For the last ten years, investors have been fed the line from advisors that Buy and Hold is the winning strategy. And that is why whole armies of investors – particularly newbies – have been falling over themselves buying passive index funds – and right near the top (as is their custom). They are now trapped.
Yes, passive investing has been the big winner as money rates have been zero or close to it and why not ‘put those dollars to work’ in the booming stock market, especially into tech. The huge exponential rise in the Nadaq is testament to the power of groupthink.
And for a while, it worked. But the big problem for this approach is that when the market turns down, who has the nerve to see what’s happening and get out? That means abandoning a central tenet of financial faith. After all, stocks only go up, don’t they? Yes, I can ride a 10%, 20% and even 30% loss of value because it will go back up since that has always happened throughout history (except during the Great Depression where it took many years for the Dow to make new highs).
But what if the decline is 40%, 50% or even 60% or more? Will most investors remain so sanguine? I very much doubt it. Emotion will get the better of them – and many will dump shares right near a major low. And many will vow to never touch equities again.
Of course, in this scenario (which I fully expect will occur), all assets will be declining in value – and the old reliable bricks and mortar ‘investments’ will provide no shelter for investment funds (assuming there is any left!).
So what will? CASH of course! And not any old cash. Forget cryptos, They are a product of the roaring bull market and will wither as shares decline in an o overall bear market. Where to put the cash? Hint: I am buying up shares in mattress companies.
Should you Keep Calm and Carry On?
That was the headline in a recent piece about what you should do in the face of the stock market collapse. I have observed the markets for several decades now and have found one immutable rule – when share indexes take a ‘sudden’ lurch down of 10% – 20% (much more in individual issues), 99.999% of the pundits try to assure is that everything is fine and because the underlying ‘fundamentals’ are solid, you should not panic and sell
There is a very good reason why they do this. First, If they advised selling, they would be ‘changing horses in mid’stream’ and betraying their solidly built-up reasons why the market is rising. And if the market suddenly recovered, they would look extremely foolish at not having faith and stayed with it. They would lose a great deal of reputation and perhaps put their employment at risk.
Second, they will have lots of company! Pundits herd just like most investors. They can always point to others who have lost more than they. That would be considered a win!
The third reason is that they do not want to lose a single client which would occur if they exited the market. They are hell-bent on keeping everyone invested – even in a down market.
So taking a contrary view, as I am doing, is risky and of course bold.
Is the old world order really being upturned?
The signs are everywhere aren’t they?
- Established bricks and mortar retail trade is being slaughtered by the internet model. The giants M&S, House of Fraser, and now Debenhams are under severe pressure and many stores are closing. How long has the large department store model been dominant on the High Street? Will John Lewis be next? Transformation is in the air.
- Uber and others are transforming the taxi industry that has remained unchanged for generations.
- Electric and autonomous vehicles promise to shake up transportation.
- AI (robots) is on the verge of shaking up many sectors from banking/investment advice to your smart home.
- In the world of politics, we have the Great Disruptor himself riding high (approval rating is climbing). I believe everyone acknowledges he is a very unconventional President – and unlike any in history. But he is reflecting the general transformation of the political landscape that is sweeping the West.
- Brexit. The UK is the very first nation to leave the EU in its 40-odd year history And there are ample signs the eurozone will have at least one member leaving in the not-too-distant future.
- Socially, sexual harassment (and worse) is not being tolerated any more. Even decades-old incidents are being exposed along with the perpetrators. Growing calls for punishment and retribution for wrongdoings that were excused and/or tolerated in the bull market is a clear sign of a new bear trend.
- And in another social milestone, the age of excess of laddish boozy and licentious party behaviour is ending with reports flights to the notorious Magaluf in Majorca are being cut as the Millennials are eschewing that lifestyle for something more sober. This is entirely normal when the mood turns bearish and conservative. The growing negative mood will manifest in many ways none of which will be seen as ‘liberal’
Are we really in a very rare bear market or just a correction?
Naturally, most of the MSM pundits are saying this is a well-needed correction and the best policy is to not panic and wait it out (see above) as you should ‘batten down the hatches’. I have had a very different take since I identified the turn in Nasdaq (this index I forecast was to be the leader on the way down as it was on the way up).
This is the weekly Nasdaq chart that helped me to identify the top on 1 October at 7700. It is trading at 6788 currently for a loss of over 900 points (12%).
