What’s With Gold And The Dow Jones In Late September?

Gold (GLD) and the Dow Jones (DIA) have one thing in common; since their recent highs, the bears have yet to force them to correct by double digit percentages. For gold, whose last BEV Zero was on August 6th ($2,061.44), two months have passed since its current correction began. The Dow Jones saw its last BEV Zero on February 12th, from where it collapsed by 37% a month later. To make the analogy fairer with gold’s BEV chart shown later in this article, I’m using the Dow Jones closing of September 2nd, a month ago when it closed just 1.53% from taking out its last all-time high of last February as the base for its current correction.

So, for both gold and the Dow Jones, neither have yet corrected 10% from their highs as noted above. The question in my mind is will they, and if so how deep into double-digits? That’s a question I don’t have a firm answer to, but let’s look at the Dow Jones BEV chart below and see what we can about it.

The first thing I note is how swiftly the Dow Jones’ 2020 37% market decline, and rebound was compared to the decline and rebound from its sub-prime bear market. It took about eighteen months, from October 2007 to March 2009 for the Dow Jones to decline 54%, and then forty-eight months, from March 2009 to March 2013 for it to recoup its sub-prime bear market losses.

The 2020 37% market decline for the Dow Jones took only twenty-eight NYSE trading sessions; what the hell?!  Since 1885, the Dow Jones has never seen anything like that. And then the Dow Jones rebounded from its March 23rd low to come to within 1.53% of making a new all-time high in only 114 NYSE trading sessions. Again, since 1885 the Dow Jones has never recovered so swiftly from such a deep market bottom.

In the Bear’s Eye View chart below, look at how narrow the Dow Jones 2020 decline and recovery is compared to the 2007-2013 sub-prime bear market decline and recovery.  I know the 2007-2009 54% market decline was the Dow Jones’ second deepest percentage decline since 1885, exceeded only by the 1929-32 89% market crash.  But historically, a 37% decline for the Dow Jones is a respectable claw back from the bulls by Mr.. Bear, but in just twenty-eight trading sessions?  And then a rebound to just 1.53% short of a new all-time high in only 114 trading sessions?

I know I’m repeating myself, but this is really weird and I want to make this point stick; going back to 1885, the 2020 37% market decline and recovery is without historical precedence. 

C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 671\Chart #1   DJ BEV 2007 to 2020.gif

So what’s going on here? I know my faithful readers know I’m now going to blame all this on the idiot savants crafting “monetary policy” at the FOMC. But looking at their “monetary policy” going back to 1966 in the chart of their M1 monetary aggregate below, I think I’m justified in claiming I see the idiots’ finger prints on our markets since 2008.

Note on M1 Data:  Beginning next week the Federal Reserve will publish M1 data only on a monthly basis. That’s twelve data points a year instead of its current fifty-two.  As a data hound; I smell a rat.

In the past I’ve stated I believed the 2007-09 54% market crash was aborted by FOMC. On a dividend yield basis, the Dow Jones should have declined by at least 70%. The steepening slope of M1 beginning in August 2008, two months before the October 2008 market panic, supports this position of mine. And now the slope of M1 has gone vertical since March 2020; why?

C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 671\Chart #2   M1 Monetary Aggregate.gif

Little commented on by contemporary market watchers, but in early 2020 the corporate bond market was full flight into a selling panic, as seen in the yield spikes in Barron’s Best and Intermediate grade corporate bonds below.  

Both these bond series are considered “investment grade” by bond rating agencies. Yet in just two weeks in March, Barron’s Best Grade Bond Yields (Blue Plot) doubled from 1.88% to 4.01%, with Barron’s Intermediate Bond Yields seeing a similar spike.

C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 671\Chart #3   Barron's Best & Int Ylds 10 Yr.gif

On March 23rd of this year, as corporate bond yields peaked, for the first time ever the FOMC announced that it was going to purchase corporate bonds.

The Federal Reserve needs the power to buy corporate bonds

Robert McCauley 26 August 2020

 

On 23 March 2020, the Federal Reserve announced that it would buy investment grade corporate bonds, and on 9 April set the amount at up to $250 billion and extended the purchase to junk bonds. This column shows that these interventions succeeded in stabilizing credit markets: prices lifted and dealing spreads narrowed. However, emergency lending powers provide an inadequate basis for Federal Reserve operations in corporate bonds. In light of these findings, congressional authority to buy and to sell corporate bonds alongside US Treasuries would help to align Federal Reserve operations with what has become a capital-market system.

 

Had the FOMC not intervened in the financial markets last March as reported in the link above, the Dow Jones would have continued deflating far below its BEV -37% level seen in its BEV chart above as summer approached with corporate bond yields increasing to alarming levels.

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