Weekly Wrap
A heads -up that I will be giving an intensive two-hour trading masterclass at the London Money Show on Saturday 8 November. I will post details, which will entitle you to a hefty discount, in the next few days.
Stock markets are falling – fast. The Dow high at 17,365 was made on 19 September. It closed yesterday 850 pips lower (a loss of 5%).
That was the last of the major indexes to top out – smaller caps topped much earlier in the year. And last week saw some terrific volatility with the Dow down 400 points on Monday/Tuesday, then the Buy-the-Dippers came in and moved it up 300 on Wednesday on the Fed minutes release, and then they got crushed on Thursday with a loss of 350 pips.
In the last few minutes of trading yesterday, it fell another 100 pips. The hourly chart is a real roller-coaster – and very tricky to trade.
Incidentally, the Fed minutes just reiterated their ZIRP policy – nothing new. But I have news for Fed watchers – the market will decide when interest rates will rise. And that day is fast approaching.
Suddenly, volatility has returned – the VIX traded yesterday above the critical 21area and is now in a third wave up. But that is only the start. Before the Great Bear Market ends, I expect VIX to be trading well above 50.
Seemingly a long time ago, I forecast that when the market finally tops out, we shall see 200 – 400 pip days in the Dow, especially on the downside.
Mark that date – 19 September 2014
The date of 19 September will go down in history as marking the end of the Great Delusion where investors put 100% faith in the ability of central banks not only to direct the economy, but to push asset prices forever upwards, especially since 2009. Remember when bad news was good – and so was good news? Those were the days.
But I have news for the Dippers – the Feds have run out of ammo. There is no more gas in the tank and now reality is biting.
And when interest rates rise, the huge leverage attending the Fed’s bond buying spree will come back to haunt them – and us. Most do not know that the Fed’s capital is minuscule compared with assets. Last seen, leverage was 70-to-one.
In addition, the markets have risen recently largely on corporate buy-backs as they could borrow at low rates, while awarding themselves a decent dividend for a positive carry. Those days are ending – the party is about over. Corporate CFOs have a strange habit of buying their shares near the tops. It is a mania, I guess.
The Left Hook
I have long observed that big bull markets often make their tops when an event appears from left field that knocks investors sideways. It is not an unexpected data point from within the usual raft of inputs from the economic data that mark the tops, but a left hook coming out of nowhere – and that role is being played by ebola.
A few weeks ago in WWrap, I mentioned that this epidemic has the potential to disrupt the world order – and markets. Ebola was then hardly on anyone’s radar, but that picture has changed radically. Now, it has become a real scare on the MSM.
Now, I am reading serious accounts of how it would decimate economies by tying up the global transport of goods and people. Already, markets are paying attention. As I mentioned before, the scare is a perfect beacon of the deteriorating social mood sweeping the world. Epidemics and pandemics really flourish when people are feeling down.
Of course, governments are hurriedly putting screening plans in place, but they wont stop it. Sad to say, but this horrible virus will eventually cover the world.
Risk is definitely going off
When social mood turns more negative, markets turn risk off. The spread between large and small caps is widening, and so is the yield spread between ‘risk-free’ Treasuries and corporate junk bonds. Here is my Plunge-ometer:
This is a fine double top – a suitable end to the madness of the Great Yield Grab – courtesy of ZIRP. Never mind the risk, of course. Now. investors are slowly paying attention to it.
Junk bonds are about the riskiest out there and behave more like equities. Already, the retail sector is suffering and I expect casualties to increase. Now, with oil prices in free-fall, the pressure is on many highly-indebted shale oil companies to stay afloat. That is an accident waiting to happen.
Now Germany catches cold
A ‘surprise’ collapse in Germany’s economy during August has been foreshadowed by a 10% decline in the DAX – and this was considered impossible only a few weeks ago. Remember when it was widely commented that stock markets hadn’t seen a 10% ‘correction’ for years -and wasn’t likely to? Well, I have news – now we have one.
The Russian sanctions are taking a big bite out of Germany’s exports – another big negative.
The string pushers debate QE for EZ
Predictably, the politicos desperately want to strong-arm the ECB to start money printing a la Fed and BoE to stimulate, but Germany still won’t relent (yet). An almighty squabble is brewing. But now with Germany not the mighty powerhouse it once was, is it conceivable that they will actually allow QE? That will open up huge cracks, but the euro will tell the story.
