The dam has burst
As many of my UK readers will agree, my dam-busting metaphor for the ‘sudden’ collapse in stock markets is totally appropriate. Many of our rivers are swollen with the torrential rains and have burst their banks, flooding wide areas.
And stock markets have become massively swollen, too, with charging bulls who are totally convinced shares can only go up. And one cohort of trader is back with perfect timing for a major top.
Yes, the day trader is back! Remember him/her? They crawled all over the hot markets in the 1990s pushing up the dotcom stocks to the heavens. They loaded up on America Online, Dell, Tellabs and countless names with .com on them. So where are they now? Many are still in stock certificates gathering dust in the back of some guy’s sock drawer.
Here is one – and at least he has a dog to provide a more paws-on-the-ground perspective..
Incidentally, I have a small collection of pre-1970 stock certificates of defunct US railroad shares. They look better than wallpaper (and a lot cheaper, too).
It may be hard for today’s day traders (and pros alike) to picture, but many currently hot stocks may well vanish from sight in the next turn-down.
And there is one speculative vehicle above all that punters turn to when feeling madly bullish – trading short-lived call options on single shares (usually the FAANG leaders). Take a look at how volumes have mushroomed:
and not to be outdone, retail share traders have joined the party – here are the trading volumes on the popular US platforms
They have doubled in the past two years as many of them promote free commissions. If ever there was a sure-thing formula to get retail punters to become armies of bedroom day traders, this is it. Free Commissions and a booming market. How can you lose?
How can you lose? I have a feeling they shall soon find out! Was that a bell I heard ringing on 12 February when the Dow hit a high of 29,560?
Regular readers know that I am using the Junk Bond Index as a proxy for how strong the speculative juices are flowing. These ‘high yield’ bonds are issued by the riskiest of companies and trade more like penny mining shares.
The yield spread with ultra-safe US Treasuries had narrowed to a sliver – until recently and now that spread is widening fast to confirm risk is really off.
Is the coronavirus killing the stock rally?
Of course, if you pay any attention to the MSM (and most professional analysis), my question is purely rhetorical. It’s blindingly obvious the fears over the virus is shutting down business and the knock-on effect is a weaker stock market.
But I have a different take. I start from the idea that stock prices are governed by how traders feel about buying/selling at that moment. When most are feeling optimistic about the future, they tend to buy shares and prices rise. When they are feeling less optimistic, they start to sell shares and prices fall or at least stabilise. And when they feel downright pessimistic, they have already sold all or most of their holdings and the prices are at or near rock bottom.
So now that US shares are very near their ATHs, how do you think traders are feeling (until this week)? Wildly bullish, of course (see charts above). And how did we get here? By climbing the famous Wall of Worry. And that Wall contained many reasons for traders to feel uneasy and start selling shares over the past few years.
But they didn’t. At any point since 2008, any trader would have felt justified in selling as the latest worry hit the headlines. But overall, they didn’t. But with the Dow off by 4,500 pts in just a few days, why have traders suddenly taken fright now? Yes, we have a new virus scare – but viruses have come along many times before. Last week, I showed how the market reacted to the SARS scare in 2003. Shares zoomed northwards. So why did the market droop this time?
Except for the high-flying US indexes, most global stock indexes have been in bear trends for some time. And bear trends signal a darkening of social mood (sentiment). And a darkening social mood helps to weaken human immune systems. We tend to get more colds when feeling ‘low’. Hence the current virus scare.
We have all kinds of viruses in our bodies all the time – some potentially dangerous. But most of the time, our immune system wards them off our vital organs – otherwise the global population would not be anywhere near 7 billion!
No, the virus is a dramatic symptom of our weakening immune systems that is resulting from a darkening mood and is producing a bearish sentiment which in turn is promoting share selling. Fear trumps the Fed!
Goodness knows, there is plenty in the news to confirm such a darkening of mood from the perpetual Middle East wars to the deepening divisions in Western societies (politics as a litmus paper has become deeply polarised). And the imminent ‘global climate catastrophe’, which is only a few years away, is the quintessential Armageddon scenario for today’s gloomy world.
When markets have reached rock bottom, many will see the current stress on fighting the ‘climate emergency’ as nothing other than tilting at windmills – with the imaginary enemy the ‘evil’ earth-greening trace gas carbon dioxide. My guess is that years hence, this episode will be included in the revised edition of the classic “Extraordinary Popular Delusions and the Madness of Crowds”.
