Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Predicting the Stock Market Crash

Stock-Markets / US Stock Markets Sep 30, 2009 - 07:20 PM GMT

By: Paul_Lamont

Stock-Markets

Best Financial Markets Analysis ArticleTwo years ago in The Return of Capital, Not The Return on Capital, we stated: "...as an indicator of a major trend reversal, 'Tens of thousands' of Japanese homemaker-traders are leveraging their bets on a fall in the yen. As global margin calls come in, investors will unwind their positions, and the homemaker-traders will find that they were the last ones to the party. We expect the Yen to appreciate for the long term, causing major pain for these novice investors." The weekly chart below of the Japanese Yen shows just how wrong those homemaker-traders have been.


With that in mind, this week's Wall Street Journal article: Small investors make big bets on currencies should be of interest. It reports that U.S. day traders are trading in foreign currency with leverage "as much as 500 to 1. That allows an investor to put up just a few hundred dollars of capital to make a bet of tens or hundreds of thousands of dollars." How widespread is this kind of trading? It "now approaches $120 billion. That is up about 20% from a year ago and nearly double the level three years ago, according to Aite Group, a Boston-based financial-services industry research and advisory firm." And why are these neophytes drawn to trading foreign currency? "The heightened interest in currency trading comes as the dollar is sagging." Just as in 2007, we have novice day traders betting with large leverage on a falling currency. Expect a similar uptrend in the depressed currency, this time the U.S. dollar, as leveraged day traders meet a fate similar to the Japanese homemaker-traders of two years ago.

The Death of Diversification

The U.S. dollar, just like the Yen in 2007, is being used in "carry trades, which allow traders to borrow cheaply in low-yielding currencies" and "give speculators like big hedge funds and prop trading desks at major Wall Street firms extra leverage to engage in ultra-low-cost speculation and reap rich rewards." Dr. Marc Faber assisted us in describing the Yen carry trade environment back in January of 2007: "the art dealers are bullish on art, the commodity traders bullish on commodities, the real estate guys bullish on real estate, the stock traders bullish on stocks, everybody has something to buy."

Now, the dollar carry trade has created the same problem for wise investors looking for undervalued investments.

"Investors are moving in lockstep like never before, driving up stocks, commodities and emerging markets and risking a replay of last year, when they all plunged the most since World War II. The Standard & Poor's 500 Index, whose increase in the past three months was the steepest in seven decades, is rallying in tandem with benchmark measures for raw materials, developing- country equities and hedge funds. The so-called correlation coefficient that measures how closely markets rise and fall together has reached the highest levels ever, according to data compiled by Bloomberg." - Financial Times

In last year's unwind, diversification did not reduce portfolio risk. When all asset prices are overinflated by credit (through a large supply of/weak currency) there is only one haven; the formerly weak currency. As we recommended two years ago: "Therefore the wise contrarian strategy is interest-bearing cash. Over the next few years, most assets will fall in value as risk returns to the market and leverage is unwound." With sentiment levels extremely one sided (only 3% of traders surveyed were bullish on the dollar), a swing in the emotional pendulum will reverse the dollar carry trade and cause speculative investments (which would include most assets) to collapse.

***More For Clients and Subscribers***

With sentiment higher than it was at the peak in October 2007 and the market rising since March on waning volume, an Acapulco cliff dive from current levels would not be surprising. Time magazine described the scene during the Crash of 1929: "Around the floor word spread that the House of Morgan and the New York banks had put a cushion under the market. The market rallied. It looked as if the Morgan "miracle" had staved off disaster." What followed was Black Tuesday:

"From the bell's first ring, it was panic; by day's end an incredible 16,410,030 shares had been dumped, capping the selling that had wiped out an estimated $25 billion in stock values. Not until 2½ hours after the market's close did the tickers catch up and carry the final sale. There was no longer any attempt by bankers or anybody else to stem the collapse. In just six days the whole world of easy prosperity had been buried."

Predicting A Major Decline

Crashes are very rare and are almost impossible to predict. Yet the likelihood of their occurrence can be very high if conditions are ripe. As always, we warn that anything can happen. All we can do is assess the current environment, learn from historical examples and attempt to stay ahead of the herd. We continue to recommend that investors protect principal.

As Paul Tudor Jones stated when predicting the Crash of 1987, we wait for "...some type of decline, without a question...it will be earthshaking, it will be saber rattling, and it will have Wall Street in a tizzy and it will create headlines, that will be, that will dwarf anything that has happened to this point in time."

By Paul Lamont
www.LTAdvisors.net

At Lamont Trading Advisors, we provide wealth preservation strategies for our clients. For more information, contact us . Our monthly Investment Analysis Report requires a subscription fee of $40 a month. Current subscribers are allowed to freely distribute this report with proper attribution.

***No graph, chart, formula or other device offered can in and of itself be used to make trading decisions.

Copyright © 2009 Lamont Trading Advisors, Inc. Paul J. Lamont is President of Lamont Trading Advisors, Inc., a registered investment advisor in the State of Alabama . Persons in states outside of Alabama should be aware that we are relying on de minimis contact rules within their respective home state. For more information about our firm, or to receive a copy of our disclosure form ADV, please email us at advrequest@ltadvisors.net, or call (256) 850-4161.

Paul Lamont Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Rohit
18 Oct 09, 08:40
Waiting for your new post

Hi Mr. Lamont,

I have been your fan and following your articles. I have saved thousands of dollars by following your advice about real estate crash.

I am eagerly waiting for your next article about your view on economy and stock market when DOW has crossed 10,000 mark.

Thanks again !!

-Rohit Joshi


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules