Monday, March 12, 2018

Troubling Midday Reversal Sends Dow Down Again

The roller coaster continues. Beginning February 1, there have been 27 trading days. Of those, on the Dow, 15 have finished positive, 12 negative. It's fair to say that this has been essentially a directionless market for nearly a month-and-a-half, unless one takes the view that it's the beginning stage of a greater, cyclical bear market.

The Dow Jones Industrial Average closed at 26,186.71 on February 1. Today's disappointing close was 25,178.61, a little short of an 1100 point decline, but barely a blip on a logarithmic chart, a mere four percent.

What's more troubling than the small decline over the past five weeks is the time it has taken for the Dow to recover, and it hasn't fully regained all of the losses.

The low point - 23,860.46 - was February 8, so the Dow has recovered more than 1400 points since then, but, for a market that until recently had been racking up wins faster than a track star on steroids, the performance of late has been a real disappointment.

While the main driver to the downside may be nothing more than simple overvaluation, that alone is a real problem which can only be fixed two ways: 1) higher profits (EPS), or; 2) lower price per share.

It appears that the trend-setters in market-land have chosen door number two, because, while there may be adequate rationale to take a positive view of the economy, stocks have pretty much priced themselves out of any further upside. Real earnings, from increased sales, sound management, new product cycles, higher profit margins - those things which exist in real economies - are not to be found in many mature companies these days. Easy credit and stock buybacks have boosted share prices by diminishing the number of shares outstanding, thus making earnings appear better because they are divided by fewer shares.

Essentially, Wall Street has been playing three-card monte with investors, buying back stock, enriching shareholders and executives while doing little to nothing to improve the business. Capital investment has been sullen for the past decade, and, if stocks begin to tailspin, don't look for companies to begin investing in better infrastructure, more R&D, or ramp up employment. The people running these companies read from the same playbook, and they're more likely to become more entrenched, slash costs and lay people off, a recipe for disaster and a longer downturn.

The next few trading days should be quite instructive as a short-term chart pattern is possibly emerging. A close above 25,709.27 (February 26) would signal a reversal from the downtrend. Anything approaching the interim low of 24,538.06 (March 2) could be cause for alarm, indicative of fourth declines.

At the end of all this is the FOMC meeting on March 20-21, at the end of which the Fed will likely announce another increase of 25 basis points to the federal funds rate, a move which will put the overnight lending rate at 1.50-1.75% and would be the fourth increase in the past 13 months. The Fed first raised rates off the "zero-bound" in December 2015, but moved cautiously, not raising again until December of 2016. Since then there have been three ore 25 basis point hikes, in March, June, and December of last year.

This expected hike could be one too many, and too soon. With the economy still doodling along at 2.3% for 2017, the Fed may be too far out in front of their inflation and expansion projections.

There is much to digest between today and the FOMC meeting, but it appears the Fed has already made up its mind.

At the Close, Monday, March 12, 2018:
Dow Jones Industrial Average: 25,178.61, -157.13 (-0.62%)
NASDAQ: 7,588.32, +27.51 (+0.36%)
S&P 500: 2,783.02, -3.55 (-0.13%)
NYSE Composite: 12,898.40, -20.42 (-0.16%)
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