Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Stock Market Reminiscent of Pompeii

Stock-Markets / Stock Markets 2014 Nov 25, 2014 - 09:54 AM GMT

By: Bob_Loukas

Stock-Markets

We're at the point in the equity bull market Cycle that every piece of news is construed as positive for the equity markets. In many cases, the news even appears to accentuate positive possibilities. The speculative nature of the current advance has by now captured the vast majority of market participants; the media and the pundits are no exception.

For example, the markets were pushed higher last week by several news events, even though the headlines hit the same themes that have been recycled for the past 3 years, and that are almost certainly, by now, fully discounted in prices. The news events included Japan calling off next year's planned sales tax increase, China surprising with an interest rate decrease, and the ECB announcing that they will be buying assets. These are all related to the tired narrative that central banks and related authorities can alter the natural long term pricing/valuation trajectory of the markets. The world's equity markets soared on the announcements, and in the process completely ignored the weak fundamentals that gave rise to them. The S&P and Dow even reached new all-time highs, in general very bullish developments. But in this case, the gains were built upon the shifting sand of sound bites rather than economic fundamentals.


The economic reality behind the announcements is anything but positive. To start the week, Japan surprised the world by declaring that it has - again - entered into recession. In addition, China's HSBC manufacturing index fell to 50, a six-month low, burdened by an extremely high level of non-performing internal debt from overbuilding. And in Europe, the economies are tottering on the brink of recession, while inflation is very close to turning negative. Even in the U.S, where the landscape is relatively better, industrial production fell 0.1% and the Markit manufacturing PMI hit a 10 month low.

It's clear that the meddling of the world's central banks is in response to a rapidly deteriorating world economy. And equity markets, if not the underlying economies, are responding. For now, equities are choosing to ignore the fact that the patient - the world economy - is sick, and that these policy changes are only artificial responses to symptoms, and are far from cures. Central banks may have the ability to artificially raise asset prices, but it is only temporary. The idea behind current central bank actions, that higher asset prices create a "wealth effect" that will become self-sustaining and spur economic growth, ignores two key facts: world economies are laden with high, non-performing debt, and the economies' problems are structural in nature.

In Japan, an easy-money policy has failed for 20+ years due to a highly inefficient domestic economy. Since 2008, when foreign consumers stopped buying cheap Chinese knock-off consumer goods on credit, China has bridged the economic gap through trillions of Dollars of debt used to fuel construction projects. The debt is largely non-performing, and its creation has led to a speculative bubble in real estate as well as massive oversupply. Adding to the world's troubles, Europe is structurally a political and regulatory nightmare, with a banking system that's holding huge amounts of bad loans. The European banking system is woefully under-capitalized and is not in a position to extend additional credit.

These problems are structural and can't be fixed with liquidity, so pumping additional cheap money into these economies is not a solution. Money can be created through cheap credit, but money velocity cannot. Until we see a real business cycle downturn, one in which non-performing debt is finally expunged from the system, we will never have a foundation for organic economic growth and an expansion of GDP. In short, the world needs to experience a fair amount of pain before it has the potential for real gain.

The implications for world equity markets are significant. Given the world's poor economic fundamentals, equity markets at current levels are both artificial and unsustainable. They are far from reflecting the current economic state and, more importantly, are completely misaligned with future risks. Once the business cycle turns lower again - as it inevitably will - the market will collapse on itself and will be seen to have been hugely, woefully overpriced. The market re-pricing which occurs during these periods is always severe and generally swift. It's the market's mechanism for closing the imbalance between prices at the peak of speculative fever, and the market's intrinsic value. But since pricing imbalances often work both ways, during true secular bear markets, prices (valuation) typically fall well below a market's true value.

Markets are often ignorant of what lies directly ahead, and I believe that's the case with equities today. After a relentless move higher, the recent sideways consolidation has given way to yet another speculative spike higher. The rally since the last Daily Cycle Low has been extreme by any standard, but the character of the current move is now consistent with the final weeks of a blow-off top.

Calling a top is difficult at best, and I'm much less interested in being right about a top than I am in generating grounded analysis and presenting it well to readers. In this case, it's hard to see the current spike in equities as anything other than a blow-off move into a final top. It's the only description for what the equity markets are doing. Blow-offs end with a final exhaustive peak, we're not there yet. And to be perfectly honest, I'm not sure exactly when it will peak...only that it's likely to be in the coming month. A possible clue is the length of the typical Daily Cycle, roughly 40 to 45 trading days in total. If this breathless trajectory continues, then this Cycle is likely to mark that peak. As it's already on Day 27, that Cycle top is just another 13 to 20 sessions away, just in time for the holidays.

$SPX S&P 500 Large Cap Index INDX

The Financial Tap publishes two member reports per week, a weekly premium report and a midweek market update report. The reports cover the movements and trading opportunities of the Gold, S&P, Oil, $USD, US Bond's, and Natural Gas Cycles. Along with these reports, members enjoy access to two different portfolios and trade alerts. Both portfolios trade on varying

You’re just 1 minute away from profitable trades! please visit http://thefinancialtap.com/landing/try#

By Bob Loukas

http://thefinancialtap.com

© 2014 Copyright  Bob Loukas - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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


Post Comment

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

6 Critical Money Making Rules