SAN DIEGO (ETFguide.com) The stock market's summer
performance has been nothing but stunning. Seeing daily swings in
excess of 4% has become as common as American fast food in
Sometimes it's helpful to step back and shift the focus from
day-to-day changes to multi-decade trends. This kind of big picture
evaluation shows whether events like this summer's meltdown are
just a hiccup or confirmation of a long-term trend (change).
More than just a Multi-Decade Fluke
Gradual changes are often so subtle that they are nearly
invisible to the naked eye or novice observer. But, just because a
change is gradual doesn't mean it's insignificant.
Let's take a look at the basic make up of the U.S. economy. A
few decades ago, sweat-trenched U.S. manufacturing facilities were
the most fertile, growth-producing environment on the planet. This
growth was fueled by 'Made in America' products. The growth was
organic and it was real.
The first red box in the chart below captures this period of
powerful organic growth. It lasted from 1947 - 1966. During this
period, GDP growth averaged 4.18%.
The second red box captures a period of growth fueled by low
interest and financial engineering. During this period - from 1975
- 2000 - GDP growth averaged only 3.4%.
(The above chart was featured in the March 2011 ETF Profit
The Only Original Dow Component, Not some Hot Tech
General Electric (
), a company that prospered during both phases, aptly illustrates
the difference between both periods.
Until the late 1960s, GE was known for manufacturing quality,
American-made products like refrigerators, washing machines,
stoves, light bulbs, and jet engines. GE manufactured real
products, provided real jobs, and made real profits.
Starting in the 1980s GE changed its focus from blue collar
manufacturing to white collar alchemy. GE ventured into television
and high finance. GE's focus shifted from building quality products
to financing purchases of competitor products. Ultimately, it went
from manufacturing real products to building a financial house of
In August 2000, GE traded as high as $60.5 a share. In 2009 it
was as low as $5.73 - a 90% drop. Today, it's hovering around $15.
As you ponder this change in valuation, keep in mind that GE is the
only original Dow Jones Industrial Average (DJI: ^DJI) component,
not some hot today cold tomorrow tech stock.
A New Trend is Born ... and Killed
Financially engineered (artificial) profits appeared to be the
best new thing since sliced bread. However, GDP growth since 2000
has dropped dramatically, now only 1.71%. The post-2007 meltdown
shows that an economy cannot be built on the financial (NYSEArca:
XLF) and banking (NYSEArca: KBE) sectors.
It also shows that an artificial bull market is much more
receptive to huge corrections. We've had the 2000 tech bust
(NYSEArca: XLK), the 2005 real estate (NYSEArca: IYR) debacle, the
2007/2008 deflation of the financial sector, and most recently the
summer 2011 meltdown.
If you think financially engineered profits are bad, brace
yourself for what lies ahead. The hopes for economic prosperity
(perhaps even survival) rest on Facebook, Twitter, Groupon,
LinkedIn, Netflix, and the like.
Social networking isn't a proven business model, yet Facebook
has an estimated market cap larger than those of Boeing, Home
Depot, Walt Disney, Dell, Hewlett Packard, Costco, or even Goldman
Hewlett-Packard employs 325,000 people, Home Depot 300,000,
Boeing 160,000. However, Facebook cuts pay checks to only about
1,000 lucky employees. Welcome to the future of high
corporate profit margins and even higher unemployment.
Groupon has an estimated value of $6-9 billion, but its recipe
of success is to coax businesses into providing discounts of 50 -
90%. Groupon is a classic economic leach that benefits by sucking
the profits out of its client base and teaching its subscribers to
buy only at discount prices. Welcome to a future of shrinking small
The Stock Market Agrees
The big picture fundamental outlook appears less than confidence
inspiring. What about the big picture technical outlook?
The chart below (although small in size due to upload
limitations) was featured in the March ETF Profit Strategy
Newsletter and provides a big picture technical forecast. In fact,
it's about as 'big picture' as it gets.
What you see is a giant bearish M pattern, it could even be
considered a head and shoulders pattern. The neckline is formed by
the 2002 and 2009 lows.
To determine an upside price target, we drew a parallel channel
that connects the 2002 and 2009 lows with the 2000 high. The April
3 ETF Profit Strategy update said the following about this trend
channel and other resistance levels:
'For the month of April this trend line will traverse through
1,377. The 78.6% Fibonacci retracement is at 1,381.5. There is a
fairly strong Fibonacci projection resistance at 1,369. In terms of
resistance levels, the 1,369 - 1,382 range is a strong candidate
for a reversal of potentially historic proportions.'
The S&P (SNP: ^GSPC) peaked on May 2 at 1,370.58 and has
since lost as much as 269 points or 19%. The Nasdaq (Nasdaq: ^IXIC)
has held up slightly better, but no matter how you slice it, the
stock market has given up more than a year's worth of gains within
a matter of weeks. The VIX (Chicago Options: ^VIX) spiked to the
highest level in over a year.
In addition, all major U.S. indexes broke below a trend line
that has provided support on nine different occasions since the
March 2009 lows.
This doesn't prevent rallies. In fact, based on our research, we
should see a sizeable rally soon. However, odds favor that the
stock market's trend has changed from up to down.
Profit Strategy Newsletter
provides a detailed forecast for the remainder of 2011. This
includes the target for the trending bottom and the up side target
for the ensuing counter trend rally.