The truth is the string-pushing ECB are powerless to stop deflation. Any QE they announce will be seen as a last-gasp desperation move and markets will sell off anyway in disgust. They are truly damned if they do and damned if they don’t.
November 5th is traditionally Fireworks (Guy Fawkes) Day in Britain, but I fear we shall see fireworks in the markets long before that.
We have reached Peak Debt
The West (and China) are maxed out on its credit cards – and that includes government. This, from David Stockman:
Needless to say, the households of Europe and America have at length reached “peak debt”. Spain had a mortgage borrowing binge, for example, that even put Los Vegas and Phoenix to shame. But now the day of reckoning has arrived. Even as the Fed and ECB keep pumping liquidity into the financial markets, they fail to notice that they are not inflating consumer borrowing, just financial asset prices.
Wages and salaries are tethered, inflation is falling fast (too much supply, not enough demand), and government debt is out of control. Debt repudiation is just along the road.
We are on the verge of a massive Deflationary Depression.
My overall view
The globe is in a major crisis -and turning point. The relative calm of the past few years is giving way to conflict, fear, panic, disruption (all features of a bear market). Here in the UK, the cosy political system is being disrupted by the rise of UKIP, which has just won its first parliamentary seat. There will be lot more. Voters are angry and this will boost UKIP, a party dedicated to Britain leaving the EU, smaller government, and tackling open-door immigration – a complete reversal of previous policies.
This shake-up in cosy UK politics is a new phenomenon and will get stronger as social mood darkens.
In finance, the fairy dust the central banks have sprinkled over intelligent people will dry up and the veil will be removed to reveal an impotent Fed – a Fed which has been in cahoots with the rich 1% to the detriment of the 99%. Anger will be directed towards them and I foresee magazine covers with the Fed Chairman vilified. As stocks collapse, this anger will intensify as the wealth of the 1% is destroyed.
I have advised my private clients to liquidate all common stocks, with the possible exception of selected pharma and biotech (ebola and other medical advances). But the general collapse will be breathtaking.
Remember my Trade for 2014 – Alcoa? We took major profits in August and the market is now headed lower.
My other Trade for 2014 – long US dollar – is doing fine. And with virtually all stock indexes in negative territory for the year, holding cash – paying near zero % – is the clear winner! Make no mistake, cash is becoming king once more.
DOW
I could have chosen any one of the US, UK, European stock indexes, but here is my favourite – the Dow on the weekly:
My next target is the centre tramline where it will meet the August 16,250 low. Breaking that will bring my second target into clear focus in the 14,800 area. Lower targets loom thereafter.
Breaking the shelf of support on the momentum chart will open the floodgates.
I managed to short the Dow only 20 pips from the 17,365 top and intend to hold a very long time. I added on the rally to the 17,200 level. I am now maximum short Dow and other indexes.
As I warned my private clients, expect some sharp counter-trend rallies along the way. These will be ideal setups for placing more short trades, if desired.
NIKKEI
Not to be left out, the Nikkei is in a clear downtrend, having made a top a few days ago:
I have a lovely rising wedge on the daily and a break of the lower line would spell curtains for the bulls. Japan stocks have been promoted heavily by those believing Abenomics would work its magic on Japan’s deflationary economy.
I believe they will be bitterly disappointed – and provide another object lesson in why putting faith in politicians and economists – and central banks – is rarely a good thing. Watch out below!
This Nasdaq darling is suddenly losing its allure:
Here is another wedge formation at a major top. It seems I will have a plenitude of examples of wedges to show in a forthcoming chart book of major topping patterns.
The wedge has been broken and market is heading for the large gap area around $450. Large gaps like this are usually filled.
But note the large negative momentum divergence going into the $620 top – a sure give-away that buying was drying up and a reversal was approaching. Lovely chart.
TESLA
This is another darling of the specs and will break hard as social mood resumes its downtrend:
Already, signs are there that the top is in. There is a big neg mom div at the top, a small scale five-wave decline, a rally retracing a Fibonacci 50%, and a textbook kiss on my tramline. Yesterday, the market began an immense scalded cat bounce down (text, pp 83 – 84, 143). Watch out below – Tesla is running out of gas/electricity!
The mini-love affair with premium electric cars will get crushed when crude oil sinks towards $50 – and beyond.
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I have a few openings for private clients who would like my guidance on their investments/trading activities during the market upheaval to come.
Please email me at ttburford@gmail.com with your needs.
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Have a great weekend!
