Month: January 2018

“It’s Time To Go” – Trey Gowdy Won’t Seek Re-Election

Rep. Trey Gowdy (R-S.C.), chair of the House Oversight Committee, announced Wednesday that he will not run for reelection.

“There is a time to come and a time to go. This is the right time, for me, to leave politics and return to the justice system,” he said in a statement on Twitter.

Full Statement:

“Words cannot adequately express my gratitude to the people of South Carolina for the privilege of representing them in the House of Representatives. The Upstate of South Carolina has an incredible depth and breadth of assets including numerous women and men capable of representing us. I will always be grateful for the opportunity to serve in the People’s House and—prior to Congress—to advocate on behalf of justice in our court systems.

I will not be filing for re-election to Congress nor seeking any other political or elected office; instead I will be returning to the justice system. Whatever skills I may have are better utilized in a courtroom than in Congress, and I enjoy our justice system more than our political system. As I look back on my career, it is the jobs that both seek and reward fairness that are most rewarding.

There is no perfect time to make this announcement, but with filing opening in six weeks, it is important to give the women and men in South Carolina who might be interested in serving ample time to reflect on the decision.

To my wife, Terri, and our two children, Watson and Abigail: thank you for all you sacrificed, missed, or did alone so I could serve as both a prosecutor and a member of the House.

To my parents and my three sisters: thank you for having confidence in me and high expectations for me, even when I did not.

To the women and men I worked with at the South Carolina Court of Appeals, the United States District Court, the U.S. Attorney’s Office, the 7th Circuit Solicitor’s Office, and in Congress: thank you for the texture, depth and joy you added to life.

To the law enforcement officers and victims of crime: thank you for personifying courage.

To those across South Carolina and our country who, over the past 7 years, have expressed words of encouragement, accountability and even criticism: thank you. All are needed for those in public service.

The book of Ecclesiastes teaches us there is a time and a season for all things. There is a time to start and a time to end. There is a time to come and a time to go. This is the right time, for me, to leave politics and return to the justice system.“

*  *  *

Gowdy’s resignation is bound to court numerous rumors as the man at or near the center of all the various investigations and memos being slung around in Washington… but frankly, who can blame him for wanting out of that swamp!

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The Next Maestro?

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

The following article emphasizes that the perceived economic prosperity of recent decades is largely the result of political expediency. Those in charge of monetary policy have repetitively failed to act in the best interests of the public in an effort to either avoid criticism or preserve their individual status. While often ignored, this dynamic is crucial to understand to form longer term expectations for asset prices.

“I’m making records, my fans they can’t wait

They write me letters, tell me I’m great” – Joe Walsh

The modern day printing of digital dollars from thin air, literally from nothing, brings to mind a Latin phrase “ex nihilo, nihil fit” which means out of nothing, nothing comes. If that statement is true, and a moment of reflection surely produces the logical conclusion that it is true, then what do central bankers hope to accomplish by means of conjuring currency from, well, nothing? What does it further say about setting interest rates at less than nothing? If nothing can come from nothing then there is no solution in the idea that by printing dollars and inflating asset prices you can create something (a durable organic recovery).

Although the net result for the economy will be nothing, the net result of those actions for individuals appears to be a redistribution of wealth in the economy. In the end, it becomes clear that the purpose of and reason for the exercise is not the good of the general public but rather advocacy of large financial institutions, political expediency and hubris. If that were not the case, then why would the Federal Reserve need to hire a veteran lobbyist (former Enron and Clinton administration employee) in navigating the use of their powers in the months following the financial crisis?

Hilltop Houses and Fifteen Cars

There is something god-like in the idea of creating something out of nothing – especially money – which fits with the progression of status among Federal Reserve (Fed) members. The idea that their stature and judgement is beyond reproach has been in play for some time.

Alan Greenspan: The absurd notion of central bankers as rock stars was popularized by Alan Greenspan. He achieved celebrity status by advancing in ways never before seen, the interventionism of the Federal Reserve. Some of his handiwork includes engineering a rapid recovery of the stock market following the Black Monday crash in 1987, the notoriety of uttering the term “irrational exuberance” in 1996, the front man on the cover of Time magazine as a member of “The Committee to Save the World”, having his name on a key market term – The Greenspan Put, and of course having a book published about him by the iconic Washington Post reporter and author Bob Woodward well before his tenure as Fed chief ended.  These are things now to which every Fed Chairman aspires – indeed, to which every central banker aspires.

