New Market Indicator Says Bullishness Overdone?

New Market IndicatorForget Hemlines… Here Is a New Way to Spot Market Trends

I would like to share with you the birth of a brand new kind of stock market indicator—an indicator that, if correct, suggests that the “good old days” for stocks may be coming to an end quicker than we think.

Whether my new indicator will pass the test of time, I do not know. But I do think it is as valid as any other indicator and may well be worth keeping an eye on.

I call it the “expanding car indicator” and right now—in spite of growing unemployment, economic chaos, soaring medical/food costs, and a total lack of organic corporate growth—it is still flashing “bull.”

Or at least it seems to be. However, as I will explain, with this particular indicator, all may not be what it seems…

Here is how it works.

Start with the Hemline Indicator

Let’s start with a similar (but different) non-traditional indicator. Look at the infamous “skirt” or “hemline” test.

Pundits noticed that during the “Roaring Twenties,” just before the Big Crash, skirts got shorter and shorter. Through the thirties, forties, and fifties, against the cautionary backdrop of depression and war, they got longer and longer. So, when times are bullish, hemlines are shorter; when they are bearish, hemlines are longer. The indicator is that simple.

This indicator is even taught in courses for financial advisors and seems to have successfully passed the test of time. (Source: “The Skirt Length Indicator,” Investopedia, last accessed July 4, 2016.)

(Critics of the theory suggest that it is no longer valid since, in the current bull market, women no longer wear predominantly skirts and dresses. Those who support the theory, however, say the core of the indicator was never about the skirt, it was really about the daring behavior, the “devil may care” flaunting of visible assets. The indicator still works, they say, simply substitute the notion of a short skirt with today’s yoga pants, a garment more often seen outside yoga classes than actually in them and more often revealing things rather than hiding them.)

And Now Move on To…Car Length?

So, now that I have your attention, you are no doubt wondering how the “expanding car” theory works?

Well, let’s travel back in time for a moment to the early sixties. This was the period when the baby boomers, known for their daring and unconventional attitudes, were just entering puberty and preparing to ultimately take an unsuspecting world by storm.

While these youngsters were discovering chemical stimulants and rock music, their parents, who were children of the War Era, were as conservative as extra starch on a white shirt. While dad went to work (usually) in a suit and tie, his children were heading to school wearing Madras shirts, sideburns, and bellbottoms.

The economy of the time reflected this clash of cultures. In the early sixties, there was a sense of unease (remember the Bay of Pigs?) and the markets reflected this. Inflation was minimal, yields were solid and unwavering, and stock growth was respectable yet conservative.

People were economical. Value was primary. Excess was shunned.

Remember the Olds Cutlass?

In 1963, Oldsmobile introduced a small economy car called the “F-85.” It was functional and durable and really nothing to get excited about. The length of the car—this was an economy car, after all—was precisely 188 inches.

Over the next decade and a half (approximately), the world went nuts.

Opposing social forces (Vietnam on the one hand, the Beatles on the other) split people apart. The baby boomers came into their own. So did Women’s Lib, birth control, and free love. McDonald’s, which had opened in the fifties, began its rapid expansion of something the pundits would later call “fast food.” IBM was establishing itself as a force to be reckoned via something it called the “mainframe.” And TV had become so powerful a force of persuasion that if it did not happen on TV, it did not happen at all.

By 1977, that F-85 model (which now had a new, sexier, name—the “Cutlass”) had grown to 207 inches—a gain of more than 10% in 14 years—with an accompanying increase in weight and a decrease in miles per gallon. It no longer looked or drove like an economy car, but that did not stop the buyers. Everyone was partying like it was…1977?

Except that there was very little actual partying going on.

The truth was that rampant inflation early in the decade accompanied by a four-fold increase in the price of oil (as a result of ongoing shenanigans in the Middle East) had left the west in a state of delayed shock.

Sure, Olds was heavily advertising a bloated and oversized version of its 1963 original, but no one was buying it—literally.

By 1978, the car companies (then, as now, always a little late to the party) realized they had to do something to make up for their overly optimistic ways. The Japanese were now in the market. “Corollas”—Toyota had been in the U.S. since the fifties!—were being snapped up by U.S. buyers like hot dogs at a home game.

So in 1978, Oldsmobile had a brainstorm. Let’s make the Cutlass (formerly the F-85) a leaner and lighter car, then sell it as a combination economy/luxury vehicle…?

And indeed it did. The leaner and meaner 1978 Cutlass had a length of 188 inches. If that number sounds familiar, it is because—wait for it—the “new and improved” Cutlass was exactly the same length it had been when it first debuted in 1963! The model—and indeed the entire economy—had come full circle.

Case in Point: The Ubiquitous Honda Civic

All this is important because your writer has noticed that, as the markets today get progressively crazier and continue to shed whatever scant reason they started with, the very same thing is happening today.

Let’s look at the Honda “Civic, one of the most popular cars in the world. (So popular that, when I said “Let’s look at the Honda Civic,” you were probably thinking, no problem, I can just go outside and look at the one in my own driveway!)

Here is the average length of a Honda Civic over the last four decades:

1976 – 139.0 inches

1986 – 150.0 inches

1996 – 164.5 inches

2006 – 176.7 inches

2016 – 182.3 inches

So, What Is the Indicator Saying?

From these numbers, we notice two things:

First, the people at Honda have been messing with your head. What started off as a small economy car (just like the Cutlass did in 1963) has morphed into a seriously bloated set of wheels.

Second, the actual amount of growth in this specific “expanding car” is significant. The Honda Civic has silently grown more than 30% (WOW!) when no one was looking—along with the economy, consumerism, car leases, easy money, central bank interference, and you name it.

For those of you who find this indicator intriguing, I should quickly mention another aspect of it.

Remember how in 1978, when GM “lowered the boom” on its rapidly expanding line of “economy” cars and made them small again, they were actually responding to events that had happened a year or two earlier…?

Because the car biz is capital-intensive and involves such a complex supply chain, this new indicator I am showing you tends to be a trailing indicator, not a leading one.

In plain English, that means that although the indicator is still flashing “bull.” In fact, the fundamentals of the market might have already begun to turn.

And the car companies just haven’t figured that out yet.

But now you have…