the views expressed are those of the author and editor, Nick Chase. Because nobody can predict the future, results of past suggestions or recommendations are no guarantee of future results. Material in this publication may be freely quoted provided proper attribution is given to its source. Subscription rate: Free on the Internet through the World-Wide Web service at Assumption College. Using your favorite Web-browsing program, Open URL http://nick.assumption.edu. Mailed paper subscriptions, one year for $39 to The Contrarian's View, 132 Moreland Street, Worcester, Massachusetts 01609. There is a limit of 50 paid subscribers at one time; please check for availability before sending any money. Sorry, Visa and Mastercard are not available. Overseas subscription rate, U.S. $54. Unsolicited material sent to us by UPS or by courier other than the postal service is refused and returned to sender! Phone: (508) 757-2881
As stocks started to take on gas last week, I was desperately trying to rescue the data I needed from my Mac before it died completely; but I was still taking a little extra time to enter stock-market data (on a VAX) and calculate "Timer's Trend". Though stocks were heading south in sympathy with the collapse of Asian markets, I didn't see any real problem until Friday the 25th, when it appeared to me that we might be on the verge of a crash even though "Timer's Trend" had not yet given a sell signal. It had been almost two months since I'd felt the need to update the "computer warmline", but this was the time, and I wrote:
Friday October 24, 1997 (7PM), Dow closed at 7715.41: It seems my office Macintosh and the stock market both decided to do slow-motion crashes at the same time. For the past week I have been desperately trying to set up an alternate machine as literally hundreds of users tried to connect to the sick machine, some of them doing so successfully between crashes. I had no idea my Web site had become so popular.... or is it that the level of panic among the novices is escalating?
"Timer's Trend" has not yet given a sell signal, though it is close; the more sensitive 10% exponential turned south on Monday, then again on Wednesday. The "Timer's Trend" signal is slow to come because the market soared so far beyond its moving averages; typically, the signal arrives within 4% of the top, not 9% or more below it.
At any rate, as in 1987, investors have all weekend to sweat it out. Will the meltdown come next Monday? Possibly, but I don't think so. The "plunge protection team" also has all weekend to work its magic, and we are not yet far enough from the highs either in value or time for a crash to arrive. More likely is increased volatility with a downward bias (Monday may well be an up day, due to manipulation) for a few more weeks until enough novices have panicked and/or gotten discouraged to all sell at the same time, bringing on the meltdown and stock-market closure.
Even without the "Timer's Trend" sell signal, it doesn't take much brainpower to see that the tide has turned.... we are now in a bear market with sharp rallies from time to time. Too many overseas markets have taken on gas; money will now be "repatriated" to support them, rather than being shipped to the U.S. stock and bond markets. With the supply of foreign funds drying up, the baby-boomers will turn tail and domestic inflows will dry up, too. That means lower prices, because the "pressure" to push prices higher will no longer exist.
The price action of gold and gold shares seems to indicate that we are headed directly into a deflationary bust, without any intervening inflationary bubble. Highly-rated bonds may be a good buy. I'll look at all of this in more detail in the October issue. §
To be honest, I was really uncomfortable posting such an equivocating outlook for Monday's market. But I knew that the "plunge protection team" would be prepared to swing into action after a decline of 200 points or more, and that a futures-induced rally was highly likely once they decided to move. But at least I could warn people of the likely volatility ahead.
When, on Monday, stocks started to sink like a stone, and when we had the two history-making circuit-breaker market closures, at 350-point and 550 point losses, and when the Dow dropped 200 points in the last 25 minutes of trading, with 100 points of that in the last 8 minutes on low volume before the market closed early, I could only look in disbelief and ask myself, "Where the hell is the 'plunge protection team'?" Was the task too daunting, and have they decided to pull back and just let 1987 happen all over again? On the evening's warmline, I wrote:
Monday October 27, 1997, 7:30 PM, Dow closed 3:30PM at 7161.15: So where was the "plunge protection team"? There are, as I see it, two possibilities: (1) They decided to allow a little gas to escape from the market bubble.... that is, do nothing.... expecting the "circuit breakers" to slow the decline. If so, today's market action should certainly get their attention. (2) They did their thing, and it didn't work.
In the first case, we should certainly see them at work tomorrow and, assuming that derivatives manipulations are really effective, it will be quite a rally day. Make sure you use the opportunity to bail out, if you've been dumb enough to tarry in stocks this long.... you likely won't get another chance.
