Weekly Wrap
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SPECIAL REPORT
In the spirit of the Commwealth Games, now going on in the UK,
On your marks, get set – GO! And the race to the bottom (for asset prices) begins. The bulls are on the run! I am limbering up for my race – the Great Deflationary Depression.
All good things come to people who wait – and wait I certainly have. Ever since the 2009 lows, I have been looking for the Great Bear Market to resume (I consider the 2000 highs as the real tops), but the US Fed (and other money-printers) managed to keep the balls in the air for over five years with their funny QE money.
And with apologies to the Great American Songbook:
But now the party’s over; it’s time to call it a day.
and; Brother, can you spare a dime (that one is for later)
Risk is suddenly being turned off with a vengeance, and the tsunami of selling begins. Last week, I showed the chart of the junk bond index. Remember, junk bonds trade very much like equities, as they are the first layer to give way in the event of a perceived (or real) downturn in sentiment. This is the updated chart – and take a moment to study it and be amazed by it:
Not only has the market broken the 50-day MA, but also the 200-day – all within a few days! That’s what I call a sudden aversion to risk! And this is just the beginning. Look at trading volumes – markedly higher on the declines – a very bearish sign. And for lovers of the kiss, note the lovely kiss on the underside of the 50-day MA before doing a scalded cat bounce down. That water sure was hot they poured on that poor cat!
Junk yield spreads (over ‘risk-free’ Treasuries) reached the amazing low of only 3.2% in late June. Last week, it rose to almost 4%. By the time the Great Bear Market is over, I expect most junk bonds to be yielding well over 20% before they default. The index may well vanish from the scene.
As I mentioned last week, the driver of shares is social sentiment. This has suddenly reversed from complacent bullish to anxiousness. Look around the world from Gaza to Ukraine, war is in the air. And what irony – coming slap bang on the 100th anniversary of the start of WWI (which is being commemorated lavishly in the UK media, though possibly not quite to fulsome in Germany).
In fact, there are striking parallels between the state of the markets in 1914 and this year. The world is on a knife-edge, but most people do not see it. Most are treating last week’s nervous selling as an opportunity to buy the dip, which has been the policy of choice for five long years – and it has worked! But this time, it is different. The buy-the-dip strategy will be suicide and many will be catching a falling knife.
Another straw in the wind is the increasingly belligerent tone of politicians regarding Russia. Today I read that Cameron (UK Prime Minister) is advising NATO to boost its presence in the Russian borders with more firepower. When a politicain senses his power is waning (UKIP will score big in next year’s elections – and he knows it), he turns to war. It is the last refuge of the scoundrel/politician. And what better foe than Putin, who has received some disparaging press recently.
One more sign social mood is changing is the sudden ebola virus outbreak in Africa. When humanity’s mood turns negative, it is more susceptible to disease and pandemics. As individuals, we all carry multitudes of potentially dangerous viruses. When we are healthy, our immune system keeps them at bay.
It is like that in the markets – the QE cash has kept the deflation bug at bay, but the medicine is now wearing off and deflation (which is already stalking Europe) is about to strike hard.
We have not heard the last of this ebola outbreak. When the markets are trading much lower, it (or something else) will be a pandemic by then.
And here’s another prediction: as the markets continue in its bear market, the US Fed will come under mounting criticism. It will be blamed for the losses by its QE and ZIRP policy, and it will be powerless to do anything about it. The QE policy will be totally discredited, meaning it will not re-appear again, despite massive market panic. The financial system is under severe threat and this time, the opposition to QE will be massive. Ron Paul will have his day! Poor Janet!
US Dollar rampant
Last week’s flight to safety turned investors to the only currency that traditionally has provided a safe haven – the US Dollar. I have been bullish the dollar for months because in a deflationary depression, there will be a mad scramble for dollars in order to pay down debt. It is the opposite effect to that seen in an inflationary period.
There were some huge moves in currencies last week and I am trading more currency crosses as volatility picks up. Panic will quickly spread and my original target for the dollar above 100 (low 80s at present) will loom into view.
DOW
I covered several stock markets in my latest MW Trader email yesterday. I noted that many were displaying rising wedge patterns that have now broken sharply to the downside on weakening momentum. Here is the Dow:
Yesterday, the market hit the Fibonacci 38% level and there should be a bounce next week if support holds. But if the market continues its plunge, the next Fibonacci level at 50% is my target at the 16,400 area.
Since December, it took six and a half months to climb to the top. It has taken just seven days to give up all gains – and produce a loss for the year. Remember, markets fall out of the window a lot faster than they climb the stairs. This is the kick-off to the Great Bear Market.
I remain heavily short from the 17,000 level and will be adding to shorts on rallies.
FTSE
The market is bouncing off very long-term resistance (from 2007) in the 6800 area:
That 6800 level has acted like a solid flat roof, but now the market has broken below my wedge line.
Much lower prices beckon.
USD/JPY
Last week, I changed my mind about this cross from bearish to bullish. That was very timely!
My downtrend line was severely broken to the upside. My next target is the 104 high, but I expect a pull-back soon.
I remain long and will look to add on dips.
USD/CAD
This is a cross I have been following for some time and waiting for the consolidation phase to play out:
And now, with the upside breakout, it can resume its bull market. If we are in a third wave up, my main target is the 1.12 highs with higher prices thereafter.
This cross has many factors working for it: commodity prices are in bear trends (crude oil traded down to $97 last week, and grains are under severe pressure) putting pressure n the Canadian. Demand for US is ramping up, so a double whammy.
I remain long USD/CAD from the 107 area and plan to add to positions on dips.
GBP/EUR
This is a market that is a risk-on/risk-off exemplar. Received wisdom has maintained that the euro is doomed and the pound benefits from a super-vigorous UK economy. But like all ‘obvious’ stories, they turn tail and bite the majority where it hurts:
The rally leg since March has been virtually straight up with few set-backs. But my lower tramline has been broken and the tide has turned. Just watch this unravel as the bulls scramble for cover.
I remain short, looking for my first target in the 1.22 area.
Have a great weekend!
