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5 "Tells" that the Stock Markets Are About to Reverse

Stocks Bull Markets Generate Economic Growth

Stock-Markets / Financial Markets 2010 Jul 25, 2010 - 11:57 AM GMT

By: Nadeem_Walayat

Stock-Markets

Best Financial Markets Analysis ArticleThe UK economy is booming! 1.1% growth for Q2 2010 annualises to 4.4%. The academic economists that populate the mainstream press were caught off guard again! with growth expectations ranging from 0.3% to 0.5%. As is usually the case the excuses button was pressed to try and mask the fact that they to all intents and purposes remain clueless on the direction of UK Economy with much press chatter focused on an non existant double dip recession.


Actual growth for the first half of 2010 now totals 1.5% which is is line with my expectations for strong growth during 2010 that targets UK GDP +2.8% as per the GDP forecast of december 2009 (UK Economy GDP Growth Forecast 2010 and 2011, The Stealth Election Boom ). This compares against forecasts of the OECD, IMF, E.U., and CBI that had penciled in UK growth of just 1% for the whole of 2010.

As is usually the case, the press and academic economists remain permanently fixated on looking through the rear view mirror, writing reams and reams to explain what has already happened. Whilst their response to one of the greatest drivers for economic growth is to state that that the stock market is detached from reality. Yes I said DRIVER, not LEAD INDICATOR which is the consensus view that the stock market rises to discount future economic growth, which is not quite accurate, a rising stock market acts as a strong positive feed back loop that GENERATES economic growth, that GENERATES RISING Corporate Earnings.

This is why the vast majority of analysts that are fixated on valuations and corporate earnings conclude that stocks cannot rise because they are over valued by as much as 40%. When the reality is that the stock market TREND MANIFESTS the reality, as I pointed out in Mid March 2009 (Stealth Bull Market Follows Stocks Bear Market Bottom at Dow 6,470) whilst many prominent analysts were stating that stocks could not rise due to the fact that corporate earnings were expected to collapse.

The bottom line - The stock market as a whole does not FOLLOW or LEAD, it GENERATES economic activity. The same can be applied to other major asset classes such as the housing market. But there the mistake that analysts make is that they fail to recognise that asset classes cycle. I.e. For a number of years housing can be the economic growth generator, at other times it can be stocks. If you get both strongly trending well above inflation then you get a boom. Similarly if both are falling then the markets are going to GENERATE a recession.

The dark pools of capital understand this, the Fed understands this, now you have also joined that exclusive club. One could generate a formula based on the real terms change in total valuations of all publically held assets i.e. housing, stocks, savings and bonds to determine the net impact on the economy to create a future trend path for the economy.

Inflation Mega-trend - The stock market tail along with other asset classes wags the economic dog by means of the derivatives market that has increased by $150 trillion DURING the credit crisis which is why deflationists are wrong, as by focusing on contracting bank lending or the Fed's balance sheet they are merely looking at the ripples on the surface of an inflationary ocean. As the banks start to lend again there will be an accelerating flood of money that no central bank will be able to prevent the inflationary consequences of.

Stock Market Trend - The Dow fell to a low of 10,007, and put in the anticipated higher low in preparation for a break above resistance at 10,407 as indicated last weekend (Stocks Stealth Bull Market Correction Generating China Buying Opportunity? ), that occurred this week with the Dow closing at 10,425. The Dow continues to target a trend to 10,700 as per the last in depth analysis (16 May 2010 - Stocks Bull Market Hits Eurozone Debt Crisis Brick Wall, Forecast Into July 2010) as illustrated below, with the actual trend having shifted a few weeks to the right due to putting in a later low.

Perma bears have now gone silent after having been busted once more, a couple of months ago Nouriel Roubini was forecasting that the Dow would fall by 20% over the next few months (23 May 2010 - Nouriel Roubini Stock Market 20% Drop Forecast, Time to Buy?), instead the Dow is still trading higher than where it was when he made the forecast, which matches every stock forecast made by Roubini that has turned out to be wrong for the duration of this stocks bull market, with other prominent media star analysts not far behind.

An in depth update is now pending that will seek to map out a trend for the next few months that I aim to complete sometime during the next 2 weeks.

The trend pattern remains for a corrective trading range in preparation for a blast off towards a 2010 target of 12,000 to 12,500 as illustrated by the below graph from the Inflation Mega-Trend Ebook (FREE DOWNLOAD). The current action signals a market that is preparing to test the bull market high.

DOW Stock Market Forecast 2010

Gold - Gold had a stable week by closing a little higher on the week at 1,189. My expectations are for Gold to target 1,140 in advance of a break to new highs to target to $1333 later this year. However my last in depth gold analysis now dates back to November 2009, therefore now requires a major update.

European Bank Stress Tests

The E.U. published its fantasy land Bank stress tests on Friday, which are based on fantasy assumptions of VERY mild recessions of just -0.4% and no sovereign debt defaults despite the fact the recessions are usually 5 Times as severe as that which has been tested for and countries such as Greece are directly heading towards default within the next 2 years which effectively means that rather than 7 banks failing the stress test, a real stress test would have indicated at least 70 of the 91 banks would have failed the stress test.

The european politicians are desperate to persuade the markets that another banking crisis is not imminent, in the meantime they intend on immunising their banks against an inevitable sovereign debt default as now they know exactly what exposure the banks have to Greek, Spanish and Portuguese debt, so know how much potential losses would need to be covered by primarily German tax payers.

Comments and Source: http://www.marketoracle.co.uk/Article21385.html

Your not too stressed analyst.

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-10 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

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Comments

Amyn Nasser
26 Jul 10, 09:44
Dollar

Hello Nadeem,

Hope this finds you well. I happened to find your newsletter by chance and now get your newsletter regularly and am always thrilled to read your outlook, and I love your boldness in explanation. I am curious as I am new to this and sometimes traders language takes a while to understand. Would you please do a Dollar update. There is a lot of chatter about the USD going lower and lower, yet with Elliott Waves I am getting an analysis that we are in a Wave 1 of an upside in the Dollar Index. From your last Market Oracle 25Jul10-Stocks Bull Markets Generate Economic Growth with the Dow headed towards 12000 that would mean that Dollar Index would go lower, USD lower, Oil up, CAD$ up, Gold up, Euro up, etc. I'd love to have your view on the USD in a newsletter or personally.

Looking forward. Thank you so much.

Amyn


Nadeem_Walayat
26 Jul 10, 09:51
Dolalr Analysis

Hi

I am backed up with analysis to complete, my focus is on the uk housing market that requires about another 20 pieces of analysis to arrive at a conclusion and ebook.

I want to analyse the dollar and gold, but don't have the time.

Best

NW


jonny singapore
27 Jul 10, 18:13
uk inflation, US deflation

Hi Nadeem. looking forward to that work. Nice idea that price growth above inflation drives housing mania.

Given money supply growth vanishing in the US can you still be bullish on the stock markets, particularly over there?

Is the UK deviating from the US give that their inflation is at 1% and falling, combined with more savings and worse housing market?

Its almost like money supply there could drag down stocks which could impact everyone else.

thx.


Sam
28 Jul 10, 09:16
GBP & Gold

Hello Nadeem

If you can I would much appreciate analysis of British Pound versus USD.

Will the rising Pound keep taking chunks out of my Gold?


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