In the second case.... and you know where my sentiments lie, they lie here... we have yet another demonstration that politicians and their hired hacks are followers of public sentiment, not leaders. You can see this in the politically-motivated, so-called "circuit breakers". Aren't they just wonderful? After the first-ever 350-point-decline, half-hour trading halt was imposed, people realized that they might not be able to get their money out when they wanted, and it took only another 25 minutes of trading and a near-sheer drop of another 200 points to trigger the hour-long, 550-point-decline trading halt, which of course closed the markets as it extended beyond the normal 4PM closing time. (For the record, had this decline come at mid-day, and had trading resumed after the 550-point decline, stocks would have traded until the normal closing time regardless of the size of the decline.) Oh, what's that? You were planning to switch to cash shortly before the markets closed, and the early closing caught you by surprise? So sorry that you weren't able to get out in time. Why don't you write a nice protest letter to the pointy-haired bureaucrat of your choice?
The bad news is that, as I have been expecting and warning for some time, "Timer's Trend" has failed (unless tomorrow should be a super rally day, allowing you to escape with at least a modest profit since the last buy signal). The first rule of investing is to use common sense, and not put your faith blindly in any mechanical system, much less in people who claim to predict the future or who methodically extrapolate the recent past into a "guaranteed" outcome.
Now, let's focus our attention toward tomorrow's market. Not only do we have the "plunge protection team" presumably ready to swing into extreme action, but we have a rapidly-rising level of panic among the recent converts to the wonders of perpetual profits through investing in stocks. There are, for me, some questions I have, and for which I don't know the answers: Today's market selloff triggered not only "Timer's Trend", but virtually every other momentum-based sell signal.... how many followers of such signals are there, and will they all try to sell tomorrow? How many switchers sold today, but the mutual funds were unable to sell the underlying shares and instead will have to rely on their bank lines of credit to meet today's redemptions? How many mutual funds will have to sell shares when the market opens tomorrow to repay those lines of credit (and perhaps incur an additional loss, due to the leverage, in the process)? How many people heard for the first time that the stock market went into crash mode today only as they drove home from work? (My co-workers, like me, are all plugged into the Internet, yet weren't aware of the magnitude of the decline until after the 3:30 PM market close.) How many evening-meal-munchers watching the plugged-in-drug, their TV sets, will realize that the talking heads promoting the bull market have been delivering only bull? How many sheeple, seeing the pundits turn from outra geously bullish to cautious, will decide that now it's OK for them to turn cautious, too, and will try to switch at least a part of their holdings to cash or bonds? (Sure is easier than thinking for yourself, even if you lose some money in the process.) How many people will realize for the first time what it means to not be able to get your money out when you want it? How many stock-market latecomers' holdings are already underwater?
A young co-worker asked me if today was like the 1987 Crash. No, I replied, it is more like the Friday before the 1987 Monday crash (not in points, which it exceeds, but in percentage and in timeline). What can be said as we head into tomorrow? Well, we are at the point.... 12% to 15% below the top.... where crashes and/or meltdowns can occur. We are at the point in time.... twelve weeks after the August Dow peak, though barely past peaks in other averages.... where crashes can occur. Since I cannot measure exactly when maximum public panic will strike, I cannot give an explicit prediction for tomorrow's market behavior. For a description of how bad it could be, I suggest rereading the May 1995 issue of The Contrarian's View, mentally extending the years by 2 and multiplying the averages by 1.9 to update the scenario. One thing I would check tomorrow morning is the action of overseas markets, since we both lead and react to their behavior in a self-reinforcing spiral. (In other words, if we go down, we all go down together, as in 1987. Fiend SuperBear has a good link to global market averages.)
Another, older, co-worker said, "I should have retired last week".
How far down is down? A few measures of value: "Fair value" for stocks, in relation to the competing yields on short-term money, is currently around DJIA 3800. (A "rush to safety" could cause the two to come into balance in the low 4000s.) If stocks traded at their averages of the last century, around 48% of GDP, that would put the Dow around 3200. An "average" bear-market bottom, if it came upon us all at once, would put the DJIA in the high 2000s. A return to "normal" P/Es of 12 to 15 would bring the Dow below 5000.
I have been wearing this cheshire-cat smile all afternoon, while my co-workers have been bearing expressions of incredulous bewilderment. And why not? I'm making money. Also, may I point out that the crafty contrarian's record for anticipating stock-market crashes is now 3 for 3 (the 1987 Crash, the 1989 minicrash, and the 1997 current-crash-in-progress), even though I have not been successful to my own satisfaction in timing the arrival of the crashes. I make no pretensions to clairvoyance; the successes I've had have come from realistic risk assessment and in understanding how computers and derivatives affect market behavior.
Is there a bright side (for bulls) to recent events? Sure.... today, we can watch stocks crash neatly graphed, in living color, on our World Wide Web-connected computers. During the 1987 Crash, I was frantically dialing up Dow Jones News Retrieval over modem, and constantly getting a busy signal, so we've come a long way in ten years. Ain't technology wonderful! §
I spent Monday evening answering congratulatory e-mails (Nick, you were right!.... that sort of thing) and doing my classical-music radio shift. When I woke up Tuesday morning, I still had this grin on my face and a bounce in my step. "Well, Onashi", I said to our older dog, "today is Meltdown Day.... maybe" - depending on what the "plunge protection team" does, I thought to myself. Onashi responded with a look that seemed to say, "Where's breakfast?" Following my own advice, I logged in from home to see how the Asian markets were doing.... not well. It appeared the Dow would initially sink about 200 points.
At work I was able to track the market on my temporary, Internet-connected Mac. Sure enough, the Dow was down sharply. Where was the rescue? Then, about 10:30 AM, it came.... The Dow 30 stocks sharply ascended on massive futures buying from an unidentified buyer who really, really wanted to own those futures, as he/she/it was paying an outsized premium for them. As in 1987, once the traders knew the rescue was underway, the rest of the market followed suit. For Tuesday's warmline I wrote:
Tuesday October 28, 1997, 6 PM, Dow closed at 7498.32: Crash? What crash? Why, Sammy, let your Fairy Godfather Al wave his magic wand..... there, it was nothing more than a bad dream! See, it's as if nothing had happened! Everything is back to normal. My friends and I will see to it that the stock market is allowed to go only one way.... up! And shame on you, Stock Market, for pulling such a nasty trick! You gave everybody quite a fright. Don't you know it's not nice to mess with Big Al and my plunge-protection friends?
Today's stock-market behavior reminded me of a passage from John Kenneth Galbraith's The Great Crash, in which he described the bankers' withdrawal on October 28, 1929 of their promise to support the stock market, the day before the biggest daily decline of that crash. Not recalling the exact words, I went looking for them, and here they are, in part (1955 edition, page 115): "The time had come to go short on promises. Support, organized or otherwise, could not contend with the overwhelming, pathological desire to sell.... now prices were to be allowed to fall. The speculator's only comfort, henceforth, was that his ruin would be accomplished in an orderly and becoming manner." But this lesson, that officials can influence only the course of a decline, not its eventual outcome, is not one that is readily learned by the masses near the peak of a mania, any more today than in 1929.
Instead, hark! Hear that collective sigh of relief now that our beneficent government is able to prevent our stock market from tanking in tandem with most of the rest of the world's markets. Absorb again the eternal message hawked by the purveyors of financial wares and their secretive central-banker backers, that only the dips should be buying.... I mean, one should always buy the dips, for stocks always go up in the long term.
Well, let me not be totally ungrateful. I do owe a BIG THANK-YOU to Big Al and his friends for allowing the people who follow "Timer's Trend" on this web site to escape with a reasonable profit after what looked like certain disaster. For the record, the latest "Timer's Trend" buy/sell pair (at the market close on the day following the posting of the signal) delivered a 3.93% Dow-point profit, not including the minuscule dividends also received during the six months.
Time to relax now? Well, not quite. For one thing, the majority of the world's markets, where the governments did not have the marvelous foresight to install the wonderful crash-blunting mechanisms we have in the United States, are still heading south. No doubt there will be some sympathetic bounce in them tomorrow in reaction to the rally here, but make no mistake: This is a worldwide.... probably deflationary.... bear market. All major markets are now in sync. In our market, contrary to the pundits' assertions, this is a "buying opportunity" only if you masochistically enjoy losing money.... lots of money. When stocks are still at 113% of GDP and are trading 134% above the average trading price (in relation to underlying value) of the past century, it is not my idea of a "buying opportunity". Let others try to catch the falling knife.
