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The Big Short? That was nothing, this is the Short of a lifetime!


Mercury

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I referenced a look at the Monthly charts on the Dow in my "Stock indices at a turning point" post and here it is.

 

When I worked through this I got some amazing and surprising confluences so I will try to portray that with a series of charts building up to the final picture.  Read in context of each chart in sequence.

 

  1. Chart 1 simply shows the historic moves since the late 1990s (actually since the early 80s, I just cut it off) with a series of clear 1-5 motive waves followed by A-B-C corrections culminating in where we are today.  I've marked the major bubbles bursting that sparked the corrections and the tramline pair (grey lines) on the current motive is decent, with a nice kiss back on the recent turn.  This supports my scenario 2&3 analysis from the other post.
  2. Chart 2 adds another pair of longer term tramlines (hashed blue) and I find this very interesting because it encompasses the entire move up since the early 1980s with a fake break out during the subprime crash and another potential right now as a result of the Central Bank inspired asset bubble (this time it had effected all assets with commodities turning early in 2011)
  3. Chart 3, now what happens if I add a Fibonacci drawing to the whole move since the early 1980s start point?  This is the real surprise for me!  The Fib lines are hit very accurately by the price action (as are the hashed trams).  Now how does it look if I relabel the whole move (red labels), we get a monster motive wave from 1980 to 2015 (or maybe later in 2016 - see other thread for near term scenarios)  And after a motive wave comes either another motive wave in opposition or a correction (A-B-C) and reset.  The large green circles to the right are probable target points for such a monster correction (Fibs 62% & 76%).

 

So what is the narrative behind all this?  Well in the 70s we have currency separated from the gold standard and the banking system went on a debt fueled money creation spree, that it is still essentially on.  In the UK we had "Big Bang" deregulation in the 80s leading to the Black Monday crash (Purple label 1-2), widely attributed to a combination of junk bond creation (i.e. not Government bonds) and automated electronic trading, that also sparked the UK housing market crash.

 

Then debt fueled consumerism and low interest rates brought us the UK housing market surge and massive investment in a new techsector but that bubble burst because it was premature and over valued (the tech couldn't deliver on the promise, though now it can).

 

After than a recovery in tech and more low interest rates and another house market surge (this time everywhere) and emerging markets opening up and on and on up to the sub prime scandal and another correction, curtailed as we know by central bank actions.  In other words they didn't let the natural correction happen!

 

Since 2009 the rally has been in every asset fueled solely by central bank actions and market speculation and China demand.  The underlying economy has been in recession for most of this period or in a state of weak growth as consumers unburden themselves of their debt while governments do the opposite.  And the sought after inflation just will not come, hardly surprising given the commodities crash and consumer debt unwinding...  Central bankers and financial services economists are in a fantasy land on their own!

 

Commodities start to topple in 2011 - is China demand and economic data real? - (Oil, industrial ores, precious metals all top out and begin to crash - a proper crash not a correction) because real growth is just not there.  Stocks and bonds markets are still propped up by the central bankers but the underlying economy, as depicted by commodities, doesn't support the high stocks and bond valuations.

 

And now cracks are showing in China economic data.  The CBs want NIRP and want to eliminate hard cash to ensure we, the people, can't take our money out of the system.  Our real money not the fake money the banking system has created.  If they do this it will spark a revolt like we have never seen but they won't have enough time to do it.  Long before the politicians have the stomach for that fight the fake money will start to disappear as speculators take flight and the markets will crash back to beyond fair value (real money) as there is always an overreaction.  This is the Short of a lifetime!  But it will be accompanied by depression in the real economy as the debt mountain used to create fake money unwinds and this is needed to reset a system that has got so far out of whack that we think it is the "new normal".  I see no paradigm shift here just rampant greed and cronyism of a political and uber rich elite that has ignored the lessons of history

 

PS: I am not by any stretch a socialist!  These are just the facts as I see them.

 

Note that in the Monthly chart there has been a significant bear move whenever there has been a Negative Momentum Divergence with price.  Guess what we have just now?  And it is bigger than all the others after momentum made the highest peak since the beginning of the 80s just before the May 2015 high.

 

Am I nuts of is this real?  Thoughts?

