Wednesday, March 23, 2005

Mark Rostenko is the Sovereign Strategist

Mr. Rostenko publishes a free e-newsletter once every week or two. It's certainly worth a look. Here's what he sent out today.

Spring Has Sprung and the Market’s Done?

Have you noticed? Stocks are falling. Oh, not enough to
give the bulls nightmares at this point. Perhaps it’s just
another dip in the eternal bull market, yet another buying
opportunity. On the other hand, there’s a very good
chance that recent weakness is signaling the end of the
cyclical bull and re-emergence of the secular bear.

While the overall trend remains upward, cracks that began
to appear some time ago continue to grow wider. A
glaring divergence between the Nasdaq Composite and
the other major indices tops the list.

Those familiar with Dow Theory understand the
importance of confirmation between the Industrials,
Transports and Utilities. I’m not so sure that the Dow
retains the significance it once did and prefer an updated
version of the theory which observes relationships
between the Dow Industrials, S&P 500 and the Nasdaq
Composite. In a strong and healthy bull market we like to
see all three indices moving generally in tandem.

It’s no secret that the Nasdaq was visibly absent at the
recent new cyclical bull market high party for the Dow and
S&P 500. That first major sign of weakness was
confirmed last week when the Nasdaq fell below its
January low, thus extending the bearish intermediate-term
trend which began in earnest on the first trading session
of this year.

Arguably the Nasdaq hasn’t moved quite in tandem with
the other indices for some time so we might be tempted to
dismiss the apparent significance of this development.
We might, were it not for the fact that both the Dow and
S&P 500 failed dismally at their recent new highs. What
should have been a bullish event ushering in new buyers
and renewed bull market enthusiasm instead woke up
sellers who grabbed the ball and ran with it, to almost a
5% decline in two weeks (S&P 500).

Now just for sport, let’s engage in typical investor/media/
government/Fed practice and all stick our heads in the
sand and ignore all those obvious danger signs. (Click
your heels together three times and mutter “Bubbles never
pop! This time it really is different!” for good measure.)
With heads firmly planted underground, we’re more likely
to experience a swift kick in the rump by a few other
unmistakably foreboding divergences.

Take a gander at the financial stocks. Or just at XLF, the
Financial Sector “SPiDeR” if you’re exceedingly lazy like
me. What we have here is a series of descending highs
indicating that buyers have grown weary. Top it off with
last week’s breakdown that confirmed a major top.
Meanwhile the energy stocks are in the stratosphere.
Bearish financials coupled with bullish energies doesn’t
generally paint a rosy picture for the market as a whole.

While you’re at it, take a peek at the CRB Index which hit
a new 24-year high last week. Prices of tangibles, real
goods, continue to climb while paper assets struggle. The
18-20 year paper/tangibles cycle that I discuss from time
to time is obviously in full swing and still only in its early
stages. Should paper (stocks) regain long-term strength,
it’d be in direct defiance of a consistent and undisputed
130-year pattern.

But somehow I doubt that things are different this time, my
primary evidence being that they never are. Only the
faces of the clowns who insist that “this time it really is
different” change. (But not nearly fast enough for my

Anyone expressing any semblance of surprise at the sell-
off and growing weaknesses simply hasn’t been paying
attention. Or perhaps paying far too much attention to
Chief Spin Doctor at the Ministry of Economic Propaganda
and Fantasticallacious Financial Delusions, Alan
Greenscam who, as usual, delivered yet another long-
winded and painfully dull reiteration of the ”everything is
fine and under control” song on Tuesday.

Naturally the Fed acknowledged inflation concerns to
prevent the commentary from slipping too deep into the
patently absurd and 100% laughable. Even the Fed
knows you can’t fool all the people all of the time, (just
most of the people most of the time), so it’s wise to
acknowledge some kind of risk in order to maintain some
modicum of credibility.

Say what you will about the risks of inflation, but prices
are rising and it has everything to do with a weak dollar,
the result of massive credit and money supply expansion.
More and more dollars fetching a relatively steady supply
of stuff. What’s the risk of $60 oil and $3 per gallon
gasoline? Pretty high in an economic expansion that is at
the tail end of historical average longevity. But don’t worry
about that. The White House assures us that adjusted for
inflation, gas prices aren’t much above the 1970s highs.

Next time you’re at the pump be sure and ask your
friendly neighborhood mini-mart clerk if he can break a
1970s inflation-adjusted $20 bill. Then you can fill your
tank and take the family out for an inflation-adjusted meal
at McD’s and still have enough change left over to see an
inflation-adjusted movie. Or maybe just stay at home and
regale the kiddies with exciting tales of pre-Greenspan
days when $20 bought more than a quart of generic brand
corn oil and half a Twix bar.

Or just enjoy watching the stock market come under
continued pressure. The chickens are coming home to
roost and even the inflated stock market is having a hard
time avoiding the flurry of feathers. The deficits DO
matter. The weak dollar DOES matter. Near-record lows
in national savings don’t lay the groundwork for a healthy
economic expansion.

Sure the numbers might look better but the devil continues
to reside in his favorite place: the details. We’re creating
some jobs but they’re low-paying service industry jobs.
Wages aren’t increasing. Of course that’s spun bullishly
as well. The feds call it “a lack of wage inflation
pressures.” You and I call it “not making ends meet.”

Yes, the headline numbers can be and will continue to be
manipulated, massaged and presented in as bullish a light
as possible. But just look to the markets for the real story.
With raw materials at 24-year highs, fuel prices at record
highs, and stocks into their second year of struggling with
making new highs, it’s becoming exceedingly clear that
the cyclical bull is gasping for breath. Meanwhile, spring
has sprung and the bear is scratching his armpits looking around for a
meal. Don’t let it be you...

Mark M. Rostenko
The Sovereign Strategist

Copyright 2004 Mark M. Rostenko
and The Sovereign Strategist


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