What do the next few weeks hold? Well, if we use 1929 and 1987 as guides, stocks in general (though not necessarily the averages) should drift lower for several weeks, bottoming shortly after Thanksgiving, then rally into the spring. Indeed, if this is similar to 1929, the crash may not be over yet.... it could return later this week or next week with a vengeance. Even the 1989 minicrash followed the peaks in that market and preceded the 1990 bear. If this is to be like the 1989/1990 crash of the Japanese stock markets, then we are just at the beginning of a steep decline of several months' duration. Right now, there's no need to rush out and do anything.... in a bear market, cash is king (or queen, if you're a feminist). Two things I am looking at are: Switching about half of my retirement portfolio into a high-grade bond fund, and buying a few hundred shares of Citizens Utilities in the Phoenix portfolio. Keep a close watch on this "computer warmline" during these turbulent times. §
As I write the tail end of this column, it is Wednesday evening (October 29) and the stock market has closed virtually unchanged after a (relatively) quiet day.... and I'm sure you all want me to tell you, what's next? I could be coy and say "Darned if I know", but that wouldn't be fair. I've outlined above several possibilities based on outcomes from prior crashes and minicrashes, and I could tell you that any one of them could happen, and still not be fair. Why? Because, so far, I've only been 2/3 right.
I said the stock market would crash before mid-November. Right. I said that the "plunge protection team" would intervene with futures buying, creating violent sawtooth patterns in the market, with a downward bias. Right, so far.... and I expect we'll see more of these sawteeth. But I also said that we'll see the market melt down, where prices drop precipitously.... on the order of 2000 points per day.... with the market closed under the pressure of sell orders, and that hasn't happened yet. I'm still expecting it.
When, you want to know? Well, we are still in an extremely dangerous market period, and it could happen as early as next week, or at any time up to mid-November. If it hasn't happened by then, it likely won't happen until 1998, as the bear market grinds on, because during the Thanksgiving to-New Year's holiday period, people generally aren't in a frame of mind for crashes. (It's not impossible for stocks to crash during the holidays, just unlikely.)
Does any of this really matter (other than for entertainment value)? No, because the route taken is insignificant in comparison to the destination reached, and this stock market is sending us a loud, clear message about its destination. Seldom is a bell rung for stock market warnings, but this time the bell rings loud and clear. And, so there will no mistake about my interpretation of the message signalled by the bell, let me clearly state it here: We are at the cusp of a worldwide asset deflation. The bear market we have just entered is a deflationary bear market, the kind not seen since the 1930s.
Most of you reading this are probably not old enough to remember any kind of major bear market at all (other than the 1987 Crash, perhaps), but I've been around long enough to have lived through a few, and I can tell you that the post-WWII bear markets have generally followed a "script". The "script" is: The economy overheats; interest rates rise, sometimes with the Federal Reserve leading, sometimes trailing; the rise in rates slows the economy; corporate profits and consumer confidence decline, and a bear market ensues; interest rates fall, the economy and stock market recover, and the cycle repeats.
The "script" for a deflationary bear market is entirely different: Interest rates are stable or declining, and perhaps have been declining for many years; the economy is on a modest tear, but without the "overheating" generally seen in inflationary times; excess liquidity has created an asset mania; it looks like the good times will roll on forever; the stock market crashes; consumer confidence crashes; debt defaults escalate; values of assets collapse in a vicious self-reinforcing spiral; the world economy goes into depression; there is political unrest; governments print money to bail themselves out of this pickle, with no apparent effect at first. After a decade or more, when the decline in asset values has subsided, the money created by the central banks during the depression becomes the fuel to feed the inflationary fires during the next several decades, when the more traditional "script" applies.
This is not what you're hearing from the talking heads and market pundits. They are telling you, in effect, that there is no risk in being in stocks, essentially because there is no reason for stocks to go down.... and if there were, the government would prevent it. I've even seen a few of the more astute columnists, who have detected the Federal Reserve's futures intervention, say that it sends the "wrong message" to investors when the government intervenes, because of the implied no-risk guarantee.
I disagree; the Federal Reserve is sending the right message, but the wrong message is being received. The message being sent is: All financial markets today are intertwined by computers and derivatives, and there is a systemic risk that a crash in the stock market, with its drying up of liquidity, will spread to the world's debt-based and highly-leveraged fractional-reserve banking systems. It is to protect the banking system that the feds try to keep stocks afloat, or at least let them down gently. It is now simply more efficient to intervene directly in the stock market rather than offer up a gusher of liquidity, as was done in 1987, to halt a downward spiral.