 

Chart 1

Wall Street Monthly 130516_A.png

 

Chart 3

Wall Street Monthly 130516.png

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And here is what it looks like on the other markets in summary:

 

  1. S&P500 looks similar to the Dow but with a slightly different shape to it, unsurprisingly as it is much more diverse than the Dow.  Interestingly the weekly and daily charts show a different profile but amounts to the same thing except that an A-B-C to Feb 2016 lows is a possiblity that is not there on the Dow, so the faster push to higher highs is more plausible here BUT can it really do that in opposition to the Dow and others?
  2. FTSE is the same but with a much different overall profile.  Here we see a much stronger rally and overshoot into the Tech Boom and a clearer boom and bust in the 80s.  The Sub prime bubble and crash was less frothy in the FTSE, this was more of a US phenomenon of course so that makes sense, but the rally from 2009 is similar if not as exuberant as the US.  Probably the FTSE has been held back by the commodities crash (it is over one third oil and miners).
  3. The most striking picture comes from the Dax in my view.  Here we see similarities again with all other main indices, less of a tech bubble than the UK/US and less frothy on the subprime bubble but just look at the central bank bubble!  Draghi must be very proud but we all know what pride comes before...  The Dax has been more bearish than even the FTSE of late...
  4. And if you are still not convinced just look at what happened to the Nikkei!  Japan has been in depression for over a decade and the recent rally in the Nikkei is central bank led, as  post on BoJ ownership levels clearly shows.  Is this sustainable?  **** to the no!  Scary version is the red labels here where the Nikkei bear is not yet over!  Is this where the rest will go?  Very likely in a depression scenario...

Just a matter of figuring out when not if in my view, doesn't everything feel a bit weird everywhere?  As i said in my Stock indices turning point post, the only thing that could push us to new all time highs would be the Fed but even that seems a bit unlikely given all this doesn't it?

 

 



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I agree with your anaysis. Great postings. I look at things a little more simply. I am very bearish, we need a catalyst to get it going. I see on the daily chart of the Dow a trendline down from the May 15 highs, through Nov/Dec highs 2015. This was broken with a higher high in April 16. downtrend line broken from highs. However a failed break to ultimate new highs is ominous. On my chart I see that downtrend line has support at 17400 and also corresponds to 100 day moving av. There is a head and shoulders reversal at 17500 - 17530 shown in yellow on my chart. We are there now. This area has been support for the last month. if this breaks I expect 17410 area to be support on the 100 moving av. This was an area of resistance on the way up. Breaks this and we are on the way down again. Looking at monthly and weekly charts using time spacing I suspect any move really lower to be next month, but we need a catalyst, what could this be? how do I post my chart from my IG account to here?  


 

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Hi  If you use PRT chart then there should be a print/save button at the bottom left hand corner of the chart tile.  Save the chart as an image and then in you post kick on photos and you will be asked to chose a file to upload.

 

Similar function on IG charts, I think there is a save chart icon somewhere on the chart.

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  • 5 weeks later...

A couple of funny cartoons from Hedgeye.com

 

I have heard so many pundits advise buying Japan and Europe stocks because the respective central banks are still pumping QE and NIRP.  Is this a "fundamental" worth relying on?  Hedgeye.com thinks not. so do I.

 

European Equities: Today's Pop Doesn't Buck The Terrible Trend - Europe Japan cartoon 04.04.2016

 

 

And now for the perennial optimists in the room:

 

Cartoon of the Day: Sobriety Checkpoint Ahead - Yellen cart 06.07.2016

Nothing To See Here, Move Along: World Bank Slashes Growth Outlook - Slow growth cartoon 09.11.2015 copy large

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According to Hedgeye.com on in early June hedge fund titan George Soros grabbed headlines after it was announced he had come out of semi-retirement and placed bearish bets, shorting the S&P 500 and buying gold.

 

He might be a tad premature, though he wont care about that but surely the end can't be far away now?  A vote for Brexit could spark the fall...  Black Swan?  Yer 'avin a laugh, more like a dumb ostrich.

