Gold and StockMarket 3

Feb. 20, 2008 updated May 5, 2008
Scenario of a possible stock market bottom:
The 1990 Recession re-visited again
The starting point of this report in February was the ABC-Washington Post Consumers Comfort Index. This week this index declined from -33 to a new low of -46. Similar levels were recorded in the late October - early November period in 1990. Comparison charts of the stock market (SP500) of that period and the present are shown below. At that time in 1990, it was not yet known that the economy had been in recession since July. Tabulated below are some similarities and differences between now and then.
The main question remains: is the stock market bottoming now as it did at the end of 1990?. The answer should be in very soon but the great similarities of the market chart patterns (see below) and of many economic indicators increasingly point to the affirmative.

Recession 1990
Recession 2008
President: G. Bush, Sr
President: G. Bush, Jr
Gulf War I
Gulf War II
Housing Crisis
Housing Crisis
Credit crunch
Credit crunch
Citicorp losses/stock collapse
Citicorp losses/stock collapse
6^th year of declining USD
6^th year of declining USD
USD bottoms at DX 80
USD's bottom at DX 71?:yes for now.
Surging oil prices
Surging oil prices
20 % SP500 market decline
(see Chart below)
20 % SP500 market decline
(see Chart below)
Gold: down trend following early 1990 rally
Gold: Reversal at $1,030 18 but still in up trend

There are three additional items added in today's update:
1. The Coference Board's Index of Leading indicators released today shows a decline for the fifth consecutive month, an occurence last seen in the 1990 recession.
2. The ECRI (Economic Cycle Research Institute) Leading Index has reached the same low levels last seen at the bottoms of 1990 and 2001 recessions(see chart 5 below).
3. The Business Conditions report of the Philadlphia Fed released today show data nearly identical to those registered at the end of 1990 (see chart 6 below).

Chart 1: ABC Consumer Comfort Index

Data as of May 4, 2008

Chart 2: SP500 Oct-Nov 1990 vs. March-May 2008

Data as of May 5, 2008

The current pattern of price and technical indicators in a long term weekly chart of the SP500 is surprisingly similar to that seen at the end of 1990 (Chart 3). A somewhat lower SP500, as could be seen this week, would complete the 1990-like pattern.

Chart 3: Weekly chart of the SP500

Similarity of patterns in 2008 and 1990

One of our favored economic indexes, the Businessweek Production Index, after a period of minor weakness recently, jumped to a new high at the beginning of this month (Chart 4). This index indicates that in contrast to the dire financial situation, the core productive economy remains amazingly resilient. Reasons for this circumstance could be the significant rise in exports consequent to the Dollar's decline and the continuing robust growth of emerging economies outside the US that generate the demand for such exports.

Chart 4: Businessweek Production Index 03/29/08

The Index has a good correlation with the SP500

Chart 5 ECRI Weekly Leading Index as of 03/28/08

Data courtesy of ECRI

Chart 6 Phila Fed Business Report 03/20/08

Diffusion and Expectations Indexes as in 1990

Finally, two contrarian indicators now favoring a stock market bottom. First (Chart 7), a contrarian indicator of investors' sentiment: the Equities CBOE Puts Calls ratio which spiked to a new high. Second (Chart 8), the ISEE Index, a Calls Puts Ratio indicator now showing investors' bullish sentiment at a 5 years low. This is considered very bullish for stocks. See also the explanatory note in the April 3, 2008 Chart of the day

Chart 7 CBOE Equities Puts Calls Ratio at new high

Chart courtesy of schaeffersresearch.com 03/20/08

Chart 8 - ISEE Index: Calls/Putts ratio

Data courtesy of ISE Co. - Data as of 04/03/08

Finally, another good technical indicator of a stock market bottom: the Net difference between advancing and declining stocks. A reading of minus 400 or lower usually signals a market bottoms. Today reading?: -400, as seen near all recent market bottoms.

Chart 9 -Net difference Advancing Declining stocks

Data as of March 21, 2008

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