Moneystream 1990s

The rally into the market top of 2000 was classic euphoria.  The first quarter of the year saw record inflows into U.S. stock equity mutual funds.  Valuations were totally and completely over blown.  CNBC was on TV stations in sports bars and every other public place.  There was talk of the new paradigm, and that old valuation measures no longer applied.  It is different this time.  Sure, if you say so.  The chart below shows the pullback in early 2000 sent the moneystream back below its 22 MA.  The difference this time was the mid year rally failed to get support in the indicator.  When the market turned down again, a prolonged bear market took the indexes down considerably.  The NASDAQ was the most over valued index and therefore suffered the biggest decline.

The Dow actually held up the best of the major indexes.  As this next chart shows though, it was still pretty nasty.  There was a significant rally that started late in 2001 and lasted until the spring of 2002.  As you can see the moneystream never crossed its 22 MA and the market eventually sold off to new lows.

The rally in 2003 was a different matter entirely.  The next chart shows that by early 2004 the moneystream had made the cross.  The indicator lacked enthusiasm the next 2 years, but stayed above the 22 MA.  The market took off again in late 2006 and into mid 2007.  The moneystream picked up considerably on that rally, finally taking out the early 2004 peak.  However, even though the Dow got considerably above its 2000 high, the moneystream never did.  This was a bit of a negative divergence, but not enough to warn of what was to come.

Late in 2007 and early 2008 the market turned down sharply.  By early 2008, the moneystream crossed back below its 22 MA once again.  It was severe enough to take out the indicator's lows from 2004-06.  It was once again time to get cautious on the market.

By mid 2008 both the Dow and its moneystream had gone even lower and the bear market was off and running.  As the sell off continued, the moneystream was really crushed.  It eventually got well below its low of 2002.  On a quarterly basis, the Dow did not close below its 2002 low.  However, there was a temporary drop below that level in early 2009.  This looks like pretty serious trouble in the years ahead.  We know there was a massive rally from this low though, so lets see what happened.

As the chart below shows, the big rally has not been supported by moneystream.  In the sell off last year, the moneystream actually dropped below its 2009 low.  Now with the Dow above its 2011 high, the moneystream is at a lower high.  This is clearly different behavior then we saw in the late 60s and 70s.  It may be signaling more trouble ahead, but only time will tell.  I can say for sure that the market is definitely not in an all clear state.  The market gained over 100% since the 2009 low, but just look at that moneystream.  This looks an awful lot like the 73-74 bear market in reverse.  That 2 year bear market had a big decline, but the moneystream stayed strong throughout.  When the bear finally ended, the market rallied like crazy.  All market participants should be very cautious.

For many decades the moneystream indicator has been useful for big picture analysis.  It has been shown to have long range implications.  However, it can diverge from price for considerable periods of time.  Therefore, it is not a great market timing indicator on its own.  Next time I will show some monthly charts with an indicator that behaves very differently in secular bull and bear markets.  It can be used to help determine when the market is switching from one mode to the other.

Bob