 

 

Cartoon of the Day: Living In A Bubble? - Soros cartoon 06.13.2016

 

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Although it was expected that interest rates in the US where to be kept on hold, I do believe now that Yellen is now loosing serious credibility. This constant talk of interest rate rises is eventually, if not already going to cause markets to dismiss anything she mentions in relation to monetary policy. In Europe and Japan, the idea that quantitative easing was going to have the same growth effects as the US, has now proven to have a complete opposite effect. It makes sense to have QE, when their is lack of credit available to lend, but when huge strangling debts are tied around nations necks, it does not matter what amount of cheap money you chuck at them, people wont spend, therefore after the last disaster G7 meeting, it is clear that a rightdown of debt should be considered to allow nations to spend and reach their 2% inflation target. Brexit fears of a falling pound, would be a massive concern if inflation was already high, but its not. Most nations are desperate for a weak currency therefore this idea that the British economy would be driven to a recession of that similar to the 2008 crisis, seems wholly exaggerated. The facts are that the reason many so called credible experts around the globe want us to stay in, is because they themselves have very little room to manoeuvre and fear that if we did prosper outside the EU, other debt straggled and increasing euroskeptic nations would choose to leave the EU, as well. . Had Brussels given Cameron what he wanted, I do believe that next weeks referendum odds of leaving the EU, would have been much more in favour of staying in.

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Like the thinking  but if I may offer some additional perspective, the critical issue for the CBs and their political task masters (all of them) is inflation because they want to inflate away the huge mountain of debt they have gotten themselves stuck under.  If they can't do this they are all up the proverbial without a paddle.  They talk about growth and protecting the people against recession and so on but in reality they are trying to do this by getting those same people to borrow more and get further into personal financial trouble, not very paternalistic is it?  Because they don't give a flying you know what about the people.  All the actions so far have been targeted as their buddies in the Financial markets.

 

And while the corporate world (at least those that can get debt, not the small operations that make up 90% of the economy) is gorging on cheap debt they aren't investing, rather they are using this to execute financial engineering to secure their fat bonuses and drive share prices up to boost their share schemes and the all important EPS measure that is linked to their rewards.

 

And a write off of debt wont help now, it might have a while ago, because everything is stagnated so only a correction will do, which will come from either depression or hyper inflation (the latter will require further CB interference with policies such as helicopter money).  Neither of these scenarios is pleasant to contemplate but there is no soft landing scenario so one of them will come to pass.  Of course all of this should have happened in 2007/8 and now matters are worse.

 

I'm not sure that Cameron really went to bat for fundamental reform of the EU, at least not what was/is needed and I'm not sure the people in general understand that anyway.  Things have gotten to the point where no one trusts the politicians and the central bankers, despite protestations, are in thrall to their political masters (they are political appointees after all).  It is no coincidence that all the CB governors are singing from the same hymn sheet as the incumbent leadership...

 

The establishment fear Brexit not because it will leave the UK at the mercy of economic shock waves, nor that it will cause economic meltdown, that is assured anyway, but rather than it is a vote against them.  Loss of control is what they really fear and I have a feeling that the people are about to speak!  Greece leaving the Euro is but a drop in the ocean compared to Brexit.  Let the mayhem being.

 



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And I think this is what this referendum will show, is the people really do not trust what politicians say anymore, and I believe that applies also in the EU and the US, hence why your are seeing a rise in far right political views. The worrying and in some ways disheartening thing, is that many of these EU countries who are now locked into the single EU currency where prospering so well before they joined, but were lied to by their own politicians. Italy is a classic example, where they had a great manufacturing industry before joining the euro and but as soon they where asked to join, Germany had one less competitor and Italy's growth since then has stagnated. The only way you can see the EU working and its monetary policy working is by having a fully integrated united states of Europe, which ironically is what the whole eu political project is about, in the mean time it seems they will continue their own political and economic selfishness until it no longer suits them.

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For my ten cents, the markets have certainly been struggling for a while now, with the Dow in particular attempting and failing to create new highs over the past 8 months. The interesting thing is that should we see new highs created for the Dow, I do not think there is the same emphasis for a sharp rally to push significantly onwards. However, of course any downturn could result is a substantial deterioration relatively quickly. As such, the higher the likes of the Dow gets, the less attractive it has is. The Brexit threat is of course going to be a key driver of volatility over the next week, yet I feel that should we see a 'remain' vote, the upside would be substantially smaller than the negative impact of a 'Brexit'. Then again, that goes for GBP too.

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Hi  If I am following you correctly you are basically saying there may still be a bit to go in the central bank induced stocks bull but the upside potential is likely to be limited whereas the downside risk is very large?  I agree with this assessment and agree it is the same for GBP with respect to Brexit (posted something similar in the Brexit thread).

