Juggling Dynamite

If you’ve ever been in a drug or convenience store and waited behind people gaming lottery tickets you may have noted an air of desperation or addiction in the players.  Odds are you’d probably be right.  As income-disparity has widened, mega-million prize pots are attracting the highest proportion of cash flow from low income families ever. At the same time, prizes have soared because the odds of winning big has plunged.  And far from living the dream, large payouts ending in waste, heartache and ruin for the winners is the norm.  As for government or charitable revenues collected from gaming, it frequently doesn’t end up in its advertised social programs. Widespread, easily accessible gambling is costing us all.  See Powerball’s $1.3 billion swindle of Americans:

In October, the consortium of states that runs Powerball approved a series of rule changed that made it much harder to win the jackpot. Under the new rules you select five of 69 numbers, up from five out of 59 numbers. The choices for the Powerball was actually reduced from 35 to 26. Still, this decreased the odds of winning the jackpot from 1 in 175 million to 1 in 292 million…

Lotteries promise the low-income people who make up the biggest portion of ticket buyers that they’ll win either through a payout or increased services. But most of the time, neither is true. As one study put it, “lotteries set off a vicious cycle that not only exploits low-income individuals’ desires to escape poverty but also directly prevents them from improving upon their financial situations.”

As the Secular bear is mauling Canada, it would be a mistake to think that the S&P 500 is somehow immune or likely to escape the cyclical bear market already underway across the world.  As shown below since 1996, years of reckless leverage and central bank interference have left a heinously over-valued S&P 500 staring down outrageous price risk.  So far just 9% below its May 2015 cycle peak, the first significant downside test lies at least 25% lower in the 1500 area (first brown band) that marked the peak of the 2000 and 2007 cycles.  As secular bears go, -34% would be an unusually mild mauling.

Indeed as shown above in the 2000-03 and 2007-09 cyclical bears, a decline towards the 2009 lows (green band) is also probable for the large cap US index this time.  That would suggest an S&P 500 in the 800 area.  And as shown in the lower panel (green line) above, each of these prior bear markets wrought 50%+ declines after the RSI (relative strength indicator) broke below 47.  It did this again with last week’s close (46.72).

Canadian dollar index (FXC) broke below .70/U$ this am as West Texas Crude broke below $32 and copper below $2.00.  Canada can’t catch a break these days.

The TSX is officially into bear market territory, now down more than 20% from the cycle peak in September 2014 and falling… Closing below 12,700 (dotted line below) last week, the next key test is the 11,000 area (brown bar below) which was the dot.com peak in September 2000, as well as support that held through the QE-led exuberance of late 2009 to late 2012.

If the 11,000 support area fails once more, we will be watching for a test of the 2009 uptrend (yellow bar) in the 10,000 area.  Ultimately, history suggests that if the present downturn is to be the third and final cyclical bear to end the secular bear that began for stocks from extreme over-valuations in 2000, then a retest of the March 2009 lows (green bar) in the 8,000 level is in the cards for the TSX composite.

The Canadian dollar (red below) typically leads the Canadian stock market (TSX in blue since 1999), and it’s already below the 2009 low as shown here.

At Venable Park, we have long suspected that at least one more test of the 2009 lows was probable before this secular bear could end.  Time will tell if that thesis was correct.  One thing for sure, few financial managers have told their clients or investors that this is a probability.