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Every time we do the math for Dollar Trading Volume,
we are blown away by the results. From 1997 to the fateful year of
2000, DTV more than tripled and even 1997 was four times the total of five
years previously in 1992. Over the eight years leading into the greatest
speculative blow off of all time, DTV increased by an annualized rate of
36.5% per annum. The math is simply mind boggling. Despite
the tremendous collapse in prices following the manic peak in 2000, annualized
growth in DTV from then to now is still a robust 12%, almost as if nothing
had happened to deter interest in stocks. Indeed, from the low point
of the Depression in 1932 to 1992, annualized growth in DTV was only 5%,
roughly the same annual percentage gains recorded by the major stock averages.
As our first chart clearly illustrates, DTV as
a percentage of Gross Domestic Product (GDP) is once again in rarefied
atmosphere, second only to the manic highs of 2000. On an absolute
basis, DTV is on track to exceed the transactional velocity seen in 2000.
Our data is somewhat suspect since we are forced to estimate the total
for the American Stock Exchange. However, we do not include the totals
of any of the other U.S. stock exchanges, so if anything, our estimate
for total DTV is liable to be on the low side. Growth in DTV on the
Amex can be directly traced to Exchange Traded Funds (ETFs), which now
comprise roughly $335 billion in assets and are growing at a clip of close
to 35% per annum. The largest of these are the Spyders (SPY), which
represent the S&P 500. This ETF has achieved $50 billion in assets
based on its advertised investment qualities, yet investment does not enter
into the picture at all. Turnover in the SPY is grotesquely
huge. Average daily volume for the last three months is 82.6
million shares and at an average price of roughly $129, annual DTV could
reach $2.7 trillion alone. Can the SPYs be an investment vehicle
if the trust completely turns over more than 50 times in a year?
The U.S. stock market has morphed into our
worst nightmare. Investment is no longer relevant, only trading is
meaningful, and the entire financial industry is on the take for more volume
and more turnover, regardless of the true cost to investors.
It's all about product.
We could easily throw in the Nasdaq 100 Trust (QQQQ)
to bolster our case. This trust will likely generate $1.2 trillion
The SPY and QQQQ together are inordinately
popular trading vehicles and are responsible for one of every nine dollars
changing hands in the U.S. stock market!
DTV will likely be 280 times greater this year
than in 1929 while the economy in the form of GDP will only be about 140
times as large as it was in 1929. By almost any measure, the stock
market will have twice the influence, clout and importance that it had
However, as similar measures in 2000 amply
we are also facing at least twice the risk
suffered in 1929.
More trading means more speculation. One
way we measure speculation is to divide the annual change in total DTV
by the change in GDP. As the chart below indicates, the typical range
bounded by the green horizontal lines was between -15% to +25% from the
early 1930s to the mid-1990's, when stocks commenced their near vertical
rise. Our red horizontal line is an arbitrary demarcation for "bubble"
behavior and the Roaring Twenties were exceeded by only 1997-2000 but have
now again been challenged by the last three years. Speculation feeds
upon itself. It did in the roaring Twenties and it did as the 1990s
came to a close. The bubble of 1999-2000 has new been followed by
a distinct echo.
Speculation is visibly in place
In our view, the combination of the huge increase
in transactional velocity and speculation must create stress. Simply
put, the urge to trade equates to a constant need for reinforcement in
the form of short term profits. As the two prior bubbles amply proved,
as the urgency to profit builds, stress increases.
THE LEAD ARTICLE FROM THE JUNE 26, 2005 ISSUE OF CROSSCURRENTS
Over the years, our analysis has shown conclusive
evidence that the performance of the U.S. stock market is predicated primarily
upon mutual fund inflows. Our "Dead Zone" research is a large part
of the equation, clearly illustrating that the period from May 1st to October
31st is a barren wasteland, almost entirely devoid of profits for the long
term investor. Essentially, all that is secured during the Dead Zone
period is risk exposure and the passage of time.
But there is always more to the story and in recent
years, we have shown that market performance is also very much a mirror
of how inflows vary from month to month. Over the last 22+ years
covered in our spreadsheets, the Dow has increased in value in 61.8% of
all months, yet inflows have risen from one month to the next only 49.4%
of the time. As you might suspect, this means when inflows rise from
month-to-month, there is a distinctly positive impact upon prices.
Five of every six months of rising inflows are up on average, certainly
an enviable track record. On the other hand, when inflows decline
from month to month, prices only rise 40.7% of the time on average.
Since inflows during the Dead Zone period tend to decline, there is every
expectation for stocks to under perform. There is no guarantee that
prices will actually fall, but clearly, there is every reason to believe
that they will stagnate.