 

I am not at all convinced of a remain vote, I would have agreed a month ago despite firmly thinking Leave is in the interests of the British people AND long term the EU as it would force the kind of reforms and get us back to the original ideals of the EEC in a way that leaving the current crop of politicians to do it simply will not work because of their vested interested.  As an example of the lunacy in the EU an Irish MEP was recently "paid" Euro 300k for relocation costs back to Ireland... Nuff said!

 

I think many people are misreading the mood of the British people (and others resident who are not British but can vote) on this issue.  I think the Remain campaign has been highly negative whereas Leave has been much more about what the nation would/could do outside of the EU, and I don't mean just about getting control of immigration, crazies like Farage apart.  The worldwide protest vote against the established politicos and their appointees (especially Central Bankers) ought not to be underestimated.  A decent bet is for Leave, I would not put money on remain, maybe it is 50/50 but that means a change could easily be the way people go and here in Britain we have always been a bit anti EU (the institution and bureaucracy rather than the people!)

 

Volatility is the killer for trading though, hard to keep positions open without strong protection of a large gap vs market current or guaranteed stops (you can't buy one after placing a trade right?).  Getting in on a Brexit drop will be all but impossible.  I think he smart move on GBP and EUR is exit or keep only old Shorts and wait.  If Remain wins then the rally will be short lived in my view and more chances will appear.  I can't see where we are as the bottom of the market just yet (famous last words).

 

As to stocks, I am not sure Brexit is the key.  Once the dust settles on that there still remains NFPs and the Fed.  Having said that, if a Brexit Leave drive the markets down much more then another rally higher looks off the table.  In that case the Big Short could begin.

 

One week to go and then the uncertainty will be over, at least for this issue...

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From a political standpoint, I do believe remain have wholly underestimated the frustration of the British People in todays modern politics. From a technical analysis standpoint, regardless of the vote, I do believe the fate of the GBP USD & GBP EUR have been sealed and I think the same is going for many indices. Although many are concerned with a weakening pound, the idea that the bank of England would intervene shows some serious skeptisism, very much like the bank of japan, all this talk about coordinated FX intervention seems more talk, than actually potential reality. I am a very big believer in market cycles and therefore any artificial manipulation simply is corrected by the market later on, example was the YEN back in January, the negative rates lasted less than 24 hours if you remember. In the US, it has long been said that their own indices are very overvalued and therefore a major correction will be in play sooner or later. The chances of a FED rate hike are very small now. Although the FED and BOE here in the UK are supposed to be independent of politics, unfortunetly this is not the case. One thing is almost certain, no interest rate hike until after the US elections.

 

 

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  Nice piece well said, in an ideal world yes, but the cycle was derailed back in the 1970's and Central Bankers have been manipulating markets ever since. Don't even try to predict, sit back and think on how to react. The current middle/ruling class liberal/left solution is open borders and helicopter money, what could possible go wrong?

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Well said Casey, central banks can try all they want to manipulate markets, however since 2008, things have changed, QE is not having its magical effects as it once did, hence why the EU and countries like Japan are struggling so much. The cut in interests rates in an attempt to weaken currencies has a very short-lived effect, but with very serious consequences to banks profitability, and if you erode profit from banks, they are less inclined to loan money, further worsening the problem, hence why Germany is screaming its head off with the ECB's current status on interest rates. Its all very well providing cheap money, however the irony of all this, the wealthy and those on lower incomes are now saving money, rather than spending it, which is having consequences on inflation targets. This is why, although many are against it, but without doubt an inevitable policy, is for Europe to have a lower tax policy as a whole in order to encourage further investment which has had a positive effect in some countries like here in the UK. If you could design a playground of investment opportunity throughout the continent and balance the equilibrium between the wealthy and lower income classes, you will create growth, unfortunately income inequality is dividing further and further. I am not suggesting some left-wing socialist approach, but if their is not a proportional balance where those on lower income are not spending and instead saving, their is no incentive for large and small companies to invest or innovate in an absent, destitute market   Another issue, of which I have mentioned before is a large right down of debt, of which the IMF has requested to occur in Greece, of which is currently strangling their opportunity to pay their interest loans and create growth. If Brexit where to occur, many are citing that debt interest in debt ridden countries in Europe will sharply increase, therefore placing them in an impossible position, causing further growth stagnation. Any idea that these so called experts that the remain campaign are using to inspire fear for uk voters, are fearing that countries in the EU will require further bailouts of which the IMF clearly resents. And finally if voters choose to leave, who will be the next country in Europe, of which decides to have their own referendum. Those that would benefit the most from leaving would be Greece, Spain, Italy and Portugal.

