It is famously said that they don’t ring a bell at market tops/bottoms. OK, not literally, but there are plenty of loud clanging warning sounds coming from various areas of the market.
I noticed last week that banks are now planning to re-introduce Collateralised Debt Obligations (CDOs) again – long dormant since the 2008 Crash that many blamed on these marvels of financial engineering. This, at a time when credit spreads are at their thinnest for years. When highly risky junk bonds yields very little over ‘safe’ Treasuries, I start to worry.
Last time, I mentioned the High Yield (HY) market where yields have crashed while Treasury yields have gone the same way. Fixed interest investors are still chasing yield in a big way, especially insurers who need high returns to guarantee future payouts for pensions and other obligations. They are basically price-insensitive (as are central banks).
But just as happened in 2007/2008, they chased the yield curve just a little too far and came an almighty cropper. I feel we are very near an identical postion today, especially given the mammoth debt levels that far exceed those twelve years ago. Here is an enlightening chart showing the explosive growth in global debt levels carried in various economic sectors – and the massive growth since the Crash of 2008
How do you like the Personal debt of $30 trillion (with a ‘t’). There are 7 billion souls on the planet, which works out at $4,000 per man, woman and child. Of course, this includes Africa and other very poor regions where many live on less that $2 a day.
And when global economies turn down, much of this debt will be unsustainable, especially when secured asset values will fall as well. That sows the seed for the mother of all deflationary periods.
But the corporate financial sector debt, although the smallest, has already peaked and a continued de-leveraging will put enormous pressure on assets. This, despite the frantic recent Fed ‘not QE’ accommodation during the repo crisis.
And the US national debt is approaching the very round number $25 trillion mark (125% of GDP) – an historic landmark. The Founding Fathers must be giddy from all the spinning.
So are US stock valuations really so high, given the record low interest rates? Here is an interesting table showing the various standard measures of stock ‘value’ in the S&P 500
I’ll say! The median valuation is in the 89th percentile and only the earnings yield of 28th and perhaps the Free Cash Flow Yield of 53rd drag the median figure down from well over 90%.
Last time my headline was: The Battle Is On – The Fed vs The Virus. I wrote that just as news of the outbreak was breaking. And since then, many have died and the economic disruption in that part of China has been large – and growing.
Of course, I had no idea then that the impact of the spreading virus could possibly engage in a David and Goliath scenario with the all-mighty Fed. With the Dow down a chunky 600 points yesterday, can the Fed do anything to keep the balls in the air as they have for over ten years?
China may hold the key in the short term. The China stock markets have been closed for the New Year and are due to open Monday. Futures are way down in this period, so will the authorities step in with both feet and keep their fat fingers on the Buy buttons?
Of course, it may yet be contained as other epidemics have been in recent years. But with the current mood of fear spreading – not just the virus – can stocks maintain their headlong rush to investment nirvana? Take Apple – it has doubled in just two months. And Tesla – the short seller’s graveyard. It has rocketed almost four-fold since May. Is this not a vivid sign of irrational exuberance?
Incidentally, I have been stalking Apple for a while and last week I pounced. My reading of the charts was telling me a major high was just ahead – and yesterday we shorted it for PRO SHARES members it at $321 (closed yesterday at $308 for a whopping loss of $15 on the day). That was a trademark precision trade.
But one point to note about this runaway stock market – the free float has been rapidly reducing as corporate buy-backs have gobbled up significant chunks of equities in recent years. It’s been a case of too much money chasing too few stocks and has lead to asset hyper-inflation..
The next phase is asset deflation.
Monday’s opening trades will certainly be interesting.
The Nasdaq will lead the way lower
The tech-heavy index sports the highest valuations and will lead the markets down. I confess it has been tricky trading it of late as the waves of its upward progress last year has been difficult to interpret. But last month, the fog began to clear as I had found a very reliable tramline pair – and importantly, I had a method for forecasting the likely top area.
As I explained to VIP Traders Club members, a chart pattern that I discovered is the ‘five wave continuation’ pattern (see text pp 38 – 39, 144 – 145). This pattern usually appears about half way along a major wave. This knowledge enables me to put a price level on the maximum extent of the rally – very useful information!
And the chart certainly displayed that pattern clearly – and last month I was able to set my upside target at the 9160 mark. This is the result:
The dark blue line is my target and I have excellent short term tramlines also working. It briefly rose above the dark blue target for a few days (on a strong momentum divergence – a clue!) and then plunged below both blue lines to confirm the ‘overshoot’ as a likely buying climax.
And with one more push up for the all-important kiss on the upper tramline, it promptly fell out of bed yesterday in textbook scalded cat bounce fashion.
That was one very pretty chart analysis and the odds now strongly favour the tops are now in with the leader of the pack Apple plunging and ringing that bell.
Has the dollar finally turned?
And talking of ringing the bell at tops, as you know I have been patiently waiting for the dollar to top out for some time. Its elevated status these past few months has been frustrating for the bears in the extreme. We have seen several false dawns. Here is the weekly
According to my wave labels, we have been in wave 2 and if it has terminated, we have entered a wave 3 of 3 down – a most devastating wave. That is why I have been stalking it all this time! I expect to see the purple wave 1 low around the 88 area to be tested in due course.
But note the lovely blue tramlines – here is a close-up
The strong bounce off the lower tramline was heralded by the strong momentum divergence. And it has now hit major Fib 50% resistance and is turning lower. So, is this it – finally?
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