Stocks

Yesterday's plunge looked like panic to me.  Such a quick, dramatic move has (Elliott) 3rd wave written all over it.  This morning's Zach's email from Steve Reitmeister says:

The odds of a recession have increased. And the average stock market decline during a recession is around 40%. So with much greater risk to the downside, investors are fleeing stocks in a hurry. I sense we will make it down to around 1151 for the S&P 500 on this leg of the journey. What is so special about that level, you ask? Because nearly every time the stock market has declined greater than 16%, it signals a recession and further stock declines. 1151 is the 16% mark from the recent highs. Put a note on your computer to watch what happens as we approach that mark. 

It's an interesting view.  But do average historical precedents mean much in today's specific situation?  I see nothing special about either 1150 or 16%.    Looking at the intraday highs and lows since the 7/21 top at 1347.00, which I am taking as the beginning of a wave 3 down, suggests that the drop from the 8/01 high of 1307.83 is a 3rd wave of a 3rd wave.  The first wave was a decline of 64.14.  This 3 of 3 is at 117 and counting.  I can't see this 3 of 3 bottoming anywhere above 1170.

Here's a best case scenario.  At 1170, the 3 of 3 drop is 138 points.  A .38 retracement would put a subwave 4 top at 1223.  Then, if sub wave 5 = subwave 1, the end of wave 3 is at 1158.  That's pretty close to Reitmeister's 1150, oddly enough.

There is a potential support band in the range of 1000 to 1050, and that is where I expect this wave 3 down to end.  But this is nowhere near a real finish.

Some roller coaster rides are all fear, no thrill.

 Update (1:30 p.m):  Subwave 3 of 3 bottomed a little before noon at 1168.35.  Around 1220-30 looks good for a subwave 4 top, and we should get there before day's end.

Update 2 (after closing):  The post-opening intraday high was 1213.59, within a tic of a .33 retracement.  This ended wave 4, and wave five down has begun.   Subwave 1 bottomed at 1191.57.  Sw 2 is in progress at today's close of 1199.38, very close to a 50% retracement of sw 1. If it hasn't ended already, it should early Monday, followed by a sw 3 down.  We shouldn't expect 3 of 5 to be as dramatic as 3 of 3.  But with two down subwaves ahead of us, the bottom is still quite a ways down.  If wave 5 = wave 1, that will take us close to 1100.  I still expect a bottom in the 1000 to 1050 range.


Here is a Yahoo chart of today's action, with wave labels added.

Again, this is just the beginning.  Look out below!
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Wow - More Lucid Candor

From David Frum.  This is impressive.

Imagine, if you will, someone who read only the Wall Street Journal editorial page between 2000 and 2011, and someone in the same period who read only the collected columns of Paul Krugman. Which reader would have been better informed about the realities of the current economic crisis? The answer, I think, should give us pause. Can it be that our enemies were right?

 
Via Krugman. And who can blame him.

For perspective, you might remember that Frum was fired from the American Enterprise Institute for speaking the truth.
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I Am So Proud . . .

. . . of my lovely wife.

Here is a message she sent to Harry Reid today.

I want Senator Bernie Sanders on that super committee that is being formed. I also do not want any "Blue-dog" Democrats on the committee.  It is vital that the Democrats you select are strong-willed and determined to protect the poor, the sick and the elderly among us from the Republicans, who care only for their rich benefactors.  

I am tired of the way things have been going and there must be a change.  It is time for the Democrats to stand up for the little guy.  That's what they have always done.

I am also sick of hearing the phrase, "ask the rich to do their part".  What's with the ASKING?  Nobody asked the rest of us.  It is time to TELL them to do their part.

Sincerely,

Mrs. JzB

She sent a similar message to Nancy Pelosi, with Dennis Kucinich as the prime recommendation.

Have you written your Senator?  Your Congressperson?  You should.

Today is also the LW's birthday.  Happy Birthday, baby.  You are the best.
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Second Thoughts

I'm starting to regret the comment I left at Beckworth's Place re: Russ Roberts - or at least the last part of it.

Update: Roberts engages me in comments at Beckworth's.

Although this is marginally off-topic, I have to point out that Roberts is misleading with his WW II demobilzation post. His cheery-picked quotes are without merit. Samuelson was wrong, three years earlier. So what? Does Roberts have a perfect crystal ball? And Truman's economic report was overly-rosy political hype. Go figure.

