The Economic Policy Institute recently floated the idea of a transaction tax on financial transactions such as stock trades.  The tax would raise more than $100 billion and be a huge step towards cutting the federal deficit and providing states with emergency aid.  Given the metamorphosis of the U.S. stock market away from an investment market and towards a casino mentality, this would probably be a wonderful idea.  Ultimately, a transaction tax would clearly aid the rationale for buy-and-hold, or, as we used to call it, investing.  However, the tax would also likely pop the current bubble and more importantly, kill profits for companies such as Goldman Sachs, Morgan Stanley and JPMorgan Chase.  We expect an outcry like none other ever heard in our fair land if Democrats begin to push for adoption of a tax on stock transactions.  Simply put, the prospect of lower bonuses for bankers and brokers will deflate this proposal.   Given how many major players in our government have come from Wall Street’s inner sanctum, there’s no way this is going to happen.  As a result, the metamorphosis of Wall Street will continue to overwhelm the rationale to invest and the capital formation system will suffer.  What a disgusting and appalling environment for individual investors, who are simply irrelevant now.
 

Seasonal patterns have not played out exactly as some anticipated over the last couple of years and as a result, the history of the last five decades plus has now found many detractors.  Since 1950, holding stocks from May through October has produced losses, and that includes the 22% gain to Dow 10,000 this month.  But only two of the last seven May to October cycles were down and for some, it is sufficient evidence that “The Dead Zone” no longer works.  However, the most oversold levels in nearly 70 years were the catalyst.  We can point to rallies for the Dead Zone after prior bear phases, such as the 17.9% gains for the six months into October 1975 and the 16.9% gain into October 1982, both after oversold conditions.  The gains from March do not invalidate the Dead Zone.

Moreover, the favorable seasonal pattern into April is no guarantee.  Since the mania imploded in 2000, returns from November through April have not at all resembled the past.  Gains for the ten periods since then have averaged less than 1% from November through April.  If anything has changed, it is the reliability of the good six months.  Seasonality for the six months into April of the second year of the Presidential Cycle is nothing special, either.  Over the last 12 cycles, seven were either flat or down, averaging only a 3.1% upside.  Years ending in “0” (the Decennial Cycle) may be partially to blame.  Remove 1970 and 1990 from the Presidential Cycle and the gains into April for the ten good seasons average a respectable 5.1%.  We showed the 9th year of the Decennial Cycle in our first issue of the year, claiming good reason for our positive annual forecast but that will change for 2010.  Only two years of the ten years in the cycle are downers and years ending in “0” are the absolute worst by far.  Eight of the 12 years finished in negative territory and the average loss was minus 6.7%, quite a difference from the 8.7% average annual gains for all years since 1950.  

Thus, we are not relying on favorable seasonal effects for the remainder of 2009, nor in the early months of 2010.  As we have shown at bottom left on page two, if mutual fund inflows remain subdued as we expect they will, the primary source for continued bull market gains is simply not there.   

Whatever you do, please read our new Pictures of a Stock Market Mania update, which was posted last week.  The web address for the public version is http://www.cross-currents.net/charts.htm.  Our revised estimate of total dollar trading volume has once again forced us to expand our charts upwards.  The velocity of dollars wending their way through the U.S. stock market is now approaching (and has possibly already exceeded) $60 trillion.  We first suspected that the stock market was poised for manic activity in 1995 and sure enough, by the end of the following year, Fed Chairman Alan Greenspan had posed the question of “irrational exuberance.”  Since our initial suspicions, dollar trading volume has expanded more than ten-fold, an annual average increase of 18.2%.  In 1995, DTV was only 74% of GDP and 86% of total market capitalization.  DTV is now 412% of GDP and 474% of market capitalization.  Investing?  No such animal.  As our article will show you, it’s all about trading and the short term now.  
 
Does this mean stocks are overvalued?  For one clue, Insider Insights tracks insider activity and recently reported that buy activity in each of the past three months represented the smallest amount of monthly insider buying since January of 2000, a particularly propitious time to avoid stocks.  For another, consider that insider sell activity is exactly the opposite of what we saw at the bottom in March.  Judging by insiders, their stocks are not even worth trading, much less investing.  At right below, resides your proof.  Just like every dollar of improvement in GDP now requires another $4 in debt, every dollar of improvement in price requires roughly $5 in trading.      

ABOUT ALAN M. NEWMAN

Alan M. Newman has been the Editor of CROSSCURRENTS since the first issue was published in May of 1990. Mr. Newman is also a member of the Market Technician's Association and has been widely quoted for years by the financial press, media, and other newsletters and has written articles for BARRON'S.

The newsletter is published roughly every three weeks and focuses on economic and stock market commentary, often covering controversial subjects. Several proprietary technical indicators are usually featured in every issue accompanied by current interpretation.  Broad samples of our work can be viewed at http://www.cross-currents.net/. 

Subscription rates are now $189 for one year and $100 for six months.  A FREE 3 issue trial subscription is available by emailing us (click the "free trial" link above).  Please note: trial requests must include name, address and phone number and must originate from the email address the trial is to be delivered.  Trials are only available by Email (.pdf files).  U.S. Mail subscriptions are available but include a nominal surcharge for postage and handling.