Out of Africa – and this time it is not a slushy movie
Was that a black swan from Africa I saw early Friday morning? I believe it was as I rubbed my eyes to get a clearer view. And within minutes, the widely-expected post-Thanksgiving advance on Wall Street had melted away in the rush to sell anything pandemic-related. In an instant, the melt-up had been transformed into a savage melt-down.
Thus, in a flash, the entire character of the stock market has changed into its polar opposite. From melt-up to melt-down. That is how lightening fast markets can turn. And we were ready for it.
Regular readers of mine will know that shares have been living on borrowed time for weeks and I have been anticipating such an event. All I needed was a catalyst – and it appears we now have one in the latest virus variant Out of Africa.
Incidentally, the 1985 movie (that won the Oscar for Best Picture) of the same name is a slushy romantic drama which is not a description I would place on this version.
So what were the signs pointing in advance to this historic move? I have outlined several here and in my VIP Traders Club Trade Alerts. Just last week I posted my case that stocks and the dollar were at major turning points together. This was a highly contrary stance with bullish sentiment towards both at extremes – but not any more! With yesterday’s 1,000 Dow collapse – and a sharp decline in the dollar – my warnings are being vindicated. Here are a few more clues to add to my growing list:
ARKK Innovation ETF
This ETF run by the celebrated Cathie Wood is hugely popular with US investors as it carries shares of the most cutting edge technologies including genomics, automation, transportation, energy, artificial intelligence and materials, shared technology, infrastructure and services , and technologies that make financial services more efficient. Many ‘innovations’ are unproven in the real world and is thus at the forefront of the speculative wave that has swept finance.
It made its ATH in February and is down a whopping Fibonacci 1/3 since then. It is close to major support and a good break there would set it lower in wave 3 of 3 (the strongest wave in my book). ARKK is now under water.
High Yield bonds are turning
High Yield Bonds (HYG) are also known as Junk Bonds – and for a reason. They are issued by the more risky companies that do not qualify for issuing investment grade debt at much lower yields. They trade very much like equities in that they rank for compensation in the event of a break-up just above the common stock.
With the higher risk, they carry a higher yield than their more senior bonds- but not by much. Many junk bonds have been issued in recent years as ‘cov-lite’ – in other words, the company promises nothing in terms of performance that would apply in more normal times. Basically, investors pay their money and hope for the best. As such, they are the most speculative instrument out there in the bond world. And a perfect reflection of the degree of rampant speculation that has gripped finance in recent years.
This is the popular HYG Index and yesterday for the first time since the Corona Crash, it has broken below the blue 50-day MA. Also note how the rally into the recent ATH (low in yields) was accompanied by weakening trading volumes – a sure sign of lack of conviction of the bulls. Also, the Relative Strength Index RSI (top chart) has broken below the critical 50% level for the first time since coming out of the Corona Crash. They have topped and an indication that rampant speculation is waning rapidly.
Another measure of the total complacency in this space, junk spreads had narrowed to just a smidgeon above risk-free Treasuries but yesterday, Treasury yields went the other way and fell hard and the spread with junk widened very sharply – another measure of the instant change of character of financial markets that occurred yesterday. Risk is now off. The appetite for out-and-out financial speculation is on the wane.
Very soon Junk Bonds will be living up to their name and my next target is the red 200-wk MA. In time, a crash is a very real possibility.
China junk bonds in turmoil
Many of the bearish persuasion have been calling the junk bond scene in China a bubble looking for a pin. The first episode of this emerging disaster was the infamous Evergrande affair but here is another massive property company in great danger – Kaisa. Its junk rated debt is now priced at 35 cents on the dollar
Ouch! Many property junk bonds are yielding 20% or more. While this seems a bargain, will the companies survive with looming huge re-financings approaching early next year? In other words, will the state step in as it always has before to rescue investors? With the current crackdown in unbridled speculation in tech, will that severity shown by the state extend to property bonds? That market may well decide that one for it.