 

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Very enlightening or eyeopening audio interview with David Stockman.  It's a bit crackly but worth it.

 

The highlight for me was when he pointed out that funds are buying stocks for yield and bonds for capital growth, which is the wrong way around!  This as part of a comment about bubbles, the bond market being the mother of all bubbles.  This fits with other serious commentators who are watching for a bond market yield spike to kick off a bond price collapse, which in turn will kick off an assets wide collapse (possibly gold excepted).

 

 

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  • 3 weeks later...

To add more fuel to this debate, although no one seems to be suggesting a case for a continuation of this bull market, have you noticed the following factors:

  1. S&P is on the cusp of fresh all time highs and who knows where it will top out - quite possible we may see all time highs for the CAPE measure, already at critically high levels while EPS results have dropped steadily over the past 1-2 years.
  2. Gold has already turned and put in a strong rally and is shaping up to continue into a very strong bull market (after a decent retrace)
  3. And bond markets are also in bubble territory with the yield on US 10 year bonds are at all time lows (1.358).  During the Credit crunch crash they only made it to about 2.2 but that was when stocks were crashing...

So how can bond prices be so high (i.e. opposite of yields) coincidentally with all time high stocks while Gold is also rallying hard?  OK commodities have recently rallied after a huge bear phase albeit from a rally that got way overcooked, due principally to China it seems (that is all gone now).  However there are signs that commodities are set for a further leg down.

 

The only credible answer to all this is central bank manipulation and market sucking up the coolade because the thought of the gravy train coming to an end is too horrible to imagine.  But it is, only question is when and how hard will it fall.  I have been bearish for well over a year now and thought that May 2015 saw the highs but now it seems we will get another (at least on US large cap markets, not convinced on FTSE and almost certain Dax and Nikkei are more bearish).  When the US large Caps do turn again I believe it will herald the beginning of the end and that this will happen in this year, probably before then end of the summer.  Brexit, although not the reason for the coming crisis (both political and financial or economical) is the first action or signpost that the end is nigh.  What will the next one be?  Another EU/Euro crisis? Japan sliding back firmly into depression?  The Donald getting elected in the US?  Or just maybe something as prosaic as more poor quarterly earnings?

 

One thing must be certain, things cannot continue as they are with all assets in a bubble, government debt at stratospheric levels, poor or no real growth, little or no inflation (in fact deflation in some areas), little or no wage inflation, retail sales under pressure, big corporates taking on debt to buy back shares and do high priced M&A in a vain effort to manipulate results and interest rates being artificially suppressed.

 

Cash and gold is the only sensible investment strategy and prepare to short like a...

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  • 2 months later...

We have been calling this for a long time now however, timing is just the issue. I think the US has a little more steam in it before we see the beginning of the end. I expect the Dow Jones to hit the 18,500 or 18,600 mark before turning the other way.

 

Perhaps I missed something, but, when listening to the chairperson of the US Federal reserve monetary policy committee, I am sure I heard her say that the US economy is not overheating???

 

Any comments on this? How is this possible? When stocks are so overpriced?

 

I am also of the opinion that the gold ball market is on its way.

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Thats my sentiment also. However the extension to 18600 has gone in my opinion so short 18340 and add @ 18400 if it makes it but hold those positions as you cannot make anything if you come out. No positions = no profit. Whats your view on Mondays business. I can see 18230 first thing then grinding upward from there. What do you think re Monday?

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Well, we saw a bit of a pool back on Friday. My understanding was that this was mainly due to Saudi Arabia is comments about oil and, somebody downgrading Apple regarding the newest iPhone sales.

 

Global commodities took a bit of a beating as well. What is becoming interesting, is the correlation between commodities especially gold, and the stock market.

 

I am going to assume that Asia and Europe should open slightly lower on Monday based on these lower commodity prices. What are your opinions?

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Gold is a tough one. I have got it wrong before on that one. There are just many variables driving the price. The dollar strength, interest rates and all sorts of 'background' issues which are not really instantly correlated to it but do still drive it. Should anybody be able to educate me further i would greatly apreciate it.

I think gold is a long but buy the dips and stay focused or it moves on and shows no mercy.

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