So basically, with our weaker immune systems (bear markets), humans are now receptive to the fears stoked by the climate catastrophe spokespersons and the coronavirus (which may be mostly harmless to healthy individuals). There could have been another factor to ascribe to the selling if any more dramatic one was handy, but this one arrived on the scene with perfect timing for the MSM, which reflects public mood closely.
My guess is that it might turn into a real pandemic only if social mood is weak enough. It is interesting that Italy is the first region in Europe that has had major cases – and Italy’s economy isn’t exactly the strongest in the EU. And its politics is deeply divided.
As I have mentioned before, it is no accident the virus originated in China, the region responsible for many previous pandemics. And I note that the West made a Devil’s Pact with China about 40 years ago. To raise up their people towards Western levels, China built factories employing peasants from rural areas paying hem low wages, with no employees’ rights and certainly little Elf ‘n Safety regs we are lumbered with here. Then we bought their cheap goods at prices we cannot hope to compete with (the Amazon Effect).
But now as China’s economy matures, and as with all Devil’s Pacts, there is always a pay-off. Today, it has arrived in the form of the virus heading our way and the wealth-destroying infection of the stock markets that have been pumped up by the insane amounts of QE and global savings.
The pundits are urging caution, as usual
It always happens this way. When the mostly bullish pundits react to a sudden and ‘unexpected’ major plunge in share values – especially in the ‘never-sell’ Apple and Amazon – they circle the wagons and proclaim: Nothing to worry about here, folks. Those Indians are fake! Just Buy the Dip!
And that’s what they said in 2007/2008 just before the biggest crash since the Great Depression.
Here is just one recent headline: Don’t panic sell, Buy! There is some good news coming out of Korea’. The author adds: I think buying the dip on the FANG names should be enticing now. Now that’s what I call ‘clutching at straws’!
In fact, I am reassured by such sentiments that I am on the right contrarian track. The declines will be far deeper than most can imagine.
Most people, especially professionals, have got very used to the thing you do with dips is Buy It! That policy has worked wonders (depending on timing, of course) for over ten years. Time enough for it to become completely ingrained.
‘If it ain’t broke, don’t fix it’ is the mantra. But what if the game has changed? The falling knife image comes to mind.
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The France 40 index offers lessons in chart reading
Many traders focus on the German DAX as their proxy European index. But here is my analysis of the France 40 index, which serious traders could well include on their screens. With much social unrest in that nation with Gilets Jaunes and the regular strikes about public job pensions, the France index is certainly worth following.
The ATH was set in July 2007 at the 6170 mark. And after zillions of stimulus provided by the ECB with the added boost of ZIRP and then NIRP, stocks still have not been able to exceed that high. It came within a whisker, though. The recent high at 6125 on February 20 was a mere 45 pts (0.7%) adrift.
Now compare that with the major US indexes. The S&P high in 2007 was 1568 and the recent high on 20 February was 3400 – a huge 120% above that in 2007! That is one huge divergence. In a supposedly globalised world, why the sharp difference?
And the wave patterns are textbook with the five down/three up prominent. The recovery off the 2009 low has traveled between my lovely tramlines and the chart shows my roadmap as of last weekend. Since then, the market has moved lower as forecast on the chart.My first major target is the lower tramline support in the 5000 region.
The failure to make new highs given all of the ‘stimulus’ thrown at the market is a dire warning sign that a large recession/depression awaits France and hence Europe.
My long-standing bearish forecast for Crude Oil is playing out
Last week, US crude pushed below the $50 level, which has been a major support level for many months.
I epxect crude to trade under the $20 level in due course.
So is the coronavirus doing what the climate zeolots crave? Ridding the earth of fossil fuels? In fact, what it is doing is making fossil fuel prices a lot more competitive with the alternatives. And China and India are planning on building a lot more coal-fired power stations. While we in the West are hell bent on bankrupting ourselves. God really does have a sense of humour!
Is this the irony of ironies?
We all know the Western world is gripped in the climate catastrophe scenario to come soon. In their infinite wisdom, the UK government has written into law the nation must produce a net zero carbon dioxide output by 2050. Many including the Extinction Rebellion zealots are calling for banning fossil fuel vehicles and also a severe reduction in flying.
In one fell swoop, the coronavirus fear is doing just that. Vacationers are cancelling flights in droves and many places are in lock-down. Who saw that coming? We may even achieve net zero a lot sooner than 2050 at this rate! And without the mandate from our all-wise policicos or pressure groups! What an irony!