Reply #37: Complacency Abounds! [View All]

http://www.321gold.com/editorials/chapman_d/chapman_d_082205.html

It's been a very hot summer. Hot hazy weather tends to slow us down. Good thing we work (or most of us anyway) in air-conditioned offices. But then with the sharply rising cost of oil and gas makes us look twice at our usage and maybe we set the levels on the AC a little higher. Indeed the sharply rising cost of oil and gas is the only thing that has been really hot in the stock market over the past few months. On the other side the rising cost of energy is beginning to show up in inflation numbers and it is impacting the profit (or outlook for profits) for host of sectors particularly the airlines, transportation and retail. The car companies (or at least the US car companies) in desperation to generate sales have dropped prices on their unsold inventories to the levels where employees buy them. That means effectively cost. And if that doesn't work? What's next - sell at a loss?

Everyone got excited because the market embarked on a summer rally. But then oddly the hot weather does for whatever reason start a summer rally. But overall it has been a pretty feeble rally energy aside. Just as we might have turned positive the market started to back off again. As of date the Dow Jones Industrials are actually down 2.1% on the year, the S&P 500 has eked out a 0.6% gain while the NASDAQ is down 1.8%. Some scorcher of a market. We call it churning. While the bulls got excited because of the rising 52-week highs and breadth they fell silent when it once again faltered. We should also say, "where's the beef" which in this case where's the volume. To be blunt it has been pitiful. What did we say, "Churning". Oh yes the TSX has been a scorcher up some 12.3%. But then energy is big component of the TSX and its up over 44%. The key financial group is up only 7.8% not bad but no great gains.

But all the action has not stopped the bulls. Investor sentiment rose to over 59% at its most recent peak lower then the 63% we saw last December but nonetheless at levels usually associated with a top. In the most recent survey the bulls were still at a lofty 57.3%. The VIX volatility indicator hit a low recently just above 10 but it has climbed to 13 over the past couple of weeks as the market has weakened. That's still well below the very bullish level of 15. Complacency abounds as the market just expects to hang in here and go higher. Oh did we remind you. This is a year ending in 5 and years ending in 5 have never had a down year or at least not in the history of the Dow Jones Industrial.

We have constantly pointed out that the market and the economy has been held aloft by record low interest rates and massive injections of liquidity from the Federal Reserve and the other world central banks. This has been the plan from the beginning of how Alan Greenspan would save us from the Kondratieff winter. But has he? We don't believe so but there are many who would disagree with us. We believe that all he has accomplished is to delay the inevitable and instead has contributed to keeping the stock market aloft when it should have been allowed to fall to more historical valuations levels eons ago.

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