But there is even more. The most recent issue
of Robert Prechter's Elliott Wave Financial Forecast (www.elliottwave.com)
sported a wonderful chart showing the effect of inflows over three-month
periods, illustrating that peaks in inflows corresponded quite well with
peaks in stock prices. Steve Hochberg's excellent technical analysis
is always welcome on our desk, as evidenced by the revelation that "The
three-month average net flow into stock funds hit $31.8 billion in March,
a figure that is higher than every three-month period with the exception
of February, March and April 2000, the top of the Great Bull Market."
Neat. As our featured chart clearly illustrates, participants are
on yet another bee line course with the manic top in 2000, just as we have
shown in other measures, such as the Bulletin Board mania of 2006.
Three month inflows surged as high as $93.3 billion
as of the end of March, but amazingly, even this enormous influx of cash
was capable of generating only a 3.7% rise in the price of the S&P
500, the broadest of all indexes. It is clear to this observer that
stock prices are still so rich that even sideways support and the maintenance
of current prices requires huge inflows. Case in point; mutual funds
have benefited from more than $800 billion in net inflows since March 2000,
the absolute peak of the mania, yet the S&P 500 index is still down
12.6%! $800 billion bought no increase at all? Yes, the venerable
Dow has risen, but by only 2.6%. If that is all $800 billion can
buy, then what lies ahead if inflows begin to decline? And we do
expect inflows to decline. As we have shown repeatedly, the historic
tendency is for inflows to contract sharply into September. Stock
prices should go nowhere this summer.
The combination of a probably peak in three-month
and the typical autumn swoon is a scenario
ripe for added stress.
THE LEAD ARTICLE FROM THE JUNE 5, 2005 ISSUE OF CROSSCURRENTS
The recent sell off in bullion and gold stocks
has a lot of folks worried. While the precious metal dive was clearly
scary, the damage in gold stocks was enormous. In ten days, blue
chip gold stock Newmont Mining (NEM) was down 17.4% from print high to
print low, American Barrick (ABX) was down 18.4% and the smaller Goldcorp
(GG) was crushed by 30.7%. Is this only a correction? In our
view, the answer is an unequivocal yes.
Not only are we still bullish on the prospects
for gold and gold stocks, our outlook has been vastly boosted by the overwhelming
optimism shown in recent months. Remember, gold is storming out of
a bear market that endured for 21 years. The phrase "pent up demand"
applies and in spades, at that. Even when gold bulls measured over
90% and most were calling for a correction on what one would have to admit
was a sound contrarian basis, the metal not only remained firm but rose
sharply again, until very recently.
There seems to be much more to this market than
meets the eye. Despite the many stories in recent weeks about commodity
bubbles in oil, metals and particularly gold, we see this interest as a
groundswell move, recognition that demand for oil and metals is going to
increase quite dramatically in the decade ahead. We believe this
recognition is just beginning.
Our inflation adjusted chart clearly illustrates
that gold's bull market commenced coincidentally with 911 (both of our
featured charts today include the high print of $725 per oz. and the lows
of the recent sell off). Some observers have pointed out that the
world changed with the terror attacks on the World Trade Center, and it
has. But in more ways than one. The Twenty-First Century has
brought the Chinese economy into view as a new superpower that will someday
easily exceed the influence of the U.S. And where China leads, India
will eventually go. Between the two countries, three of every eight
people on the face of the planet harbor the same wishes for the same goods
and services enjoyed by Americans. The theme for the decade ahead
is demand, demand and more demand.
If you require any additional rationales, you might
want to check out James Turk's comments in the May 29th issue of Barron's.
Sandra Ward's interview with Goldmoney.com's founder reveals Mr. Turk's
arguments that, "...There are problems with the dollar, an that's being
reflected in a higher price for gold." Since Mr. Turk believes the
dollar is going lower, much lower, he believes gold is going higher, much
higher, to $8000 per ounce. While we are not anywhere near that pessimistic
on the dollar nor that optimistic on gold, we are quite confident that
our charted resistance points will be at the very least, tested.
Our featured chart shows the next major resistance
point is $856 per oz. We are confident the correction will not last
very long and when it ends, watch out. We strongly believe that our
former resistance point of $434 per oz. will not be seen again and that
any decline that reverses sentiment will itself be reversed in very short
order, suddenly viewed as a last ditch entry point by all those who have
yet to board this super bull market. Please refer to our page three
analysis and chart in the April 24th issue (see chart below) and our forecast
of a correction based on time elapsed since the start of the bull market.
The bottom for stocks in 1987 was achieved in less than two months.
The same period of time is likely the worst case for gold. We expect
the correction to end by mid-July at the latest.
