Weekly Wrap

ANNOUNCEMENT

I am now writing articles for Interactive Investor and every Monday I cover a major UK share in Chart of the Week.

Here is my latest article on Royal Bank of Scotland.

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Market Commentary

Last week confirmed my advice to expect massive volatility in US shares – and so it proved.  The Dow has moved up by several hundred pips, and then back down by several hundred – all in one day with yesterday being the standout.

The VIX Fear Index jumped to the 22 level yesterday which is where previous peaks have occurred. I expect that level to be breached pretty soon.

But this is typical behaviour at major highs following the stunning one-way bull market that has lasted six years.  The bulls are still slathering over the ECB QE blitz that they believe is bound to reach Wall Street’s trading desks and keep the party alive.

But since that announcement on Thursday 22 January, the Dow topped that day at 17,860 and has lost 700 pips since!  What a ringing endorsement for how QE pumps up asset prices – the conventional wisdom!!

Actually, this is in keeping with all previous QE announcements – stocks run up to the day of the news and then promptly collapse thereafter.  You can set your watch by it.  But surely, we are running out of the QE opportunties, although I would put no degree of madness past central bankers/governments.  When cornered, they will try anything – and cornered they are.

But now the bears are freshly emboldened as they see conditions in the real world not exactly hunky dory – and getting worse by the day.  The Greek election result has thrown a spanner in the sovereign bond works with a ‘shall they or shan’t they default’ mentality dominant.  That is a result of the rapidly increasing negative social mood sweeping Europe.  It is spreading like wildfire with Spain next in line for the anti-austerity treatment.

Then yesterday’s US GDP data wasn’t much for the bulls to crow about either.  All of these developments are a result of what I have been forecasting for some time – the approach of a deflationary collapse.  Now, the inevitability of deflation is being noted by more and more people with the result showing up in falling stocks.

The world is waking up to deflation

It has been a long time in coming, with US stocks finally having got the word that major markets are in bear trends (gold, oil, copper, base metals, etc).  The topping process has been painful (for the bears) – and long winded – but I believe we are finally at the point of recognition and I expect US shares to begin their massive decline in earnest over the next few weeks with declines of thousands of pips.

On a lighter note – I see that Tiger Woods – the archetypical bull market sportsman – shot the worst round of his career last week and missed the cut.  Is this an omen for stock markets?  Remember, Tiger was taking all the silverware during the great bull market era and now he is fading as are US stocks.

Finally, what does a deflationary depression look like?  Citizens of Greece are already finding out with Spain, Italy, Portugal on deck.  Not only joblessness, but salaries will decline, taxes will rise, asset prices – including housing – will fall, banks will fail, popular culture will continue to stress the darker side of humanity, and CASH WILL BE KING.

One main feature of a depression is the ‘righting of wrongs’ made during the economic expansion phase.  We are seeing that in the UK with more historic charges of pederasty and sex with minors now has reached inside parliament as well as with celebrities. During the good times, such behaviour is excused and/or swept under the rug, but in the darkening times we are in, retribution is demanded.  Public anger from many quarters is on the increase.

How to play a depression

Liquidating assets and getting into folding money will be the smart play, but very few will do that.  Most investors sell out at the bottom, which will be my signal to start buying again.  I expect that to occur in a couple of years after a relatively short depression (1-2 years) that will wipe 90% off most investments.

The problem for us bears will be counter-party risk.  If you have a terrific short position, will your provider be there to pay out?  It will pay to be very nimble.

DOW

The titanic battle between the inflationists (QE lovers) and the deflationists (the realists) was played out vividly last week but as the week ended, the latter had the upper hand:

I have a lovely wedge pattern which has been broken.  A wedge is like a coiled spring wit the swings getting tighter and tighter until the spring is released, unleashing chaos!

My first target is the December low at 17,000 and from then on, we should be in third waves of many degrees.

I remain maximum short Dow/S&P.

You can follow my trades in my TT Alert serice,  Details here.

And if you want to receive my trades in real time as I make them, drop me an email at ttburford@gmail.com and I will send you details of membership in my VIP Traders Club.  I have a few openings remaining.

CRUDE OIL

Now that the whole world is bearish on crude, it has started a massive counter-trend rally starting Thursday.  Here is the hourly:

 From the huge  pos mom div, oil has rallied by 11% in two days.  That is a massive turn-around and has caught the army of shorts napping, expecting crude to fall to the widely-touted target at $30.

Amateur pundits have been calling the decline a tax break for consumers.  If so, why did the Dow fall 300 pips yesterday? Could it be that this crude rally actually heralds an imminent interest rate increase?

If this holds, it will have major implications for US Treasuries.  Once the penny drops that higher oil prices will encourage inflation, T-Bonds will fall like a stone.   I reckon a move above $50 – 55 should get the gums flapping.  There will be talk that deflation is temporary – and that will encourage EUR/USD to maintain its budding rally.

Remember, shorting T-Bonds is one of my Trades for 2015 and I am confident we shall get a chance to put that trade on sometime this year.  Naturally, I did not intent to short the Bonds on January 1 – that would be insane.  Our time will come.

GOLD

I had a MoneyWeek Trader email on gold yesterday and forecast a bounce off the $1250 level which was a conjunction of the Fibonacci 38% support and third tramline support.  Later on in the day, it rallied to close near $1285 to confirm my forecast.

You can follow my gold trades on my TT Alert service or join my VIP Traders Club to receive my real-time trades (see above).

Have a great weekend!