With the clear lower tramline break, odds are extremely high the bear is now in full control and the 7700 highs will not be seen – if ever – again for many years. That is a bold claim, but I have had it for some years and have simply waited for the bull to run out of steam, which it did on 1 October. I also forecast when the turn came, the collapse would be historic and breathtaking. We are getting the first whiff of that but so far, I see little signs of panic. That phase is to come.
Into early October, the news was all ‘good’ with no signs of a turn (except for traders like me who were counting the waves and observing the weakening sentiment indicators). I know full well that markets only turn down when everything looks rosy to the average person, so I was on high alert.
And as the downturn progressed this month, I forecast that since the news follows the market (not vice versa), I expected some negative news to emerge especially on the Tech Titans who universally had a good press.
Lo and behold on Thursday night, Alphabet (Google) and Amazon – the whales among the Tech Titans – reported less than sparkling news and the shares were hammered yesterday big time.
I noted the potential overshoot above my upper tramline which was confirmed on 8 October when the market broke back below the line. That was the ideal place to sell out of longs and even take new short positions.
I also have a similar tramline break in my chart of Alphabet to confirm they are both heading south. And when they do, we shall very likely read stories of how tax authorities around the world will start taxing them. It will be a coordinated effort certainly by the US, the UK and EU at the very least and the tax rate will be seen as punitive by some.
Governments of all stripes are running out of ways of adding a greater tax burden on their citizens (hint: it’s a vote loser), but taxing the loaded US Tech Titans gets around that nicely – if only they can prevent them from moving to another tax haven I see a digital sales tax coming that would obviate that need.
And boy, do they need the money (headline today: Housing Benefit Bill To Triple to £70 Billion). In the UK, the NHS is a perpetual black hole (and growing), the benefits payouts are mushrooming and the police service is starved of cash.
My guess is that when the digital tax ‘bombshell’ hits the headlines, the shares will stage a massive relief rally. Make a note for your diary.
We have now in a deflationary depression
This has been my long-held forecast result of the unbridled speculative excesses built up since since WW2 – not to mention the utterly destructive QE ‘experiments’ by central banks that produced ZIRP and NIRP. This has enabled unpayable debt to build up to gargantuan heights.
But now, the music has stopped. Interest rates are climbing (the US 3-mo T-Bill rate is now at a high of 2.35%) and much of that debt will never be paid, especially junk debt.
Next target – the red 200-wk MA.
My thoughts on the important T-Bond market
Interestingly, we are trading the US T-Bonds from the long side now (yields lower) and is a highly contrarian trade. I figured that since the whole world now believes rates can only go higher, it is time for a reality-check for the bears in a second wave advance to put the squeeze on them.
This, while the short end 3-mo T-Bill yield makes new highs this week as the interest rate curve flattens – and signals a major downturn in the economy.
But when the rally exhausts, I fully expect the bear trend to resume – and we will be ready for a third wave plunge of some size. Near-term, the collapse in crude oil and stocks is allowing inflation expectations to recede – and lead to short T-Bond covering by the large speculators (hedge funds).
So are we actually seeing hedge fund short covering? Here is the latest COT
We certainly are! And on the other side, the ‘smart money’ commercials are increasing their shorts in anticipation of the eventual downturn (they do not expect a huge rally). Nice.
Note that the hedge funds remain at a large 2:1 net short so there should be more in the tank for a further push up.
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DOW Short at 25,600. Now 24,730. A £5 per pip bet worth £4,350 today
NASDAQ Short at 7570. Now 6860. A £5 per pip bet worth £3,550 today
RUSSELL 2000 Short at 1740. Now 1485. A £10 per pip bet worth £2,550
FTSE 100 Short at 7630. Now 6950. A £5 per pip bet worth £3,400
DAX Short at 12,320. Now 11,215. A £5 per pip bet worth £5,526
NIKKEI 225 Short at 24,270. Now 21,220. A £3 per pip bet worth £9,150
GOLD Long at $1,177. Now $1,232. A £50 per pip bet worth £2,750
SILVER Long at $14.10. Now $14.65. A £50 per pip bet worth £2,500
COCOA Long at $2040. Now $2,260. A £10 per pip bet worth £2,220
COFFEE Long at $9.9000. Now $1.2140. A £10 per pip bet worth £22,400!
SUGAR Long at 11.05. Now 13.75. A £10 per pip bet worth £27,000!!
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