The message people think they're receiving is that the government has their best interests at heart, and is trying to protect them. Get real. Unless you recently paid a $50,000 bribe to attend one of Bill Clinton's "coffees", you are an insignificant pimple in the political landscape.... none of the big boys have you in mind, they are acting to protect their own interests. This is no different than in 1929, when the bankers at first attempted to support the stock market so they could themselves escape without damage; they ceased, and took their lumps, only when it became clear that further efforts at support would be futile. It is your fault if you misinterpret the message, because you will be hearing the siren call to be in stocks when you should be out of stocks.
I've had several people ask me if I've been approached by the financial press or TV because of my "good market call". No, not yet, and do me a favor; don't call their attention to me. To date, I've not had very satisfactory dealings with the mainstream press, because they have usually approached me with a certain agenda in mind, and have edited whatever I have said or done to fit their agenda. The last thing I need is to have what I write and say distorted by some mainstream journalist, most of whom are still wildly bullish, to what they think I should have said according to some preconceived point of view. So, let's just keep the existence of The Contrarian's View a secret among the paid subscribers to the paper edition, and the thousands of regular Internet readers, OK?
As I finally finish this essay, I find I am still haunted by those words of Galbraith from The Great Crash, turning over and over in my mind: Support, organized or otherwise, could not contend with the overwhelming, pathological desire to sell....
COMMENT on "Timer's Trend": Currently on a "sell" signal generated by the
October 27 crash.
______________________________ TIMER'S TREND ______________________________
Wed 24 Sep 97 . | .# | 7906.71 |~.~*+~~~~~~~~~~~~~~~~~~~~~~~
Thu 25 Sep 97 . | .# | 7848.01 |~.~+~~~~~~~~~~~~~~~~~~~~~~~~
Fri 26 Sep 97 . | . # | 7922.18 | . + *
Mon 29 Sep 97 . | . # | 7991.43 |~.~+~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Tue 30 Sep 97 . | . # | 7945.26 | . + *
Wed 1 Oct 97 . | . # | 8015.50 | . + *
Thu 2 Oct 97 . | . # | 8027.53 | . + *
Fri 3 Oct 97 . | . # | 8038.58 | . + *
Fri 3 Oct 97 . | . # | 8038.58 |~.~~+~~~~~~~~~~~~~~~~~~~~~~~~~~*
Mon 6 Oct 97 . | . # | 8100.22 @|~.~~~+~~~~~~~~~~~~~~~~~~~~~~~~~*
Tue 7 Oct 97 . | . # | 8178.31 @|~.~~~+~~~~~~~~~~~~~~~~~~~~~~~~~*
Wed 8 Oct 97 . | # | 8095.06 | . +*
Thu 9 Oct 97 . | .# | 8061.42 *|~.~~+~~~~~~~~~~~~~~~~~~~~~~~
Fri 10 Oct 97 . | .# | 8045.21 |~.~+*~~~~~~~~~~~~~~~~~~~~~~~
Mon 13 Oct 97 . | . # | 8072.22 | . + *
Tue 14 Oct 97 . | . # | 8096.29 | . + *
Wed 15 Oct 97 . | # | 8057.98 | . + *
Thu 16 Oct 97 . |# . * | 7938.88 |~.+~~~~~~~~~~~~~~~~~~~~~~~~~
Fri 17 Oct 97 . & . |*7847.03 |~+~~~~~~~~~~~~~~~~~~~~~~~~~~
Mon 20 Oct 97 . I .# | 7921.44 | + *
Tue 21 Oct 97 . | . # | 8060.44 |~.+~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Wed 22 Oct 97 . I # | 8034.65 | .+ *
Thu 23 Oct 97 # . I *. | 7847.77 |+.~~~~~~~~~~~~~~~~~~~~~~~~~~
Fri 24 Oct 97 . & .* | 7715.41 |+.~~~~~~~~~~~~~~~~~~~~~~~~~~
Mon 27 Oct 97 # . I| . {| 7161.15 |*-.~~~~~~~~~~~~~~~~~~~~~~~~~
Tue 28 Oct 97 . #I . | 7498.32 |~.-~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Wed 29 Oct 97 . I #. | 7506.67 | .- *
================================================================================
{, } = "Timer's Trend" (4% and 10% exponential) SELL ({) or BUY (}) signal
[, ] = 4% exponential change unconfirmed by 10% exponential (not a signal).
@ = market overbought or oversold. I or & (on baseline)=10% exponential SELL.
NEXT ISSUE - will appear about November 28. /Nick Chase