OK, now what?

Yesterday felt like the morning after the night before! Like most, I was somewhat shell-shocked by the Brexit decision and its implications and the market reaction not just here in the UK, but around the globe where stock markets and currencies were whacked very hard.  Even the Japan index lost 10% overnight.  What has Japan got to do with Brexit, you ask?  Of course, globalisation – and social mood – links just about everything that moves.

Incidentally, the BoJ is buying up to 10% of all stocks in the Nikkei in an effort to keep the market propped up.  With the index still trending hard down, they certainly need to attend a course in chart reading I would say.

But governments and their agencies the central banks are always acting just as a well-established trend is ending. They zig when the markets are zagging. Now that the UK government is starting the EU exit process (after years of a growing popular revulsion of the EU), I am interested in seeing if this trend can be maintained by other member nations.  The signs are quite good it can.

Already, Frexit for France and Dexit for Denmark are being openly discussed.

As I have long maintained, a breakup of the EU was only a matter of time and will coincide with the onset of the great bear market as social mood changes from inclusivity to division, as I wrote last time.

Also, as an aside in yesterday’s post, I noted that London is really a separate country in reference to the Brexit vote (they were strong Remainders).  Little did I suspect that just one day later, a petition for London independence for the City (and a hoped-for application to join the EU) had gathered a massive number of online signatures!  It is easy to see why – London is the heart of the UK financial sector and workers in that sector fear for their jobs with a looming EU exit.  Many may be forced to move to the mainland if their firm moves, as is widely rumoured.  That is, if they keep their jobs at all.

But this fear is only augmenenting the already existing anxiety as banks and hedge funds have been shedding employees for years since the 2007/2009 Crash.  The financial sector will continue to shrink as deflation and the bear market gathers pace again.

With the earthquake that Brexit has wrought on Friday morning, it suddenly offers a realistic prospect of a breakup of the UK with Scotland seeking another independence referendum and Northern Ireland similarly unhappy with the result.  This is a shock to the UK political system.  And it is all playing into my theme of increasing division and ‘small is beautiful’ that will continue to spread globally – just as the bear market gets into its stride.

Now, ratings agencies have downgraded UK debt and with a massive debt/GDP ratio and a horrific balance of payments trend, the pressure on sterling will force it towards parity (see previous post).  Also gilt yields should rise putting upward pressure on debt payments, despite the trend into safe havens.

With declining asset values (including housing), slowing GDP, falling tax receipts, rising spending (welfare budget still zooming up), the scene is set for a humongous bust in government finances.  It is this scenario I anticipated many months ago that is now coming to fruition – and why I advised clients to get out of sterling and into dollars.  That remains my strong advice (see previous post).

As for stock markets, volatility is exploding, as I forecast.  Here is VIX Fear Index updated to yesterday:

It has jumped to 26 – and it has doubled in two weeks) and knocking on the door of the old highs at around 30.  In a few days, there will appear a ‘Golden Cross’ where the two MAs cross as both are rising, unless stocks can mount a stupendous rally (see later).

Here is the Dow showing the Brexit carnage

That was one massive blow. On Thursday night, the market was pushing up to new highs and all expectations were focused on a Remain win and big upside on Friday to point the way to new all-time highs.  But something happened overnight and markets did what it does best – it confounded the expectations of the majority.

So now, the best picture I can paint for the bulls is this – a near-term decline in wave C and then an almighty rally.  But what can induce such a rally?  See later.

Of course, safe havens jumped with gold leading the way with a $100 gain overnight.  But with hedge funds piling into gold last week ahead of the vote, they are now almost 7:1 long:short futures (latest COT data) – and still at a record net long.  That sets up a possible swift decline phase.  See later.

Cable has broken

GBP/USD closed the week well under my 1.38 – 1.40 support level and now can be considered resistance (see previous post). The trend is firmly down, but there is one question: will the BoE or the Fed lower interest rates first?  See later.

But one market I am keeping a clear eye on is USD/CAD

The decline is an A-B-C and we should now be in the early stages of wave 3 with my first target at the 1.36 area.  Naturally, a decline in commodities would help this along.

My best guess near-term scenario

With social mood turning down hard, I expect the weekend MSM to be full of gloom and doom scenarios with a strong agreement that a Frexit referendum and other -exits are now in the running leading to an EU breakup.  Here is a likely picture:

1.  Weakness in stocks next week would prod BoE and Fed to lower policy rates, the degree depending on the stock selloff.  If not the act, but certainly the rumourswill fly.
2. This would set up an almighty stock rally after initial weakness (see Dow chart) which would carry Dow/S&P to new all-time highs
3. This would induce a mini-collapse in safe havens gold and silver
4. With sterling in the direct Brexit firing line, my guess is BoE would act before the Fed and hammer GBP/USD further as my 1.38-1.40 resistance line proves its worth.

The VIP Traders Club

I strongly advised members to reduce or exit most positions (except long gold/silver and crude oil) before Thursday and we avoided all of the losses and made stunning gains on those positions held.

With so much damage done to hourly chart patterns, my plan is to tread very carefully for now.  My principle theme is preservation of capital, and its value was clearly demonstrated last week.