Ben Bernanke: So desperate to follow suit after he stepped down as Fed Chairman in 2014, he could not wait for someone to write his story so he penned his own in the self-aggrandizing “Courage to Act”. In addition to well-paid fees for public appearances, his desperation for notoriety also extends to consulting for some of the most powerful hedge funds as well as blogging his perspectives from time-to-time. The legacy he is desperately trying to shape seems similar to the gilded stature Greenspan crafted for himself.

Janet Yellen: In her time as the Chairman, Yellen was the beneficiary of much good fortune and did nothing to make waves (or right the ship). As the New York Times reports, given her tenure presiding over a “plummeting unemployment rate and consistently low inflation, Ms. Yellen became a pop culture phenomenon.” Such hyperbole used to lobby for Janet Yellen’s rock star status is derisory. The health of the organic economy is contrived by the over-use of debt. The disparity between the rich and poor has never been wider as Yellen assisted in hollowing out the middle class by adhering to a “saver-punishing” low-rate policy. Trickle down policy of boosting asset prices is surely benefitting the wealthy but to the detriment of society.  By myopically targeting traditional measures of inflation, she took latitude to continue crisis policies to print money and is complicit in the on-going accumulation of debt. The likelihood is that the failure to normalize monetary policy years ago has sown the seeds of the next crisis. Like Bernanke, how her role is cemented in history as one of those who are “great” among central bankers too will be determined by time and economic outcome.

Jerome Powell: Will the latest chairman of the Fed, Jerome Powell, have the courage to act? Vilified in the late 1970’s and early 1980’s for raising interest rates and temporarily choking off economic activity, Fed Chairman Paul Volcker had the character to sacrifice his own popularity and accept the short-term consequences in exchange for dramatic long-term economic benefits. He did it because arresting inflation was in the best interest of the country. Mr. Powell has a choice to make. He can do what’s best for the country or he too can aim to become a “pop culture phenomenon” and keep the charade going but he cannot do both.  Time will tell.

…Before the Fall

The modern day desire for individual notoriety and legacy among central bankers belies the purpose of the role they play in shaping the business cycle. Their influence on the trajectory of the economy should be so subtle as to scarcely be perceived. As was the case with McCabe, Martin and Burns, few should recognize their names. The incongruence of this passion among the power-elite who manage the printing presses of the world’s largest economies is akin to the contrast between pride and humility. Anyone who thinks themselves qualified to manage the monetary policy of the complex system of a major economy lacks requisite humility and is too deceived by pride to be thus qualified. A proud man is always looking down on things and people and, of course, as long as you are looking down, you cannot see that which is larger – the best interests of people or democracy

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Trump’s Turned Republicans Into Everything They Once Hated: New at Reason

Donald Trump’s caused some role reversal in American politics.

A. Barton Hinkle writes:

If you could jump into a Wayback Machine and travel to the United States, circa late 1960s, you would find the country torn between two political tribes.

One tribe consisted of anti-establishment radicals who preached sexual license and thought Washington was a nest of vipers that conspired with one another to thwart social and economic progress. They were not necessarily communist, but they did not hold with the orthodox view that the Soviet Union represented a threat to the United States. The more extreme elements, such as the Weather Underground, favored the use of violence to bring about the sort of society in which they believed.

These people were the New Left.

The other tribe consisted of pro-establishment Middle Americans who cherished traditional morality, believed in law and order, and venerated institutions such as the FBI. They abhorred Russia and the pinkos who were soft on communism, and they considered radical elements in American society—especially the ones prone to violence—a grave threat to the nation.

View this article.

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Jack Dorsey: “We Support Bitcoin; It Is A Path Towards Greater Financial Access For All”

While Facebook has decided to close the page on bitcoin and cryptocurrencies, banning ads about bitcoin, ICOs and other “alternative” financial products, Square is delighted to pick up the market share that Facebook does not care about, and as Jack Dorsey, who is the CEO of both Twitter and Square, tweeted moments ago (in his capacity as boss of the latter), he “supports Bitcoin because we see it as a long-term path towards greater financial access for all.”

