They are now falling at once
Stock indexes are now in full-blown retreat, as I intimated from last week’s blog caption ‘It drops slowly – then all at once’. Last week the Dow lost almost 2,000 pts. See what I mean? Markets usually fall a lot faster than they rise as is encapsulated in the aphorism You fall out of the window faster than you climb the stairs.
And that mini-crash is just the start of something much much bigger. The Great Asset Mania is starting an historic retreat. As I stated last week, the Dow and S&P were the last hold-outs of the historic reversal in bull markets that were signalled last year in the Nasdaq and other major US indexes.
These bull markets have been decades in the making. In that time, we have gotten used to sky-high house prices, stock prices, bond prices, eye-watering salaries and bonuses for the elite, rewards for failure on a grand scale in government especially, and so on. But finally, the music has stopped. The emperor really has no clothes!
In fact since the Dow ATH was put in only on 5 January, the Dow is off almost 3,000 pts in only two weeks. The previous large Dow correction was in the Corona Crash in early 2020. The Dow lost nearly 40% to the March low in about 30 trading days, which then was noted as the fastest decline off an ATH in history. That was a dress rehearsal – this present one will be far faster.
Why? Simply because the extreme levels of rampant and aggressive speculation by retail and professional investors has been so far off the scale that it has almost come round again! The world of the cryptos has been one of the leaders in this mania. Despite the failure of Bitcoin to make significant inroads in the down to earth world of global finance, speculators have frantically bid up the market to the astronomic $70,000 area in November. That is a triumph of hope over experience. It last traded at around $36k – a loss of almost 50% in two months. It has much further to fall.
Another aspect of this ‘triumph of hope over experience’ theme is the physical and economic impossibility of much of the Net Zero aspirations. Almost overnight, these are being dashed on the rocks of reality. For example, the basic infrastructure of Net Zero – the mass roll-out of charging stations for all the EVs we will be driving -is running into brick walls. In the US, Blink Charging Company is a leading start-up in this sector and investors are jumping ship in their droves
The shares have lost 70% off their ATH so far (matched by Chargepoint Holdings) The odds are pretty high they may be bankrupted this year (unless a massive government injection appears Chinese style, of course). So widespread adoption of EVs is not so obvious after all, despite the expanding sales figures.
While many are calling for a reduction in the output of CO2 into the atmosphere to follow the ‘Climate Change’ agenda, it was reported last week that coal use for power generation has increased to new highs this year as the winds have dropped markedly. So many windmills across the country are lying still – as I have been noting recently.
With NatGas prices at punishing levels, power companies are turning to coal with even Germany – the most rabid anti-CO2 nation in Europe – is using a lot more coal. This supreme irony is a natural consequence of the false path to Net Zero our glorious ‘leaders’ have taken us.
This year will mark the sudden social realisation that Net Zero is unaffordable (as well as being impossible). Facing huge costs to replace gas boilers with heat pumps (or even hydrogen) in a period of escalating consumer cost-of-living inflation, many will vote with their feet and favour political candidates that have the courage to speak out against the current madness. I fully expect to see a revolution on political thinking this year. And that will be a consequence of a sinking stock market. Remember, the news follows the market, not lead it.
Bear markets always bring about many doses of reality and away from magical thinking. The fact that the globe has experienced no warming for many years (the 20-year ‘hiatus’) despite a large increase in CO2 levels will finally reach the mainstream. Many will start to question the whole ‘Climate Change’ basis and the most prominent media proponents will be castigated. Boris is one of the cheerleaders for Net Zero and he appears to be living on borrowed time already. The next leader will most likely tone down the Net Zero message to try to align with public opinion.
It’s similar in the USA with Biden plumbing new depths of unpopularity. A Presidential candidate will emerge that will roll back the excesses of the war on fossil and massive support for alternative energy sources (Trump may well re-emerge!).
I have long stated that when the markets turn, the leaders will be the Tech Titans that lead the market up the hill. Last week I showed the FANG Index that was on the verge of breaking the major support trendline. At the close, that line has been clearly broken. Here is the tech heavy Nasdaq leading the charge lower
As it broke its major trendline, it entered a third of a third wave – the most one-sided wave in the book. These waves take n o prisoners. Anyone caught long will be slaughtered. The market closed yesterday near bottom tick right on the previous wave 4 low. While this is a normal place to see a bounce start, I am not so sure it will happen this week. If on Monday the market opens with a large gap lower, all bets are off for a rally phase early next week.
Is there a safe haven in stocks in these bearish times?
The Nasdaq topped on 22 November and in the two months since, the Dip Buyers have been run over with a steamroller by the fleeing hordes of very scared investors. Since the markets had been rising last year when the Dip Buyers came in, we must allow the possibility they may be battered and bruised, but do they have enough fire-power to stage one more advance?
One of the scariest market developments has been the rapid increase in bond yields of late with 10-yr US Treasuries pushing the 1.75% resistance area. With debt levels at unprecedented high levels, unless yields can suddenly drop back again (unlikely), margined investors are feeling the pain and are fleeing expensive shares.
But one sector that has always acted as a solid port in a storm has been Tobacco. I first recommended British American Tobacco last year to Pro Shares members as a share that paid a very high dividend that I regarded as pretty safe. Also, the shares had sold off into a great buying range
The decline off the 2017 ATH was partly the result of many large institutional investors being forced to divest from ‘sin’ sectors such as tobacco and oil by shareholders who took a moral stance. But that gave more rational investors (such as us) a magnificent opportunity to acquire a rock solid company at bargain basement prices. Currently paying a 7% yield, the shares are rapidly moving higher off solid support at the Fib 62% retrace.
The huge mom div here should ensure a very rapid re-rating this year as a 7% yield starts to look pretty good compared with the zero yield tech high flyers that are rapidly losing steam. This is another aspect of the change from rampant speculation to a more conservative investing stance this year that I have been forecasting
There are other sectors that I am advising Pro Shares members as worthy of consideration for defensive investments.
High Yield (Junk) Bonds are poised for a crash
One of the most extreme areas of speculation has been the Junk Bond market. Yield spreads with ‘safe’ Treasuries had narrowed to a sliver. Imagine – the riskiest bonds issued by the riskiest companies paying only slightly over that available from the US Treasury (with its tax-raising powers and unlimited borrowing capacity). Utter madness – and only present when risk is firmly off the table. That is herding to the max. Only when almost unlimited ‘free’ money is available thanks to the Fed can such anomalies occur.
But with stocks in freefall, can Junk Bonds be far behind? This is updated from earlier this month:
A good break of the blue 50-wk MA should herald a rapid decline to the 200-wk MA with much lower potential.
Tesla joins the bear camp
Along with Bitcoin, Tesla shares have been my two leading Great Asset Mania indicators. They are poised right on the major line of support
In this wave 3 of 3, it is conforming to the massage of the Nasdaq chart (above) and several others. A sharp break here would set up a more severe decline from the current $950 to my main target around $500.
Watch out below!