7, 2008 -- In October, the Dow lost 14 percent, it's worst performance in 23 years while commodities as measured by the CRB index fell 26 percent, the worst decline in 37 years. It was a bearish month indeed. But what does a historically weak October suggest for the Dow during the month of November? The Dow has fallen 10 percent or more in October only six times in the past 93 years. It is rare for the market to endure such a percentage beating.
According to Birinyi Associates, when those weak Octobers occurred, the Dow followed up in November, with an average decline of eight percent. Birinyi Associates is a stock market research and money management firm. Their approach is to understand the psychology and history of the markets, and most importantly the actions of investors. Much of their effort involves money flow or ticker tape analysis according to their website.
There is more to the strong headwinds fronting the Dow this month than money flows, ticker tape analysis and psychology. Paul Krugman, columnist for the New York Times, a professor of Economics and International Affairs at Princeton University and recipient of the Nobel Prize in Economics said, “The long feared capitulation of American consumers has arrived.
“According the GDP report, real consumer spending fell at an annual rate of 3.1 percent in the third quarter, real spending on durable goods (cars, TV's) fell at an annual rate of 14 percent. To appreciate the significance of these numbers, you need to know that American consumers almost never cut spending. Consumer demand kept rising right through the 2001 recession; the last time it fell even for a single quarter was in 1991, and there hasn't been a decline this steep since 1980, when the economy was suffering from a severe recession combined with double-digit inflation.”
Birinyi is suggesting psychology will make for a weak November while Mr.Krugman, believes it will be the sea change in consumer spending habits that push the Dow into the red. Then there is the work of Greg Weldon, the supreme slicer and dicer of numbers, a true data wizard with few equals.
Mr. Weldon is publisher of Weldon's Money Monitor. As described on his website his newsletter is a “fluid combination of top-down fundamentals, bottom-up technical analysis, inter-market examinations, psychology, and intuitive insights reconciling the dominant secular macro-trends against the shorter-term micro-evolution taking place. Weldon's Money Monitor is a highly respected daily global capital markets research letter, having garnered some of the world's most respected fund managers, traders, and institutional money movers as loyal reader.”
In an article entitled, “Can't Borrow on Your Home? Whip Out the Credit Card!” Mr. Weldon writes, “What consumer spending there is has been fueled in part by credit cards.” He notes an obscure but ominous piece of data; “the second largest ‘"merchant-vendor"' for credit card use is now McDonalds. Analysts view that data bit as suggesting many consumers are in serious financial trouble when they have to pay $5.25 for a Big Mac meal with a credit card. Weldon also writes, “This is the problem facing the economy next year. Credit card growth like we have seen in the last few months has never been sustained at such a level, and is unlikely to be this time either. This is especially true as credit card delinquencies have been rising, as noted above.”
The logic behind why the Dow could turn lower in November may be sound but it is still old news. Markets tend to operate on the, “tell me something new” theory rather than rehashing stale, worn out ideas and information that are known to everyone. Including the markets.
Take for example, today's Employment Report showing the economy shedding 240,000 jobs after a loss of 284,000 jobs in September, the biggest two month slide since 2001. The job losses pushed the unemployment rate to 6.5 percent, the highest level since 1994. The report was clearly bearish but the Dow took one look at the ugly numbers and promptly rallied 200 points. The market went up on bad news!
A market that rallies in the face of bad news it is a sign of a market that wants to rally. That does not mean the news in the coming days, weeks and months regarding the economy will get any better. It simply means the news was already discounted as being stale. Old. It was rehashing what everyone already knew or strongly suspected!
Ignore all the news, good or bad. Instead, focus on the 7900 level for the Dow Jones. As long as that level is not taken out to the downside in decisive fashion the market is in the slow, agonizing process of carving out a meaningful long term low. If that level is shattered, then all bets are off as to how deep the market needs go before it finally bottoms out.
(The information in this article is the opinion of Commodityinsite. com's Jerry Welch and subject to change without notice.)