Who’s in Charge of Wall Street?

Anarchy is amok on Wall Street, a scene of riot.

“Neither the bulls nor the bears are in charge,” cries Michael Kramer of Mott Capital Management.

Thus we find bull and bear, bovine and ursine, pitted in savage brawling, each battling for control of the nation’s capital.

One day the bulls wrest command and the Dow Jones leaps 500 points.

The next day bears pull off a countercoup… and retake the 500 points the bulls won the day before.

The rascals may claim an additional hundred or two before the bulls come back at them the following day.

Investors are glued to the desperate back-and-forth, like breathless spectators at a tennis match with everything on the line.

Which side wins ultimately — bull or bear?

Today we assess opposing forces… and hazard an ultimate victor.

The bears put the bulls to rout again today.

The Dow Jones plunged 497 panic-stricken points. The S&P sank 51, while the Nasdaq lost another 160.

MarketWatch reports on today’s combats:

U.S. stocks fell sharply… as investors focused on a batch of weaker-than-expected economic data out of China and Europe, sparking fresh worries about the state of the world’s second-biggest economy and prospects for global growth.

Freshly released data out of China revealed that November industrial output and retail sales underperformed expectations.

“Indeed,” says Stephen Innes, head of Asia-Pacific trading at Oanda, “investors are right to be worried about global growth as China economy continues to sputter.”

Meantime, data out this morning revealed that both German and French private sectors pulled back sharply in November.

And so the “globally synchronized growth” the professionals crowed about last year is nearly turned upon its head.

The United States economy is still growing… though trending in the incorrect direction.

GDP growth crested in this year’s second quarter at 4.2%. Third-quarter growth slipped to 3.5%, while fourth-quarter estimates converge at roughly 2.4%.

Bloomberg tells us today that excluding autos, U.S. manufacturing has stagnated two of the past three months.

Today brings further word that rating agencies have downgraded a thumping $176 billion of corporate debt this quarter — a possible portent of a credit crisis.

And we have it on reliable authority — Jeffrey Snider, head of global investment research at Alhambra Partners — that the banking system has contracted for the second consecutive quarter.

“This,” says a gulping Snider, “hasn’t happened since 2009.”

Meantime, the marauding bears think they have victory within sight…

The S&P peaked in late September. It presently trades more than 10% below that summit — meaning it is in official correction.

Thus the index is halfway to full bear market territory, defined commonly as a 20% fall from its most recent heights.

And as notes financial journalist Mark Hulbert:

“The stock market’s late-September peak looks disturbingly like the beginning of a bear market.”

Here he stands behind data from the widely respected Ned Davis Research.

They reveal the stock market’s third-quarter showing tracks closely with a pattern matching bull market tops for nearly 50 years.


[Ned Davis] calculated the average return of the S&P 500’s 10 sectors over the last three months of each prior bull market top (back to the early 1970s). This enables them to periodically look at how that historical ranking compares with how the sectors are actually performing.

For example…

Davis Research reveals the health care sector performed second best of the 10 S&P sectors (on average) the three months prior to previous bull market tops.

“Ominously,” notes Hulbert, health care ranked first the three months prior to the Sep. 30 market top.

Meantime, the utilities sector typically ranks last of the 10 sectors for the final three months of previous bull markets.

Its current ranking: eighth.

How do these sector rankings inform us of our place in the market cycle?

Once again, Hulbert:

One reason is that the stock market may be anticipating an imminent economic slowdown, in the process favoring more defensive sectors such as health care… Another reason is that interest rates typically start rising in the latter stages of a bull market, and higher rates have a disproportionately negative impact on “financials” and “utilities.”

Interest rates may rise once again next week, when the “Open Market” Committee of the Federal Reserve huddles at Washington.

Market odds of another rate hike presently stand at 76% — in favor.

This, as the global liquidity stream is going dry.

The Federal Reserve chiefly accounts for the drought… but the other central banks are falling in behind it.

And so the tide swings in favor of the bears after a nearly unbroken string of defeats stretching a decade.

So today we wonder:

How much fight do the bulls have left?


Brian Maher
Managing editor, The Daily Reckoning

The Daily Reckoning