Weekly Wrap
It was lonely at the summit on 2 January being a bear – and shorting almost every stock index in sight, as we did. But we are no longer alone. The latest DSI (Daily Sentiment Index of futures professionals) shows we have company – about 40% are now bearish. What a difference a month makes!
All it took was a near- 1,000 pip decline in the Dow. Of course, the pundits are falling over themselves coming up with the ‘reasons’ for the change of heart (this is a more accurate description of the process than logic) from EM currency collapse to poor earnings to on-going Fed tightening. But at New Year’s, all eyes were pointing up to the blue skies of ever-increasing stocks.
Now in January we have had some ‘bad’ news and 40% are now looking down. This little scenario proves my point: the market drives the news. And when the bears run rampant, the market will turn back up with a vengeance.
We shall see big declines but also big rallies. We saw one of these in the Nasdaq last week as Google’s figures looked good to the market. These are opportunities to position short. The tide has turned.
One fly in the ointment is this: what will the Fed likely do in the face of a huge sell-off? With Yellen in the chair, who is a ‘print, and damn the torpedoes’ person, they may decide to ramp up QE again in a nod to the old black QE magic that worked so well. But will the market see through this act of desperation and sell off anyway? Or will the buy-the-dippers get stuck in and force a rally since stocks are ‘cheap’?
If this option is ever discussed, the feathers will fly as many on the Fed committee were not happy with QE in the first place, and this re-emergence would get their blood boiling. I foresee deep divisions in the Fed this year. And that goes for society in general. Divisions will become wider, especially in the eurozone, which has had a quiet time recently.
But that is about to change with France sinking ever deeper and Italy on the brink with unemployment at depression levels (and growing). Extremist political groups will gather strength across Europe. The euro, doomed as it has always has been, will fall hard.
The ECB is discussing lowering policy rate, already at a minuscule 0.5%. This will have little practical effect, but will send a signal to the markets that they are in deep do-do. The engine of growth Germany, is weakening as its workforce gets older and with China slowing, its exports will suffer.
And Germany will not allow debt-sharing with the southern nations, which could put at least a sticking plaster on the eurozone. So something has to give and since Germany would like the euro to weaken to boost competitiveness of its exports, that is the likely path.
And don’t forget the European banks – they will go pop at some point under the weight of their bad loans that nobody wants. This will become a big story this year.
I don’t know about you, but I am looking forward to 2104 as the Year of the Bear.
And remember my New Year Trades for 2104: Short stock indexes and Long gold/short stocks. These have got off to a flying start.
DOW
We now have a terrific five down to confirm the new trend. And yesterday, very important support was broken, but not decisively as the pigtail shows:
With momentum oversold, chances are high for a decent bounce from here, especially now that the five down is in. And with the bear camp swelling fast, I am less comfortable forecasting a big move down from here. Odds are definitely swinging to a bounce scenario.
Of course, if the market falls hard early in the week, that would set the seal for a relentless decline. Monday and Tuesday should hold the key here. But I remain aggressively short and will be adding to positions on decent rallies. My next major target is the October low at 14,800.
EURO
A big move into the dollar last week especially from EM currencies as it gathers steam for a big push up in a large third wave:
When the tramline breaks, it will be fast and furious towards my main target at 1.28. Last time I showed how the GBP/USD was likewise poised to suffer a massive wedge break. They will drop together like stones. I could have added to my list of Trades for 2014 this one: Long US Dollar.
BRENT CRUDE
Is tracing out a massive triangle:
Isn’t that pretty? It is on the brink of a plunge down out of this coiled spring and when it goes, it will be in freefall. My main target is the summer low at $90, but should eventually reach much lower levels.
Of course, with crude oil in decline, many will see this as supportive of stocks and the economy (more disposable income). That is wrong. It will reflect the shrinking economy and a falling stock market.
GOLD
Has broken my tramlime but has come back for a kiss:
I have no reason to think the kiss is not genuine and I look for a continuation of the move higher. But if the market moves below current levels, the rally is off and the bear market resumes.
Have a great weekend!
STOP PRESS
And this just in – story of a couple who lost everything trading shares who borrowed from their stockbroker on easy-money margin.
Do read it – it is a sign of the times – wild speculation that has driven NYSE margin debt to new heights in December. It will fall hard this year as margin calls will explode.