One other very important point. If demand
for hard goods and commodities is on the kind of incline we believe it
is, there will be sufficient residual demand for paper to maintain support
for most of the world's financial markets. Any prospects for a huge
breakdown or crash at some remote point likely now depends totally upon
the derivative markets and the possibilities for a cataclysm like the one
that befell Long Term Capital Management in the fall of 1998. There
is never a free lunch and the one thing you can always count on in any
market is risk. Any entity is capable of laying off risk with the
construction of a derivative security, but it must be patently clear that
the risk is only transferred. Even if the transferred risk is laid
off, and transferred again and again along a long chain of interested parties,
the risk remains in the system and can never be erased. The derivative
wildcard will always be there and always threaten the financial markets.
And if the worst case scenario ever arises, we can't imagine a safer place
Note: the above article and charts have not been
updated. Also note the equivalent time frames highlighted for stocks
into the 1987 high and for gold into this year's peal. We have already
commented about the possibility of a correction in gold as a mirrored pattern
and indeed, a correction in gold occurred. Our newsletter commentary
also forecast that the timeframe for the collapse in stocks in 1987 would
equate to the timefram for the slide in the price of bullion. That
would mean a bottom for gold no later than the end of August.
If gold again now rallies, we believe it
will be another sign of stress for stocks.
A PORTION OF THE LEAD ARTICLE FROM THE AUGUST 26, 2005 ISSUE OF CROSSCURRENTS
WISH TO SEE THE ENTIRE ARTICLE, PLEASE EMAIL
In the week ending June 30th, the New York Stock
Exchange abruptly changed the way program trading activity is calculated.
We quote from their news release (see http://tinyurl.com/hnp84),
"Program Trading as a percent of NYSE volume was formerly calculated as
program buy volume + program sell volume as percent of NYSE volume. A more
accurate calculation would be program shares bought, sold, and sold short
as a percentage of NYSE shares bought, sold, and sold short." In
other words, the NYSE will essentially now multiply all volume transacted
on the exchange by two for their calculations. All other volume statistics,
such as daily and weekly volume reported by the exchange, remain as they
always have been reported. So, why double reported volume?
Doubling volume for program activity calculations
effectively halves the percentage of trading devoted to programs, which
clearly presents the statistic in a far more palatable form to the public.
Program activity had risen from an average of 19% of daily trading in 1999
to over 62% this year and there was ample concern that analyses such as
ours were finding their mark - simply put, the more programs ruled our
market, the less impact fundamentals could possibly have on stock prices.
The fear was that eventually, the stock market would necessarily be overwhelmed
by inefficient and unrealistic prices. Eight years of extremely high
price earnings ratios and extremely low dividend yields would appear to
have confirmed those fears. When program activity pushed towards
this year's highest levels, we commented repeatedly that fundamentals were
completely disappearing behind activity based on index arbitrage and tactics
and strategies designed to take advantage of fleeting and almost infinitesimal
price anomalies. Throw in the mass purchases and sales of indexed
securities by both passively managed index funds and index and sector ETFs
plus the catch up moves practiced by actively managed funds, a/k/a "closet
indexers," and the pursuit of value is perhaps nowhere to be found.
As our featured chart clearly illustrates, growth
in program activity has been on a rather fast track for quite some time.
The lower line comprises the only data released by the NYSE thus far for
activity under the "new calculations." In the week ending June 2nd,
program activity had risen to a record 73.3% of all trading using the old
computation, thus the concerns about public perceptions were raised higher
than ever before. The NYSE had in fact, previously stated a few months
ago that the effect of programs were overstated if one used the new calculation
that simply multiplied trading volume by two. Thus, when program
activity under the old calculation achieved yet another and rather dubious
record of 92.8% of all trading volume during the week of June 30th, the
change was immediately made and the NYSE managed to rewrite history.
In retrospect, there was undoubtedly a huge surge in index related activity
as the second quarter was coming to a close. The Russell and S&P
500 index rebalancing acts were likely candidates for the blame.
But even under the supposedly more accurate new calculation, we know without
any doubt that roughly half of all shares did not trade on the basis of
individual corporate fundamentals and prospects. The important question:
under the circumstances, how can prices reflect reality? The only
answer: to a very significant degree, they cannot.....
[THE MIDDLE PORTION OF THE
ARTICLE HAS BEEN EXCISED]
.....If you are an investor in the 21st century,
all you need to know is that you are probably better off not believing
anything you hear and only half of what you see. Trust is no longer
on the table for you and I. Trust has been sacrificed so that the
industry can do additional business.
As far as this writer is concerned, it's all about
product. Individual companies no longer matter because for the most
part, they are now too small to matter and in the final analysis, there
are way too many of them to research and follow. In one recent week,
more than 8000 issues traded on the American markets, of which we estimate
at least 60% were individual entities in the form of operating companies.
With so many complications at hand, active managers are accepting the cost
efficiency of sector and index ETF purchases. ETFs now number 263,
of which 194 are domestic equity and 63 global and international (six are
bond index ETFs). As late as 1995, there were only two ETFs.
