While I was away, the investment world is changed. The pin is getting awful close to the balloon.
And as a long-time bear, I have been amazed that it took five years of government manipulations on a gigantic scale (yes, I’m looking at you QE) to keep the bullish ball in the air following the Armageddon scenario of those dark days of 2008/2009. But the house of cards they have built is starting to collapse. At no time since 6 March 2009 have I felt more secure in calling the top in stocks – and a very high probability of imminent collapse.
Memories are notoriously short in the markets, but now the bulls (who outnumber the bears by a very wide margin) should be getting some deja vu. For the first time in two years, the Dow has fallen in five consecutive days. That is how amazing the bull run has been. And now that the markets have convinced most people that stocks are off to the moon, that is when the trap is being sprung – in textbook fashion.
Suddenly, the signs of fear are everywhere. The Ukraine situation is the latest hot spot. Read AEP’s piece today in the Telegraph. Russians are taking evasive action for the near-certain US-lead sanctions next week. And the recent dip in Treasuries was undoubtedly caused by EMs dumping their Treasury holdings in an effort to prop up their currencies.
And foreign companies (as well as locals) have been falling over themselves to get their money out of Russia pronto. As AEP says, a big rally in the dollar would spell curtains for the world economy. I expect that to occur.
Last week, there was another sign the wheels are falling off the Chinese economy. Feb exports missed the economists’ forecast by a staggering 25%. Yes – that is no typo. They expected an 8% rise and got a 17% fall. Hard landing – here we come.
I will make this prediction: When the stock markets are in real turmoil (we have only just seen a slight wobble), the Fed (and other central banks) will resume QE with a vengeance. And after the initial knee-jerk rally, the market will see that move as an act of desperation and resume panic selling driving markets even lower. This should be a massive third wave (long and strong).
Remember, the basic factor confronting us is that the world has built up a gigantic record pile of debt – and is still climbing. This debt growth is unsustainable because at some point, enough traders will worry that much of it will never be serviced. It is not the amount of debt that is the problem, but the belief that the interest payments will stop. That is when this incipient bearish sentiment will mushroom and panic selling will drive markets lower – andit has already started. Already, we have seen a major Chinese solar company debt default- this is the first of many.
As I mentioned a couple of weeks ago, the VIX (the Fear Index) was the indicator to watch for signs of bottoming in the 13-14 area
With the recent jump from the 14 level, it is now in my w3 and the next target is the 21 level (w1 high). I expect that level to be breached and eventually, I expect the high at the 60 level in 2008/2009 to be tested. And because the bear market just started will be more devastating than the 2008/2009 move, I expect VIX to top out well above its record 60 level.
Was it a bubble?
Here is a great read from seekingalpha.com The author points out one very startling fact – that 74% of all US IPOs over the past six months are losing money at launch! But that hasn’t stopped punters scrambling to get hold of them often with massive first-day gains. Also, penny stock trading has reached a record. These are clear signs that the end of the stock mania is nigh.
Remember the dotcom mania of late 1990s? Punters were likewise filling their boots with companies losing money such that the higher the burn rate, the more they desired them! It was all about eyeballs. Those eyeballs turned out to be hogwash.
Another indicator I have been watching is the junk bond market. As investors have scrambled for yield, these bonds have been pushed ever higher with the result that there is little spread with “no-risk” Treasuries. These bonds are called junk for a reason, and that will become apparent as they decline. But they tumbled last week along with stocks:
and I hear today that the US authorities are charging the major banks with manipulation of LIBOR and other crimes. This fits in perfectly with the theme of retribution for crimes committed during the 2009 – 2013 bull market. This is a trait uncovered by the change in social mood from bullish to bearish. We will be seeing many more crimes uncovered and punished this year.
While I was away, the Dow made a high of 16,513 – and note the date that was made – 7 March. This is five years and one day from the infamous plunge low on 6 March 2009. And I posted my forecast that March would see a major top (see previous posts).
But the important point is that the high at 16,600 made on 31 December has not been breached.
That places the latest rally as my w2 which I forecast in January. It just took a little longer to run than I had expected.
The huge neg mom div into last week’s high gave the game away. Now we are in a third wave, the decline will now start motoring.
I shall be looking to add to shorts on decent rallies.
Incidentally, I remain long ALCOA. Even in a Dow collapse, I expect Alcoa to out-perform most equities.
With global turmoil ratcheting up, I expect the dollar will fulfill its traditional role as the safe haven of choice. In particular, the GBP should bear the brunt of dollar demand. The euro may be the safe haven for Russia-related disruptions, and so I favour GBP over EUR as a short candidate. But both should lose ground to the almighty dollar.
The rally to the recent 1.68 high has hit the precise Fibonacci 50% retrace on the daily, which is also very strong resistance.
Bullish enthusiasm has been running at fever-pitch as traders have been seduced by the better-than-the-eurozone economic numbers coming out of the UK. They believe the UK will be able to escape the fallout from the Ukraine explosion. It won’t.
Latest COT data reveal that the specs, who have been running a record level of longs/shorts, have begun to lighten up on their bullish bets.
I shall be looking to add to shorts in decent rallies.
Hit a high near $1390 yesterday, but I am growing more bearish as the specs have fallen totally in love with the metal (DSI is over 80% bullish). Only two months ago, they were just as madly out of love with it. Such is the fickle finger of fate in the mad world of trading!
The sister metal, silver, is faring less well as it lags the gold rally. This is OK because silver is part-industrial and will follow the economy. In periods like this, when economic growth is teetering, silver should out-perform gold (which rallies on safe-haven status).
I took partial profits on longs yesterday at $1385 and retain the other half. We are in a C wave and that could end at any time – it could exceed the A wave or fall short. But when it completes, that will be large wave 4 and the next major move will be down.
I do not want to outstay my welcome, having entered near the $12o0 level and there is a potential neg mom div forming (red bar) as a warning.
Much will depend on global events, so I am willing to stay with a half position. Next week (after the Ukraine referendum and US sanctions) should be most interesting!
My longer-term strategy remains one of exiting long trades in due course and positioning short for the expected big decline below $1000. By one measure, I have a $600 target.
How is my Trade for 2014 doing – Long Gold/Short Dow?
Since 1 January, gold has increased by $183 (or 15%) and Dow has lost 600 points (or 4%).
The trade has gained almost 20% and if leveraged by 20-to-1, that is a gain of 400% on your initial stake.. Nice.
If spread-betting at the minimum £1 a pip, that is a gain of £18,000 t o date. Very nice.
Remember, I said that I expected it to work for the first part of 2014 only. I expect to be exiting it sometime this year.
Have a great weekend!