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How Low Will The Stock Market Go?
"Who will be the next President of the United States?" may be the top question on the minds of Americans today, but right behind it is this one: Has the stock market made a final bottom?
Getting a clear answer from Wall Street hasn't been easy. After several weeks of 1000-point price swings up and down, many mainstream experts now find it difficult and even dangerous to try and navigate the market's seeming madness. Some of their more vivid comparisons are: "Catching a falling knife," babysitting the "'Exorcist' child," and riding in a "vehicle that's spinning out of control."
But consider this: What if the real problem isn't the market, but instead the "fundamental" method of their approach? Truth be told, the Dow Jones Industrial Average has plunged 30%-plus from its October 11, 2007 all-time peak. AND, during the entire fitful decline, one piece of evidence has remained clear and consistent: the Junk-to-Treasury Yield Spread, or difference between low grade and high-grade debt.
The two sides of the spectrum carry the following implications.
- Narrowing: The public takes greater risks in search of greater rewards. Feelings of optimism encourage speculation and spending, the two engines of economic growth.
- Widening: The public flees to safe assets. Feelings of pessimism dissuade risk-taking.
History shows that a narrowing spread coincides with a rising stock market; and a widening spread, with a falling one. Case in point: in the September 2007 Elliott Wave Financial Forecast, our analysts foresaw that a psychology of fear was about to wake from its bullish slumber to find the following bedfellows: A record widening in the spread between the yield on the US Industrial B-rated 10-year Bond AND the 10-year US Treasury Bond -- AND -- a historic decline in stocks.
EWFF presented a compelling chart of the spread and wrote: “Lehman, Bank of America, Barclays Say Rout Is Over.” We say: “It’s Just Beginning… On rare occasions, it is darkest right before the storm hits; this appears to be one such time."
(Has The Stock Market Hit Bottom? Only those who saw the TOP in the Dow Jones Industrial Average can say where and when the downtrend will end. The October 20 Short Term Update has all the evidence to make a very strong case. Act Now)
A new year later, the June 2008 Elliott Wave Financial Forecast revisited that same chart and picked up where it left off. Below is an exact reprint: Keep scrolling down, a little bit further, sill further. O.K. Now… … … Stop.
Observe: The most dramatic upsurge in the yield spread occurred right as the Dow Jones Industrial Average was nearing its October 9, 2007 all-time peak. Now, the October 20 2008 Short Term Update presents an equally powerful chart of the S&P 500 versus the spread between Moody's Corporate Bond Indices BAA and the yield on the 30-year US T-Note. In STU's own words: "The spread has done a good job leading stock prices over the past year and its" current position is a "strong signal" of whether the stock market low of October 10 is the final low.