“Instant buying (and selling, if you don’t want to hodl) of Bitcoin is now available to most Cash App customers. We support Bitcoin because we see it as a long-term path towards greater financial access for all. This is a small step.” Dorsey tweeted.

And with that one tweet, which put Dorsey on the other side of the room from Zuckerberg who has explicitly opined against crypto – and the millions of Millennials who are addicted to the digital currency – Twitter may have just bought itself several more days of interrogation in Congress where it will have to explain again, and again, and again why a few thousands “Russian” retweets cost Hillary Clinton the election.

Meanwhile, the acceptance of cryptos in society continues, with Line – the chat and payment app with over 40 million users (compared to 13 million for Coinbase) – announcing overnight that it is also starting a cryptocurrency exchange.

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Train Carrying Republican Lawmakers Collides With Dump Truck

A train carrying Republican lawmakers collided with dump truck near Charlottesville, Virginia on Wednesday; no immediate reports of serious injuries…

Politico reported that the lawmakers were traveling to a retreat in West Virginia, and that the crash will delay their arrival at The Greenbrier. Riders are currently being checked for injuries.

 

 

 

 

This is a developing story. Check back for more…

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“We choose debt. . .”

I’ve long held a working theory that US voters are completely predictable in Presidential elections.

The idea is that Americans almost invariably tend to swing wildly every few election cycles, voting for the candidate who is as close to the opposite of the current guy as possible.

Let’s go back a few decades to, say, Jimmy Carter.

In 1976, the country was sick and tired of the corruption, scandal, and disgrace of Richard Nixon’s administration (which at that point had been inherited by Gerald Ford).

Jimmy Carter was pretty much the opposite of Richard Nixon– a youthful outsider versus an aging crony.

After four years of economic disaster, Americans swung in the opposite direction from Carter, choosing an older, polished conservative in Ronald Reagan who represented strength and stability.

That trend lasted for twelve years– two terms with Reagan, and one term with his successor George HW Bush, after which the country swung in the other direction again– to Bill Clinton.

Clinton was another young, energetic liberal, pretty much the opposite of the elderly, curmudgeonly Bush.

After eight year of Clinton and his personal scandals, the country swung again to George W. Bush, a God-fearing, fundamental conservative who wouldn’t cheat on his wife. He represented Clinton’s opposite.

And after eight years of war and economic turmoil, the country swung once again to Bush’s opposite– a youthful, charismatic, black outsider.

Eight years later, the 2016 election was won by a man who is as far from Barack Obama as it gets.

Now, however you feel about the current guy, it’s safe to say that the country is probably going to wildly swing in the opposite direction in either 2020 or 2024.

Last night the world got a sneak peak at what that might look like– Congressman Joe Kennedy III, the 37-year old grandnephew of John F. Kennedy.

The young Congressman clearly represents Trump’s opposite and seems to embody so many of the gargantuan social movements that are coming to a head– the Dreamers, #metoo, BlackLivesMatter, etc.

Now, I typically hate talking about something as trite as politics and elections; elections merely change the players. It’s the game that’s rotten.

But in the Congressman’s rebuttal last night after the State of the Union address, he said something that I found quite alarming, almost inconceivable.

He lamented that the government has turned America into a “zero-sum game” where benefits received by one group must come at the expense of another– fund health insurance by cutting funding for education; build new highways by slashing teachers’ pensions.

He cited a number of examples, and then told his audience, “We choose both!”

Given the thunderous applause at that remark, everyone seemed to agree that the wealthiest, most prosperous nation in the world should never have to make a single tough financial decision.

Americans should have everything they want. And somehow, the money to pay for it all will just magically appear.

I found this astonishingly naive. He should have said, “We choose debt!” Because that’s the only way they’ll be able to pay for any of it.

Bear in mind the US government is already nearly $21 trillion in the hole and spending hundreds of billions of dollars each year just to pay interest on the debt.

In Fiscal Year 2017, in fact, the Treasury Department reports that interest payments on the debt hit a new high of $458,542,287,311.80.

That’s about 15% of federal government tax revenue… just to pay interest.

On top of that, the government spent another $2.15 trillion on Social Security and Medicare, and $720+ billion on defense spending.

So– just between interest, Social Security, Medicare, and Defense, they spent $3.3 trillion.