Truth is, the troops demobilized over several years - the draft continued well into 1947. Further, the GI bill sent many vets into school, not the workforce. Rosie the riveter went home and had babies - like me, frex, opening up a job or two. Wartime shortages, rationing and high savings rate caused a huge pent-up demand, so growth was pretty much inevitable, since it had-been supply constrained, and that was relieved.

It's no coincidence that Hayekians and Libertarians focus on the post WW periods to validate their claims. These periods are aberrations. And then they have to misrepresent reality to make their points.

JzB

Not that I regret saying it - I just regret saying it there. I shouldn't use up David's band width for my rants.  So I'll continue here.  While engaging in this chicanery, and with the typical right-wing tone-deafness to irony, Roberts obliquely accuses Krugman of intellectual dishonesty - a charge echoed explicitly in his readers' comments: "Unfortunately, Krugman doesn’t provide a link to those “many studies” of the historical record. Maybe he was busy or simply didn’t have room to provide them."

It is particularly ironic - and unfortunate - that this phrase in Roberts' Post - and, I guess, my favorite bit of his polemicism - is this linked phrase:  "Yet despite the release of 10 million people into the labor market with demobilization private sector employment boomed and the economy thrived."   Not only is this quasi-example pretty much irrelevant to Krugman's point, it doesn't link to anything even remotely resembling facts or data.  It links to one of his own posts where he drags out the two quotes I dismissed above.

Update:  I should also point out that Beckworth puts the lie to Roberts' point by providing the links he seems so desperately to crave: "e.g. here, here, and here" (PDF files.)  Roberts is an economics professor at George Mason University, and ought not to need having the literature searched for him. 

Besides, I've actually looked at the thriving post WW II economy, here and here, and found it to be rather weak tea.

This is why I have no patience with Hayekians and Libertarians.  They live in an isolated world of their own creation, consuming only what meager fare cherry-picking provides for them.  It's no wonder they are intellectually starved.

I've crossed paths with Roberts before - he even paid a very gracious visit to this humble blog after I ripped up one of his earlier posts - and in a far less gracious way.  I have no personal animus towards Roberts, and respect him as a gentleman.  But the mental games that he and all Libertarians play to preserve their skewed view of the world seriously makes me crazy.

Cafe Hayek - come for the epistemic closure, stay for the (unintentionally) irony-laden intellectual dishonesty.

Stock Up Downdate

OK. This is the bottom falling out.

Graph from Yahoo Finance.

Yesterday.

B. Hoover Obama

 I just heard Krugman tell Keith Olberman that Obama's speeches sound a lot like those from Herbert Hoover in 1932.  "It's really quite depressing," he added, with no apparent sense of irony.

Hoover = Obama.

Why didn't I think of that?

Update (8/04):  Happy birthday, Dear Mr. President.

I thought I was being clever and unique in referring to Mr. Hopey-Changey in Hooverian* terms.  But a few seconds with TEH GOOGLY  has disabused me of that mistaken notion.

Other references provide quotes and react in a range from the quizzical to the severely misguided** (though very well written) to deep disappointment to something bordering on despair.  I am not alone.

_______________________________
* The earliest use on this blog that I can find quickly is from Feb 2, 2010.
** Seriously - Glenn Freaquing Reynolds!?!
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Today's Stock Report

My S&P 500 bounce expectation from yesterday looked pretty forlorn this morning.  But after sinking another 20 points (1.6%) to 1,234.56, bounce it did to 1260.34, within a point of the high for the day.  This is also right in the range of the former support band.  While this could be support reasserting itself, it's also true that yesterday's support becomes tomorrow's resistance.

Yahoo Finance provides technical indicators for intra-day data, and momentum, as measured by MACD (26,12,9 -- I suppose these are in minutes,) peaked before 2:00 pm, and languished for the final two hours.

Despite the positive finish on the day, short term momentum indicators crashed through zero (actually yesterday, and continued falling today) for the first time since climbing from the mid-June lows.  Longer term indicators turned down more sharply. They have not touched zero this year, but are now on their way.   The mid-day rally is not the sign of a market recovery.

In this morning's e-mail from Zach's, Steve Reitmeister states he has gone to 0% long stock exposure, citing these reasons.

Simply, the economic data is not good. The final straw for me was the hefty negative revisions to GDP plus an ISM Manufacturing survey that is teetering on a negative reading. This now has me contemplating a 50% likelihood for a recession on the horizon. That leaves 50% likelihood of Muddle Through Growth which would provide modest gains for stocks going forward. The problem is that far too many investors were expecting better than Muddle Through Growth for the 2nd half of the year. As those investors ratchet down their expectations, they will also decrease their risk appetite for stocks.

