The Flinchum File

Thoughtful Economic Analysis and Existential Opinions
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Embracing the Baby Bear

The stock market hit another record high on Tuesday.  The next day, it lost 111 points on the Dow.  Is the rally over?  Of course not!

On average, the market has at least five pullbacks of 5% or more each year.  We are due for one and, frankly, need it to consolidate our gains.

Yesterday’s 1% drop partially reflected some weak economic data but mostly reflected bellicose talk of nuclear war from the crazies running North Korea.  (If a nuclear strike actually occurs, the market will likely plummet, which would be a good time to buy more stock, especially defense stocks.)

I am a little worried about the market.  The best performing sectors are health care stocks and consumer staples, which are usually the best performing sectors in a bear market, not a bull market.  And, trading volumes remain suspiciously low.  There is also “Dow Theory” which suggests a bull rally is not sustainable if the Transportation Index is not also rising.  So far, that Index has supported the Theory but has now reversed itself.  All of this makes me expect that a 5-10% pullback is due and appropriate.

With respect to gold, it is definitely in a downward spiral, not because demand has fallen, but because the dollar is strengthening.  Who would ever expect the dollar to strengthen when the Fed is printing vast amounts of money?  The reason is that the Bank of Japan, Bank of England, and European Central Bank are printing money even faster, making us the best-looking horse in a glue factory.  Our Fed looks like the adult at a children’s party, compared to the other central banks.

This doesn’t change my analysis that we are vulnerable to a “heart attack” or Jim Fixx Moment over the longer term.  But, right now, a baby bear market would not be bad for us.  Besides, aren’t baby bears cute?