Bitcoin and Tesla are leading the charge lower – will Apple follow?
On Wednesday I issued a Special Report to both VIP Traders Club and Pro Shares members on these two of my Trio of Termination – Apple, Tesla and Bitcoin. I have been using these three as a proxy for the degree of bullish enthusiasm in financial markets.
Bitcoin is a figment with little practical application in settling of debt (money) and Tesla makes cars but has no earnings (if you strip away the massive government subsidies of carbon credits). The only one that has a genuine traditional business is Apple and it has been making new highs in recent days while the other two are in bear trends already. Here are my notated charts
and the final holdout was Apple that remained in an uptrend – until last Monday when it made a high at $166
but last week’s action where the shares moved above my major upper trendline very briefly to create an ‘overshoot’ (buying climax) and finished the week in a classic weekly key reversal (bearish). The huge mom div should ensure a rapid decline to my pink target with much lower potential.
So now all three are aligned to the downside and that direction was confirmed by the huge declines yesterday in the global indexes.
The bottom line
The ‘shock’ move yesterday (1,000 pips in the Dow, 120 pips in the S&P and 400 pips in the Nasdaq) will bring up thoughts of the Fed coming to the rescue, especially if we see further sharp falls. But can they? Do they have any ammo left, as they did after the Financial Crash in 2008 when they created ‘funny money’ in the form of QE? That did juice stock markets alright but would that rabbit appear out if the hat if they tried that trick again?
The spectre of a new pandemic – now dubbed omicron – is clearly rattling the bulls who acted first and will be asking questions later. Right on cue, the medical authorities are playing down its likely impact. Nothing to see here, folks. And I am sure the MSM will carry similar traditional ‘Don’t panic’ messages to retail investors when the FTSE has the temerity to lose 300 pts in a day (it was off by 400 pts last week).
But the financial landscape is totally different today from that in 2008. Today, stocks are over-priced as is the dollar. Back then, stocks were overprices but the dollar was very weak. Then, the dollar advanced as more dollars were created by the Fed. That wasn’t supposed to happen! So will a similar counter move in the dollar (down) appear today if more dollars are created by the Fed?
I believe any whiff the Fed were planning on scrapping the bond taper and moving to ramp up Treasury buying again would surely be viewed as a supremely panic move by investors – and would trash the dollar into the ground. In my view, that would only apply if and when markets are already in well-established bear trends.
They are in fact, between a rock and a hard place – and it is all of their own making. As stocks fall further, more investors will see the Fed as not their saviour as they do at present, but their enemy.
Yesterday, crude oil fell out of bed with a whopping 18% loss and that helps solve one Fed inflation problem to ease gas prices for US consumers (the UK stations will likely not pass this drop on at the pump if history is any guide -and it usually is).
I will stay with my Dow roadmap that I created on Nov 10 – well before the Red Friday crash
Odds were good that the ATH was put in on 8 Nov at 36,570- two days prior to my roadmap. I see no reason to change my mind.
If you missed these clear signals, I invite you to a two week Free Trial to my VIP Traders Club where members are trading not only these stock indexes but also commodities and currencies. They are early birds because they receive my daily Trade Alerts which I issue around 7 am each trading day. Accurate timing of trade entries is essential in these very volatile markets. And huge profits await those who are alert to the major signals that I highlight for members.
Gold hit my target
I have refrained from trading Gold of late and missed the $100 swing down in recent days. Basically, the wave labels were not very clear to me and I figured the best policy was to stay away – but with the decline to the $1780 mark on Wednesday set up a likely bounce and I set a target of $1810 – $1820 and then a decline off that target.
In fact, it rallied on Friday to smack in the centre of my target at $1815 and then fell hard back to the $1780 mark.
From here, a sharp break would help confirm a wave 3 down. But a rally would offer other options. But longer term, with The Great Asset Mania now on the turn, I believe Gold as a financial asset should not escape the general decline.