Total tax revenue was only $3 trillion to begin with.

So before they paid for ANYTHING else… National Parks, Homeland Security, infrastructure, foreign aid, or even paid the electric bill at the White House, they were hundreds of billions of dollars in the hole.

On top of that, the federal government has entire trust funds that are completely insolvent.

Both the Federal Highway Fund and the Disability Insurance fund, for example, have been bailed out within the last two years.

And there are several more, from the Pension Benefit Guarantee Corporation to Social Security itself.

This amounts to literally tens of trillions of dollars in liabilities; according to the Treasury Department’s own estimates from Fiscal Year 2016, its long-term liabilities amount to $46.7 trillion.

I find it simply extraordinary how few people in power seem to have a grasp on the magnitude of these long-term challenges.

Instead, the solution is to give everything to everyone without ever having to make a single responsible financial decision.

It’s total lunacy, a new form of American socialism that will be the final nail in the fiscal coffin.

And if history is any indicator, it’s coming… possibly as early as 2020.

Source

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Michigan State Students and Faculty Protest Interim President for Supporting School Choice, Not Being a Woman

John EnglerStudent-activists crashed a meeting of the Michigan State University Board of Trustees this morning. They were there to protest the decision to hire John Engler as the university’s interim president. (Engler’s predecessor, Lou Anna Simon, resigned in the wake of the Larry Nassar sex abuse scandal.)

One student climbed onto a table, sat down, and delivered a speech lamenting that Engler, a Michigan State graduate who served as governor from 1991 to 2003, “further corporatizes Michigan State University, defunds and de-integritizes Michigan State’s public education reputation.” Other activists then began snapping their fingers and clapping their hands.

The protester was apparently referencing Engler’s long history of supporting school choice reforms in the state, which many activists view as an attack on the public education system—even though the case for school choice is, as Reason‘s Nick Gillespie puts it, “overwhelming.”

Some instructors were also bothered by the trustees’ choice, albeit for different reasons. Notably, they were upset that Engler is not a woman.

“We suggested that a strong effort be made to place a woman with extensive academic leadership experience in this position, because her lived experience would provide needed wisdom at this juncture,” some of the faculty said in a statement.

One might think the necessity of finding a female candidate would be undercut by the fact that the Nassar scandal unfolded under the watch of Simon, a woman. In any event, Engler is only an interim pick until a permanent candidate is found.

Simon isn’t going to disappear, by the way. According to the terms of her contract, the university still has to pay her millions of dollars over the course of the next several years.

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It’s Not The Size That Matters, It’s The Speed (Of The Selloff)

Earlier this week we looked at the key threshold  in the 10Y TSY, beyond which stocks would be slammed, with most banks agreeing that anything above 2.70% and it’s “watch out below” for stocks. The subsequent 2-day selloff, the biggest since September 2016, appeared to confirm this skepticism.

But what if it’s not the size, but rather the speed of the selloff that matters?

That is the argument behind a bond market signal for equity investors, which shows the deterioration in credit may already be happening too fast for equities to withstand. The indicator – first noted by Bloomberg – is the Leuthold Group’s Dow Bond Oscillator, and it just flashed a reading that has spelled trouble for equities before, and may have bitten Tuesday as the S&P 500 slid the most since August.

While the recent selloff is certainly troubling, with the 10Y yield moments ago sliding to the highest level since April 2014 at 2.7387%.. .

… to Doug Ramsey, chief investment officer at Leuthold, the market has been caught off guard not by how high yields are as bond prices weaken, but how fast they’re going up.

“Everyone is focused on a rate level, but the rate-of-change is impacting things at almost a subconscious level,” Ramsey said. “The upward trend in rates is already sufficient to slow or reverse the market’s ascent.”

As Bloomberg further explains, “basically the model looks at how quickly returns are weakening in corporate credit. Namely, it’s the 10-week exponential moving average of the 26-week percentage change in the Dow Jones Corporate Bond Index (which measures price, the reciprocal of yields). The lower it goes, the tighter monetary conditions, and therefore worse for stocks.”

So far the indicator has been spot on: Leuthold’s gauge dipped below zero last week for the first time since June, triggering a sell signal for shareholders. It’s one reason the firm cut equity holdings in its core and global funds to 58 percent from 65 percent.