The DJI finished up 29.82 today at 11,896.44.  Barring a big turn-around in economic data, Reitmeister sees the DJI down to 11,000, and possibly far lower.

Hang on to your hats.
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On Playing Monopoly

I have done it wrong all my life.

You have done it wrong all your life.

By "wrong" I mean not in accordance with the rules.

"Oh - of course," you say, "everybody does that."

But not in the way you imagine.  I'm not talking about house rules.  I'm talking about ignorance.  You have always played it wrong because you don't know how to play it right.

H/T to Johnathon Bernstein. (Pt 7 at the link.)
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Inflation? No Thanks, already had some! (But not recently)

Zheng Liu and and Justin Weidner of the Federal Reserve Bank of San Francisco demonstrate that over the last couple of decades headline inflation effects have been ephemeral, and have not fed into core inflation increases.

They invoke anchored expectations, which I think might be some bastard relative of the confidence fairy.

At any rate, if you think we are in the midst of, or anywhere near to approaching an inflationary crisis, you are quite emphatically wrong.

BTW this does not mean that I refuse to recognize that headline inflation can be quite painful in the short term.  It does mean that making policy decisions based on headline inflation moves is an exercise in futility. 


H/T to DeLong.

Update (8/04):  BT left such a good comment that I'm hoisting it up to the main post.

Headline inflation since the imposition of strict money supply management starting in the 1980's is fundamentally a money re-allocation syndrome -- the re-allocation of money from other asset items to the chosen asset items. Thus why increases in headline inflation are not reflected by changes in overall inflation, prices of some things are going up, yes, but that is being accompanied by reductions in spending in other things, not by creation of new money to drive up prices across the board.

In other words, core inflation is a monetary event, and if there is no monetary event -- if there is no increase in the effective money supply because issued M2 is simply being stashed in the Fed's electronic vaults, for example -- there is no real inflation, just the actions of speculators moving their money around driving prices of a few asset types up and down according to the whims of Wall Street gambling. Making monetary decisions based upon the whims of Wall Street gamblers rather than upon hard money supply facts is thus about as reasonable as making decisions about what clothing to wear outside today based upon throwing dice. I assure you, that wearing your winter coat in August in the continental United States is rarely the proper thing to do, regardless of whether throwing a snake's eye when you throw your dice means "wear winter coat"...

- Badtux the Snarky Economics Penguin

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Investment, Consumption, and Progressive Taxtion

This is the title of a thoughtful and thought provoking post by Bruce Webb at AB.

If you go read it, as a no-extra-charge bonus you get to see me make a horrendous blunder in comments.
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Taking Stock

The S&P 500 Index at 1271.91 and falling, just slipped below the lower bound of an upward-slanting trend channel that began at the 3/12/09 close of  679.53.  The market has been trending sideways since mid-February of this year.  Sideways moves are hard to figure.  Is it a pause on the way to new highs or the beginning of a new downward phase?  My money is on the latter.  Corporate profits are ridiculously high - but none of that is based on growth.  And what growth prospects do you see on the horizon, at any term length?

...............

UPDATE:  Here are some views posted by Rebecca Wilder at AB.

Terrible GDP Report

Slowing Global Economy

...............
There is a support band around 1256 to 1272, starting in late March of this year.  If that gets broken, the next potential support might be around 1000 to 1050.   Beyond that, it's the 2009 bottom.

Long and short term momentum measures have been stagnant, at best, during this sideways phase, and are about to fall through 0.

I'm anticipating a big decline, but I've been pessimistic for the greatest part of a decade.

We shall see.

UPDATE 2: While I was playing taxi for granddaughters this afternoon, the stock market took a head-first dive into the sewer.   The DJI was down 265.87, or 2.19%.   The S&P 500 was off 32.89, or 2.56%.  The Nasdaq fell 75.37, or 2.75%.  The bluer the chip, the less the decline.  In other words, riskier issues overachieved in leading the losses.  The flip side of a flight to safety is a flight from risk.

This placed the S&P 500 close at the yearly low, negative for the year to date, and slightly under the 1256 to 1272 support level range cited above.  This is merely a peek over the brink, not a crash through the barrier.   But, with 7 straight down days (8 for the DJI,) it's pretty clear that upside momentum is spent for the nonce.  This does not guarantee an immediate steep drop. In fact, I would be quite surprised if there isn't a bit of a bounce tomorrow, since nothing moves in a straight line.  But I am now quite sure that over the next span of weeks to months stock movement will be negative.

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Is It Worth it to YOU?

Source:  MaddowBlog

H/T to the LW.
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