March 9, 2013

What Say You, Mr. Market? (the early 2013 Edition)

This is what the market is saying to Paul Krugman:

" [...] What, then, are the markets actually telling us?
I wish I could say that it’s all good news, but it isn’t. Those low interest rates are the sign of an economy that is nowhere near to a full recovery from the financial crisis of 2008, while the high level of stock prices shouldn’t be cause for celebration; it is, in large part, a reflection of the growing disconnect between productivity and wages.
The interest-rate story is fairly simple. As some of us have been trying to explain for four years and more, the financial crisis and the bursting of the housing bubble created a situation in which almost all of the economy’s major players are simultaneously trying to pay down debt by spending less than their income. Since my spending is your income and your spending is my income, this means a deeply depressed economy. It also means low interest rates, because another way to look at our situation is, to put it loosely, that right now everyone wants to save and nobody wants to invest. So we’re awash in desired savings with no place to go, and those excess savings are driving down borrowing costs.
Under these conditions, of course, the government should ignore its short-run deficit and ramp up spending to support the economy. Unfortunately, policy makers have been intimidated by those false priests, who have convinced them that they must pursue austerity or face the wrath of the invisible market gods.
Meanwhile, about the stock market: Stocks are high, in part, because bond yields are so low, and investors have to put their money somewhere. It’s also true, however, that while the economy remains deeply depressed, corporate profits have staged a strong recovery. And that’s a bad thing! Not only are workers failing to share in the fruits of their own rising productivity, hundreds of billions of dollars are piling up in the treasuries of corporations that, facing weak consumer demand, see no reason to put those dollars to work [...] "

According to pure technical analysis doctrine, price action and only price action should matter. Whether one agrees with that or not is an ongoing century-old "conversation" (some would strongly object to this understated way of putting it) better left for another day, a conversation beyond the scope of this post (and probably of this blogger). But, if you accept this very "severe" view of market analysis for a second, one of the better (but in no way the only) ways of visualizing pure stock market price action is taking a look at the 20-year monthly chart of the Dow Jones Industrial Average (DJIA) with only one technical indicator (Bollinger Bands with the 20-period/2-standard-deviation default settings). Here it is, covering the 2/28/1993 to 2/28/2013 period (click chart to enlarge):

What is the market telling you? To be continued...

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