Of course, in a world where risk-parity funds have become the dominant price setters, and where getting the bond-equity relationship right is key for stock investors, whether Leuthold is right could mean the difference between a profitable year and a rout, especially if the Fed continues to hike rates. And, while some have warned of trouble for stocks if 10-year Treasury yields rise above 3 percent – according to Bloomberg – or 2.7% according to us, an alternate view of Ramsey’s theory is that market might be fine should the ascent in rates slow.

The problem is that with everyone on one side of the market, or the other, such phase shifts are never slow, and certainly not without turbulence. In other words, once the squeeze begins, it will only accelerate, triggering both the size and speed indicators.

Leuthold studied market performance since 1920 and found that the Dow Bond Oscillator has shown a good track record of predicting equity returns. When it stayed below zero, as in the case now, the Dow Jones Industrial Average fell at an average annualized rate of 0.3 percent. Equity returns were more robust, rising 11 percent, when readings were above zero.

“It’s the rate-of-change in bonds, not the bond yield level, that has the stronger impact on the stock market,” Ramsey said.

If the selloff in the 10Y accelerates, and the S&P turns red as it appears to be getting ready to do, Leuthold will likely be right.

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Betting On A Hawkish Farewell Party By Yellen? Not So Fast

When two days ago we previewed  Yellen’s “swan song” FOMC meeting, which concludes at 2pm ET today, and launches Janet Yellen’s retirement, we observed that according to most sellside analysts, she is expected to send a distinctly more hawkish signal than in December, “by observing a more upbeat economic assessment and higher inflation measures”, an outcome which could send short-dated yields spiking, lead to further curve flattening, and as for what it does to the beaten down dollar is anyone’s guess, especially if a determined hawkish bias by the Fed is seen as an accelerant to the next US recession.

Or maybe not. According to Citi’s former chief FX strategist Steven Englander, currently at Rafiki Capital, the Fed does not see a particular reason to send any message today, “when there is ambiguity over whether it is a Yellen or Powell Statement, and without a press conference to explain the context of the changes.”

So I lean to the minimum needed to reflect improved economic conditions and firming of inflation expectations.

Given how rates have moved in recent weeks, Englander believes that this may come across as slightly dovish, which would be a change to the prevailing market sentiment, which as described previously is leaning hawkish and may explain the selloff over the past two days.

Meanwhile, as we discussed on Monday, market expectations are for upgrades on the language in activity and inflation, unwinding the Hurricane references and removing some of the language that could be viewed as referencing downside risk. This is more hawkish than the previous statement, but 2Yr yields have moved 30bps since after the December FOMC, so that kind of updating is already priced in, if perhaps not by equities. Also worth noting: while the market expects no action today, the March FOMC is about 85% priced in so according to Englander, “there is no pressing need to adjust market expectations in a hawkish direction.”

* * *

What should traders keep an eye on to determine if the Fed is turning hawkish… or not? According to Englander, the key issue will be how they characterize inflation and inflation expectations. The paragraph 1 text from the December Statement:

“On a 12-month basis, both overall inflation and inflation for items other than food and energy have declined this year and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.”

The key is whether they say something like:

” inflation and inflation expectations have bounced a back a bit, but remain below 2 percent on a 12-month basis”

 or whether they say something like:

“Readings on inflation and inflation expectations have rebounded towards the target although on a 12-month basis they remain below 2 percent.”  

The distinction is whether you make a point of saying inflation remains below target or whether there is an implication that the targets are being approached. Their problem is whether to look at 6-month annualized core PCE deflator growth (blue) which has rebounded smartly and is just over 1.7% annualized, or the 12 month (red) which shows a more shallow increase.


Englander here thinks they are worried about the blue line but see the March meeting as the better opportunity to discuss any changes to the speed with which they forecast an approach to 2%. In addition they still have to thrash out whether they want to aim for 2% or feel that a temporary overshoot is preferable. 

The macro strategist’s bottom line: “they do the minimum and the minimum is slightly dovish given current market pricing.”