Since the manic peak of 2000. new ETFs are appearing at the rate of 22%
Thus, the U.S. market is now very much a
market comprised primarily of indexes and sectors, rather than a market
of individual common stocks. Since the analysis of individual companies
has become less relevant, the concept of divining a fair value for individual
corporation prospects has also become less relevant. As a result,
the prices of the component issues must be considered suspect. If
the prices of the component issues are suspect, then so must be the prices
of the indexes and sectors that accommodate them.
We still believe U.S. stock prices are headed
much lower into the autumn and that prices are destined to remain under
pressure for several years to come, burdened by the tremendous apathy shown
toward investment in individual stocks and the reliance instead on sector
and index “analysis” and in particular, the enormous amount of trading
dealing with strategies and tactics that otherwise have nothing to do with
individual corporate prospects. No matter how you slice them, the
NYSE program trading statistics offer proof that investors cannot trust
the prices of component issues to reflect fair value. If a more accurate
rendering of programs illustrates that they constitute only one-third of
all trading, rather than two-thirds, should we be mollified? Remember,
program activity is growing at a pace of 18.6% per annum. Take the
current growth in programs out to 2009 and no matter how you calculate,
programs will account for well over half of all trading. Take the
current growth in programs out to 2011 and programs will account for well
over three-quarters of all trading. Another year and it will be more
than 90% and no amount of new math nor novel methodology will suffice to
ease concerns. The American market will be for all intents and purposes,
a trading vehicle and nothing more. Investment per se will have ceased
If the rationales for investment are
isn't it reasonable to assume stress is
on the rise?
Despite the obvious transformation of the U.S.
stock market from investment to trading vehicle, the marketing pitch overwhelmingly
remains "buy for the long term." Ask any brokerage firm for the facts
and they gladly sport statistics that show the long term is practically
a guarantee. Well, it is not. As our final chart clearly illustrates,
there have been many 20-year periods where the right choice was to be out
of stocks. Indeed, returns over all rolling 20-periods were negative
5.4% of the time and returns were under a 2% annualized rate almost one-quarter
of the time.
A prior break down in the trend in the late Sixties
led to a devastating secular bear market. We believe the break down
in the trend from the 2000 peak indicates the same circumstance, a secular
bear market firmly in control at this time. Certainly, it must be
conceivable that returns will once again fall to zero at some point.
And clearly, it makes sense that returns could easily fall as low as 2%.
However, our minimum expectation is that the long term 20-year trend will
return to the average of the last 90 years at 5%, which still equates to
major damage, either in price or in time, as investors patiently wait for
a secular bull cycle to commence. For instance, our 5% target could
be achieved if we postulated an eventual secondary bear market low at Dow
8500 in November 2011. However, if stock prices simply traded sideways
from the August 18th close above Dow 11,300, the 5% long term number would
not be achieved until April 2015. Either way, we see investors as
But then again, the U.S. stock
market is not for investors any more, is it?
There is nothing like the downside to increase
stress. And the longer the downside persists, the more stress impacts
investors. Patience has not paid off over the last six0and0a0half
years and is not likely to pay off for quite some time to come.
Stress will continue to build.
The Dow now stands at 11,284.
The Dow first traded at 11,284
in late August 1999
The S&P 500 now stands at 1295.
The S&P 500 first traded
at 1295 in early March 1999
The Nasdaq composite now stands at 2140.
The Dow first traded at 2140
in late December 1998
Investor patience will not
Stress is building....
to maintain our forecast of a secondary secular bear market low target
of Dow 8500. These levels equate to SPX 970 & Nasdaq 1610. Caveat:
these levels could be achieved several times in the next few years
and it might be as much as another decade before a new secular bull market
is capable of taking all of the major averages above the peak achieved
in 2000. While the Dow obviously maintains the best chance of achieving
new highs, the SPX is still 20% away and Nasdaq is a resounding 136% from
the all time highs.
Targets for 2006
Dow 11,670 /// SPX
1326 /// Nasdaq Composite 2375
Targets for 2006
Dow 9600 /// SPX 1060
/// Nasdaq Composite 1800
Odds greatly favor
that the highs for 2006 have already been achieved
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I hope you have enjoyed your visit and please return
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we have to offer, we'd be happy to have them visit as well!
Alan M. Newman, August 28, 2006
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All information on this website is
prepared from data obtained from sources believed reliable, but not guaranteed
by us, and is not considered to be all inclusive. Any stocks, sectors
or indexes mentioned on this page are not to be construed as buy, sell,
hold or short recommendations. This report is for informational and
entertainment purposes only. Persons affiliated with Crosscurrents
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or other derivative securities mentioned in this report. Our perspectives
are subject to change without notice. We assume no responsibility
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