In "Some Funnymentals"(below) I wrote about some of the factors which explain why most stock indices markets have gone nowhere in 2004-2005.
The main reason is that despite enormous growth in corporate profits, both M2 money growth and the ten year treasury bond yield minus the FED funds rate have depressed growth potentials. See the analysis based upon Paul Kasriel's arguments earlier this summer which were buttressed by the Conference Board's Leading Economic Indicators.
A second reason was the rising household debt to disposable income ratio which Kasriel and I showed as historically impacting spending, and hence GDP, thence stocks.
Nothing goes in a straight line, and we have had a substantial 5-10% sell off in market indexes which validates much of the above. However, in the past three months both M2 money and MZM money (cash) have begun growing again after a year's pause. FED actions affect these short or no duration moneys, but so do stock market moves. When people take money out of stocks it's either because of profits or fear of losses. In either case it means there is more money for expenditures or for investment. Currently with short term rates rising, cash may also be a preferred investment, with some money market funds (Vanguard's Prime Money Market Fund comes to mind) yielding close to 3.4%. Neverthlesss there is no penalty or loss of investment principal when you take cash money for another purpose, so cash is always "hot money" in a sense. If you are familiar with Terry Laundry's T Theory of cash build ups, you'll have a good idea where this can lead: http://ttheory.typepad.com
On another subject, I promised earlier last week to write about market analogies between now and 1934-35, because I think this may be the bullish "sleeper" amongst all the gloom and doom scenarios after a stagnant period and pullback.
Over the past four months, four different people have drawn my attention to the similarity of the NASDAQ 100 chart since 2000 and the DJIA chart from 1929 to 1935. I don't believe any of these four knows any of the others, and each approaches the markets from a different perspective and with different tools. It's possible they all are being influenced by someone else of course. Two are very successful private traders, one in central Europe and one in the US, and two are money managers who publish investment newsletters.
There are whole websites devoted to comparisons of "now" and "before" with percentage similarities on a day to day or week to week basis. Moore Research Center is one such: http://www.mrci.com/special/
I have always been biased against such minute comparisons as they seem to be favored especially by "crashistas" looking for a 1929 or 1987 crash next month or next week! But there are some superficial similarities of the economies and the markets of 2000 and 1929 and their aftermaths.
Disinflationary booms created manic bull markets followed by three year "crashes" of about 90% in the 1929 Dow and 2000 Nasdaq. Then there were major bullish recoveries of a year or less followed by nearly two years of high level consolidation when the market went nowhere. Don Hays of http://haysmarketfocus.com (this requires a signup process for a three day free look), one of my four sources, adds that the recovery off the 1982 multi year bear market low was much the same. Each of the three markets, 1933-35, 1983-85, and 2004-2005, spent 22 months, 27 months, and 22 (currently) months respectively before taking off in major bull market extensions for two years more.
One of my other sources showed that the position of the 50 and 200 day moving averages of the current Nasdaq100 and 1935 DJIA are quite similar, and another source has cogent Gann timing reasons which are virtually identical to 1935. Also it's probably a coincidence, but each of these examples ended in year 5 of its decade. This reminds me of the famous "Tides in the Affairs of Men", the original decennial pattern of Edgar Lawrence Smith, discussed and/or extended by many including W. D Gann and Edson Gould. 2005 looks to be an exception to the general rule so far, unless............................
Here are the three charts involving the 1935, 1985, and 2005 ends of high level consolidations after runs up from major bear market lows. You be the judge. (Left click on the images for a large version .)
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