Bear Market?
There is a " 100 percent historical correlation with the onset of equity market Bear markets."
This would be the Fed raising the Discount rate to 6.00 percent.
Since the Fed came into existence back in 1913 they have raised the discount rate to 6.00 percent and over on only eight occasions.
The Discount Rate (not the Fed Funds Rate) is the Rate the Fed charges member banks.
Here's the dates the Fed raised the Discount rate to 6%:
1/23/1920
8/9/1929
4/3/1969
1/11/1973
10/26/1977
9/4/1987
5/16/2000
5/10/2006 (Here it is !!!)
The average that the DOW fell is 12.8% in three months after raising the Fed discount rate. Proof?
decisionpoint.com
The period of “three months past the initial hike to a Discount Rate of 6%” shows an average loss of 12.8% for the Dow in seven prior instances. We’re well on our way. As the evidence mounts, it certainly appears rough sledding is dead ahead.
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What, More Leverage?!
Total margin debt increased another 2.2% in April to $265.2 billion, uncomfortably more than the $260.4 billion registered at the end of January 2000, a mere ten weeks from the manic peak. What is even more striking is that total margin debt represented a larger share of the market at the end of April 2006 than at the end of January 2000, up from roughly 1.5% to 1.6% of total market capitalization. Given the fall out from the manic peak, this is an astonishing display of confidence, or should we say utter complacency?
Even at the absolute peak in March 2000, it is hard to make a case that margin debt represented a much larger share of total capitalization, perhaps only 1.65%. Thus, we can easily make the argument that leverage is at the second highest level ever and bear in mind that mutual fund cash levels are very near their all time lows. Both of these circumstances indicate tremendous optimism. In the past, that has usually been a great time to take the opposite view.
In March 2000, margin debt peaked at $300 billion, 13% higher than today, while the cash-to-assets ratio of mutual funds fell to 4.02%, the lowest level recorded since January 1973. With margin debt at $265 billion and the cash-to-assets ratio at 4.1%, we are one tiny step away from brand new record optimism. |