* * *

Meanwhile, for those readers who disagree, and think Yellen will take the opportunity to take the hawkish exit in her final meeting, here is what Goldman believes the Fed’s statement will look like, redlined to December:

Expected Changes to January FOMC Statement

Information received since the Federal Open Market Committee met in November December indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Averaging through hurricane-related fluctuations, job Job gains have been solid, and the unemployment rate declined further remained low. Household spending has been expanding at a moderate rate strengthened, and growth in business fixed investment has picked up in recent quarters. On a 12-month basis, both overall inflation and inflation for items other than food and energy have declined this year and are running below 2 percent. Market-based measures of inflation compensation have risen recently but remain somewhat low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Hurricane-related disruptions and rebuilding have affected economic activity, employment, and inflation in recent months but have not materially altered the outlook for the national economy. Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong. Inflation on a 12‑month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise maintain the target range for the federal funds rate to at 1-1/4 to 1‑1/2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

Voting for the FOMC monetary policy action were Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Patrick Harker; Robert S. Kaplan; Loretta J. Mester; Jerome H. Powell; and Randal K. Quarles; and John C. Williams. Voting against the action were Charles L. Evans and Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate.

 

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The Return Of The Junkie Market

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Yesterday saw a profusion of both new highs AND new lows on the NYSE — a condition that has often preceded poor stock market performance in the past.

 

After a smooth, one-way ride higher to begin 2018, stocks finally hit a speed bump this week. And along with the moderate losses came some interesting developments related to the stock market and its associated statistics. One such development was the sudden profusion of both new 52-week highs and 52-week lows on the NYSE — a condition we’ve termed a “Junkie Market” in the past, i.e., lots of highs and lows.

Specifically, both NYSE new highs and new lows came in at over 200 yesterday for just the 7th time ever. On a percentage basis, they each accounted for at least 7% of all issues traded on the NYSE. To put that into perspective, that was just the 5th time in the history of our data back to 1970 that saw both series reach that level.

And as the following chart indicates, there have now been just 15 days since 1970 that saw both new highs and new lows hit even as high as 5%.

image

 

The presence of highs levels of new highs and new lows represents a key component of some notorious market warning signals like the Hindenburg Omen. As the ominous sounding names would imply, the historical stock market performance following such signals has been poor. We have found the same to be true with respect to our “Junkie Markets” — usually. A peek at the proximity of occurrences on the chart above would indicate why.

Many historical occurrences have taken place near key tops, either on a cyclical or intermediate-term basis. Why is that? We don’t have a concrete answer. Our guess is that perhaps there are a number of stocks below the surface that are breaking down – yet enough that are still performing well to mask that weakness and prevent market participants from getting too bearish. But that is just a guess. We will also note that a good deal of the increase in NYSE new lows yesterday was likely due to weakness in the bond market and the issues on the exchange that are sensitive to rates. However, that has not been a disqualifier in the past so we aren’t going to dismiss yesterday’s readings because of it.

We don’t really know (or care) why these conditions have often occurred near tops — just that that they do. And thus, the subsequent performance, in aggregate, has been poor. The following table shows the dates and forward performance of the S&P 500 following incidents when both NYSE new highs and new lows accounted for over 5% of all issues traded.

image

As you can see, intermediate to long-term performance has been poor. We will say that the longer-term numbers are heavily influenced by the 2000 and 2008 instances. On those occasions, the market had already topped and was well into its cyclical decline. That doesn’t really accurately portray our present circumstances, i.e., just off of a 52-week high.

Therefore, we took a look at those instances occurring just when the S&P 500 was within 1% of a 52-week high, as was the case yesterday. To increase our sample size, we did expand the sample to include all dates when new highs and new lows accounted for more than 4% of all issues. Here are the results, in aggregate, of those previous 22 occurrences since 1970.

image

There is good news and bad news here. The good news is that, as you can see, the long-term results were not disastrous as on the above table. That’s due to the 2000 and 2008 events being weeded out in order to get a sample that is more like our current episode. The bad news is that the short to intermediate-term returns were actually weaker, and consistently weaker.

That suggests that this data point may not be the long-term death knell that it has been on several occasions in the past. However, it also suggests a high degree of risk in the near to intermediate-term. That fits with many of the studies and observances we’ve noted recently. That is, in the near-term, the market has gotten well ahead of itself and may be due for a breather. However, the internals and price structure on a longer-term basis are still solid enough that, if historical tendencies hold true, stocks should be able to withstand the shorter-term weakness and eventually put together at least one more decent push to the upside in the longer-term.

*  *  *

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