Stockmarket Collapse Got Surprisingly Little Coverage

Something odd happened in the past couple weeks and especially last week. The market was pretty much in free fall mode, something which thanks to central banks manipulating markets we haven't witnessed for a very long time - outside of January spectacular drop that led me to call for something bigger. Yet the collapse wasn't getting the coverage it deserved or that which is usually seen when volatility rears its ugly head in an extended bull market. Case in point, last Thursday. The Dow rallied 400 points, the headline was everywhere on financial websites until late in the evening, but the real news wasn't easy to find if you didn't have your eyes on stock quotes in afterhours trading. Indeed after the close and the 400 Dow point gain, futures cratered on the back of Amazon.com results. Amazon plunged almost 10% that evening in afterhours, and the Nasdaq 100 futures (which trade round the clock) went into freefall, erasing all the gains during the regular session. The following Monday the heavy selling resumed after a brief rally at the open. And it's only since then that talks of a bear market or bigger correction are making headlines in the financial press, although in European newspapers, it hasn't been much of a focus of interest yet. Even central bankers seem to watch in indifference. And that's what has started to worry people. Oh aren't they supposed to "support" the stockmarket (so-called "financial conditions") ? You can bet pretty soon, there will crying for central bankers help. But remember ... They can't do much anymore. They are just about out of ammo ! 

Warning flags may now be long term sell signal

Stocks as defined by their indices have actually been in a downtrend since the top on October 3, the definition of a downtrend in technical analysis is a succession of lower highs and lower lows. The market meets resistance on each rebound and falls again on resumed selling. October closed with an ominous sign on equity markets. The 200-day moving average, which defines a bull market, has indeed been crossed for good. The question is now whether equities can reclaim that key moving average. Today we saw a follow- up to the powerful rebound initiated on Wednesday but in afterhours Apple has disappointed (the  iPhones now at $700-$1000 aren't selling as well anymore, can you believe ?). The stock is taking a 6% hit and took out recent lows. This could signal trend resumption for the Nasdaq. The Composite has fallen 15% from peak to trough. That is a very big move and the damage is severe on the charts (in investors psyche). With the FANG stocks seemingly topping out at least on an intermediate basis, you have to believe the "correction" is not over . At the very least it will take time to repair the damage and the year is likely going to close on a negative note, technically speaking.

                     An obvious downtrend and current attempt at a rebound

 

Crash on World Markets is Starting this Year 2018

 Last month we got what I believe is technical confirmation of the coming crash I have warned about in the past couple of months. To be fair, it's certainly not the first time I call a new market crash, I have warned for several years about a bad ending to the mad central banks' experiments and thought the crash could occur in 2016, until Donald Trump got elected and for purely technical reason I saw at that time a buying opportunity . It was difficult to tell whether this rally had legs and could continue for a few years, or whether it was the so-called climactic run seen before the end of an expansion (the most likely scenario I believe), but after the first quarter of 2018 which saw an incredible January run followed by a no less stunning reversal, the elements of a crash got into place. Sometimes you have strong conviction in a future move, and it certainly feels that way this time. I decided on the purchase of puts on the S&P 500 (SPY, September 18 expiry), something I usually shy away from because buying options goes against the odds (especially when betting on a crash). But time will tell. The trade is already in the money at this point (not necessarily a good thing, big moves tend to involve a bit of pain in the beginning). The position will be closed this summer if the S&P reaches new highs, otherwise it will be held until expiration or until a crash happens.

Janet Yellen who famously remained blind to the housing collapse, left the Fed with words intended to cover her rear end

On the geopolitical front, there have been very positive developments with the Trump administration's great and commendable strides towards some deal with North Korea but also very negative developments with the illegal strikes by Western powers in Syria. On Syria, one can only get the feeling something is amiss. See Senator Rand Paul interview on this, below. It seems Syria is sliding into a simmering conflict between Israel and Iran which is allied with Russia. Israel struck Syria, which got uncovered after some confusion as to whom was responsible for the bombing. A couple days later, its traditional allies strike in a show of force. Now there is increasing talk among Western powers of a new nuclear deal with Iran. This state of affairs is very alarming and of course the concern is no longer the markets and economy here, even more alarming is the fact that there is not a lot of coverage and citizen awareness about this escalation with Iran and Russia .

In the process of the crash, various corporate scandals will explode on the front scene, we have all the classic features of a huge market top 

For stockmarkets though, the main drivers should remain interest rates and earnings outlook. And the picture is not good on the interest rate front, see charts below which show a major technical signal of a trend ending (and reversing). On the macro front, economic data show signs of a slowdown in Europe, Europe is going to get stuck at the zero bound thanks to Draghi & Co who also unleashed a bubble in bonds and RE. We also got some revelations of shenanigans (Facebook and data scandal.) that I sensed coming, and there is more to come for sure. I believe in the process of the crash, new corporate scandals will explode on the front scene, particularly in tech.

We have all the classic features of a huge market top. Autonomous cars and AI  are all the rage, they are going to change the world in the next couple of years , so would the media have you believe. In fact, we are coming to the realization that self-driving cars are far from being fully developed and safe, as for AI, there are also many hurdles to overcome especially if humans want to use AI ethically and for the real benefit of humanity . Were you around at the market top in 2000 ? If so you remember how we were being told new medical discoveries on the human genome were going to eradicate cancer. How alternative energies were going to power car engines and homes, homes were all going to be "intelligent" and there were even some talks of future "flying cars" (yes just like today). None of that happened. Nearly 20 years later, cancer still hasn't been cured (but continues to be a boon for the pharmaceutical industry), fuel cell cars never got developed, homes are still not "intelligent" to the point of being automated and connected to the internet (thank God as far as I am concerned). Yet , remember how those innovations were promised to us within just a couple of years.

The financial elite, and the so-called smart money (if any such thing actually exists) is not unaware of the impending trouble. In fact, even Janet Yellen who famously remained blind to the housing collapse, left the Fed with words intended to cover her rear end. She warned that stock prices were "elevated". Funny how she spent her whole tenure telling us stocks were not overpriced !  Amazing. Amazing too the little private speech she gave after leaving  for a fat fee;  institutional investors got from her firsthand information on the likely future direction of the Fed.

Now the collapse can start in earnest .  

 

                                Chart by Worden Brothers   

                              Chart by Worden Brothers