Bubbles are bustin’ out all over!

Apologies to Rogers and Hammerstein, but today, I thought I would review some of the bubbles in various markets – many of which appear to be bustin’.  It appears last week may well go down in the annals of market lore that marks secular highs in many markets that may well stand for years to come.

If so, it has been a long wait for me.  The universal rush away from cash in recent years – engendered by the mistaken central banks’ policies – has been the icing on the bull market cake that has sent complacency and bullish fervour into the stratosphere.  Many stock valuations are utterly ridiculous and will turn down very hard when the mood music changes (it may have d one so already).

THE STOCK MARKET BUBBLE

On Tuesday morning as I was preparing my Trade Alert for VIP Traders Club members, the Dow was about the hit my tramline target at the 23,600 area.  This is a target I had set many months ago.  And here I was, right in the long-awaited zone of price and time – and crucially bang in the early November time slot I had set those many months ago.

This was it – I thought for a second and wrote this for distribution at 8:30 am:

Note the price quote on the chart – 23,622 which was Top Tick (within three pips).

And at 1:30 pm I sent a Flash Alert with this:

With the decline off Tuesday’s high, it is looking like I have indeed picked top tick in the 300-year old bull market!  But that’s not all, I advised shorting on a rally to 23,600 – and that was reached later that day as a small wave 2 high for a very low risk entry.

In a recent post, I outlined some of the extreme readings in many sentiment indicators that strongly suggest a very hard collapse would begin when the market finally topped.

So has that  bell they ring at market tops sounded last week?

On the S&P, I have a decent ending diagonal/rising wedge which the market broke.  Note the wave 5 fell short of the upper blue line and that spells weakness.  Since Wednesday’s hard plunge, the perpetual dip-buyers have been trying to get it back on track, but so far, it has failed to plant the usual kiss.  If that fails, the outlook is hard down in wave 3 that will wipe out many of those dip-buyers.

THE JUNK BONDS BUBBLE

Junk bonds are so called because they are issued at ‘high’ yield spreads by the shakiest of companies.  These yields are usually measured against the 10-yr US Treasury bond and in ‘normal’ times, command a decent premium to reflect the added default risk.  But in recent times, the spread has narrowed  to record lows as the mania for yield by institutional investors has gone viral.

This went along with the extreme hatred for cash that I showed in a recent series of charts.  The public also hates cash as they fall over themselves to find an investment that beats bank interest.  They have been piling into buy-to-let and also alternative investments (fine wines, art, vintage cars – and many get-rich-quick pension scams) in their mad scramble to get rid of their cash.  Not only that, but consumer debt has sky-rocketed, so that many are super-leveraged, as are many companies.

Another straw in the wind is the action over in that riskiest of debt instruments, the Junk Bond Index HYG:

This is the index of US junk bonds.  This latest plunge mirrors the action back in August when the 50-day MA was breached although then, the market recovered strongly with stocks.  But this time, the MACD measure of momentum sports a very lengthy momentum divergence – and that suggests a deeper decline this time.

Here is a revealing chart showing the yield spread of Eurozone junk bonds

(chart courtesy www.elliottwave.com)

Note the spread is now negative!  The yield mania has reached such a point that investors are willing to accept less yield from flaky company junk bonds than they are from the safest bonds on the planet – US Treasuries.  Astounding!  To my knowledge,t his has not happened before and when the animal spirits subside, this anomaly will be corrected – and fast.

We know that when interest rates rise, junk bond defaults also rise – and that magnifies the yield on then.  This high leverage will result in junk bonds losing value at a much faster rate than Treasuries.

THE BITCOIN BUBBLE

But that most bubblicious of markets – Bitcoin – topped with the Dow on Tuesday and has slumped by 20% since in a clear showing of RISK OFF:

That push to the £7,880 high after its exponential rise caps wave 5 of 5 and is now headed down towards to my first target at the $5,000 area in wave 1 of what will be a large five down.

When the venerable futures exchange, the Chicago Mercantile Exchange recently announced it was to kick off a Bitcoin futures contract, I thought then that was the bell rung at market tops.

The whole rationale behind Bitcoin lies on very shaky foundations.  The bulls have been taken in by the romantic story of a ‘currency’ that lies outside the clutches of governments and central banks and is a child of the sexy blockchain ledger lines of code. Does anyone seriously think that the authorities would allow such a subversive product to challenge the supremacy of their own fiat currencies?  If so, I have a bridge somewhere in Brooklyn for sale.

Despite looking very hard, I have yet to find an article on cryptos that advise selling short!  That is a very dangerous state of affairs (for the bulls).  We shall soon see some emerge as Bitcoin declines further.

THE BOND BUBBLE

And then there is the notorious investment grade and sovereign Bond Bubble – a bubble engineered by the various central banks with their QE, ZIRP and NIRP policies.  Many EZ sovereign bond yields are still negative – a totally preposterous state of affairs.  Who in their right minds would buy such a bond, knowing 100% they would lose money if held to maturity (unless a gun was put to their heads, of course).  This is the very definition of a mania (a disease of the mind/brain).

But yields are on the rise for bonds of all maturities.  Here is the market-derived market for 3-month US Treasury Bills

That is a bull market, folks.  To me, it implies the Fed will be forced to raise their policy rates again much sooner – and more frequently – than most imagine. You will be reading about this change of heart very soon.

Remember, the Fed follows the market, it never leads.  This goes against conventional thinking (as does so much of market commentary).

Further thoughts on the markets

We are seeing an immense story in the UK and USA in the MSM of sexual mis-deeds of politicians and celebrities that sometimes go back 40 years or more.  Many are asking why they are coming to light in such numbers now?

I see it as the slow motion change in social mood that always attends stock market tops.  In bull markets, misdemeanors and even crimes tend to be swept under the carpet or excused.  The mood is expansive and embraces all.  But when the public mood starts to darken, sexual abuse victims find they can’t hold it in any longer and begin to ‘spill the beans’ – and now the media picks up the stories.  This feeds on itself as other victims become emboldened to report their own stories.

In the UK, this was licked off by the Jimmy Saville case three years ago and in the USA, it was Bill Cosby at around the same time.  But in the intervening years as the stock market zoomed up to new all-time highs, such revelations were thin on the ground as the mood remained elevated.

But with the market looking to have turned down, I expect more and sadly, more disturbing revelations.

Then there is Brexit.  I expect this to end very badly if I am correct about the darkening of mood to come. The acrimony between the sides will ramp up.  I have long maintained that the UK will walk out of talks at least once. But if stocks do resume their bullish moves, Brexit could be relatively painless, although I place this outcome at much lower odds.

I expect a very eventful week ahead.