Are you still buying the dips? Hmm.
The MSM can always be relied on to offer us great financial news – after the event, of course. We now learn that the S%P having declined by greater than the arbitrary 20% is now in ‘bear market territory’. While I managed to locate the multi-decade all-time highs in the US indexes back in November and again in January, and rode the twisting bear trend down for Club members, many were buying the dip in knee-jerk fashion – after all, that tactic has worked so well in recent years.
But as I stated at year-end, that policy was likely to fail in what I saw as the coming Great Bear Markets. But for BYD die-hards, you are being presented with mammoth dips to buy with the Nasdaq off by 34%, the S&P by 24% and the Dow by 20%. The big name tech FAANG Gang companies must be particularly attractive now with their huge discounts (Netflix is off by 76%).
Of course, most BYD believers would have been buying on the way down this year and are suffering large losses already. But are they fazed? Not if they are following the usual MSM advice to ‘stay the course’ and ‘hold your shares as they always go up’. Some even believe a loss is not a loss unless you sell – so never sell!
A reality check: A paper loss is still a loss to your wealth. Shares have no tangible value until you sell them for tangible cash that can be spent in the real world.
But are the hedge fund pros riding the waves lower and are positioned heavily short (as we are)? After all, these are supposed to be the smartest analysts on the planet and are usually trend-followers.
Of course not! Not only are they staying heavily net long S&P futures (COT data), but also retail investors have been piling cash into equities while on the down escalator!
Since April, retail investors have been lapping up global ETF issues (a constantly weekly net positive inflow) at a staggering rate all the while the S&P declined by a whopping 12%. While we have been shorting and selling, they have been buying off us! I like that dynamic.
And it’s not just the retail crowd that are still into BYD – it’s also the investment pros. They are holding a near-record net long S&P futures, despite the massive declines in the indexes.
My take: Shares have only just started the greatest Bear Market in history. The persistent high level of confidence in equities tells me that only when shares are much much lower will the prevailing investor mood turn negative and only when it becomes real ugly will shares find a low. This is my Dow roadmap:
But the decline has not been straight down. Far from it – we have seen several counter-trend rallies of several thousands of points. It is no exaggeration that most traders even if they have correctly identified the downward trend still manage to lose! That is because our natural human tendency is to see each hard decline as a reason to sell as it confirms our bearish view.
But markets, being utterly perverse, become short-term oversold at the lows and the BYD crowd manage to push shares higher thus squeezing out these poorly-timed short sales on their stops.
That is why my strategy in strong bear markets has always been to sell the rallies, not sell the breaks. In fact, my short term trading policy is to take profits on the breaks (as we did on Friday morning just prior to a decent rally for a tidy 1,000 Dow profit in a week).
All of this means that the timing of your entries is absolutely crucial in strong bear (and bull) markets – and that is where many traders fall down.
HUGE PROFIT OPPORTUNITIES LIE DIRECTLY AHEAD – WILL YOU TAKE THEM?
Huge profits await nimble and canny traders in the upcoming major bear trend in shares. But navigating the inevitable sharp swings will require expertise. Even in a strong trend, it is possible to lose money even if your overall view is correct! As in most of life, timing is (almost) everything.
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Divisions in society are widening – a very bearish force
Meanwhile, we are seeing many signs of a darkening mood in the wider world. In the UK, we are seeing strikes at work for the first time in many years (absent during the bull market). And divisions in society are opening wider with two recent landmark US Supreme Court decisions standing out.
First, the always divisive abortion theme (previously quiescent in the bull market) has been split wide open with pro-life and pro-choice sides hardening their stances with violent clashes seemingly inevitable. The majority of the public are against that decision.
And second, the decision to disallow US government agencies to determine climate change policy and bring it back to politicians on Capitol Hill has thrown a very large spanner in the works of the eco zealots. Could this be a major turning point in the headlong and economically destructive rush to Net Zero?
And of course there is the extraordinary utter confusion among some about sex and gender that only can arise at the very end of a great mood of positivity when inclusion becomes mandatory. Everyone coming together and being in harmony is very much a bull trait. Now I see push-backs against ‘inclusiveness’ in the media with Disney being accused of ‘brainwashing’ children into believing that men can get periods as well. Hmm.
Also we now have an ongoing war in Europe – the first since the Balkan 1992 – 1995 conflict. This latter war had much less geopolitical influence (and no effect on stock markets) than the current Ukraine invasion with the severe disruptions to energy and food markets.
The current war will have far-reaching implications for stock markets than is currently envisioned. Relations with Russia as a major nuclear power have changed overnight with NATO awakening from its slumber. Are we in a 1937 moment in history?
But the majority of investors remain complacent as they BYD – and that will change when the S&P loses 50% and more.
Which way Gold?
The PMs have been a major disappointment to gold bugs who believe that falling stocks equals higher demand for the ‘safe havens’ such as gold. And even the other ‘safe haven’ of the Japanese yen was similarly a major bust.
In fact, there has been nowhere to hide (except in the hated cash which few have turned to) with the cryptos crashing spectacularly.
As I suspected all of the above markets are part and parcel of the Great Asset Mania that drove all assets from classic cars, art, and even Non-Fungible Tokens (now crashing) to dizzying heights. Now they are falling in unison. This will be a bear market for the ages.
I first hinted Gold was making a Double Top back in March when it hit the $2070 mark
With the market dropping to yesterday’s low at $1785, it has possibly completed a five wave move down off that high. That sets it up for a possible rally surge since after five impulsive waves comes a strong three wave countertrend rally.
So here’s my thought – as shares start a major third wave collapse very soon, will the PMs resume their role as a ‘safe haven’ again now that traders have become fully disgusted with its performance recently? Is it time for the market to once again surprise the majority?
I shall be watching very carefully for such a reversal.
The Dollar nears the end of its great bull run
For over a year, traders have been lapping up dollars as the Fed first promised and then delivered on rising rates and a cessation of QE. Many hedge funds have been front-running the Fed’s well-flagged moves. Meanwhile, the EZ has kept rates super-low and has even engineered negative sovereign bond yields (that will be seen later on as a massive policy error). That has kept the euro weak.
But things are a-changing. Here is the long term dollar chart
Note that the 104 level has seen previous major tops that heralded strong bear trends in 2018 and again in 2020. But recent dollar exuberance has pushed the index well above the 104 mark to the recent 105.50 high. And if my wave labels are correct (with noted mom div), a major reversal lower will ensue making the push above the pink resistance an ‘overshoot’ that would be confirmed by a move below the 104 level.
And what’s this coming down the pike? Do I see a rally starting in Treasuries (lower yields)? Just when (almost) everyone was looking the wrong way forecasting ever-higher bond yields as inflation expectations were ramping up. The MSM were all over the oil and food inflation story with their dramatic headlines of 10+% CPI coming just when these markets suddenly reversed.
Oil was down 20% recently and Wheat off 37% as of Friday. In fact, these declines were perfectly timed from a MSM perspective if you use their headlines as a contrary indicator as we do.
On Friday July 1 the market again made an accurate touch on the solid support line and bounced into the close. Because of the multiple accurate touch points, this line will continue to be solid support – until the market breaks below it (which it will at some stage).
So with this line providing solid support, the correct trade was to buy. Of course, there are no guarantees the line will continue to provide the launching pad for another advance, but as the great Damon Runyan wrote in the context of horse racing: “The race may not always go to to the swift nor the battle to the strong, but that’s the way to bet”.