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Trading Lessons

Stock Market Nirvana Has Been Broken

Stock-Markets / Stock Markets 2015 Aug 22, 2015 - 04:50 PM GMT

By: Doug_Wakefield

Stock-Markets

Is it possible to have a calm and boring market break down quickly in merely two trading days? Is it possible that THIS is the start of breaking the "stock nirvana" illusion?

Let's examine the evidence.


Wilshire 5000 Weekly Chart

All Is Calm...Until It Is Not

Anyone looking back over the trading days of July and August as of Wednesday would have seen nothing but the illusion of "control" at the 200 day moving average of the S&P 500.

S&P500 Daily Chart

Four Horses

As the markets closed today in the U.S., we can see that the four major equity market indices have now closed two days in a row under their 200 day moving averages, declining very sharply.

S&P500 Daily Chart 2

Dow Daily Chart

NASDAQ Daily Chart

Russell 2000 Daily Chart

The Global 200

Does the evidence reveal, that the US equity declines are isolated, or part of a much larger global drama?

Nirvana Has Broken

Who Me...Fear?

VIX Daily Chart

After being pushed to its lowest reading since July 2014 in early August, the VIX finally roared past every top over the last year today, with the exception of the one we saw last October.

Near term, this would argue for a bottom very soon in stocks and a top in the VIX. However, considering the fact that it has taken so long to break underneath the 200 day moving averages of the four U.S. equity indices shown above, the last two days appear to be a wake up call to global investors, that September could prove dramatically different from the illusion of "nirvana" that has been experienced these last few years.


But Where Are the Bulls?

While there have been stock bulls and gold bears for 4 years, the following are three reasons that gold should prove welcoming to those looking for a bull trend.

Anyone reading, "Gold is 'Undervalued' For First Time in 6 Years, BofAML Says, released on Zero Hedge on August 18th, will learn the following:

Hedge Fund Net Gold Position

Hedge Funds just went short for the first time ever. This is a contrarian signal, when compared with the actions of the commercial hedgers, who were recently holding their lowest short position since the gold bull started in 2001.

Comex Gold versus Commercial Hedgers Net Gold Position

Lastly, a survey of managers by Bank of America Merrill Lynch recently revealed that they believed gold was undervalued for the first time since 2009.

Gold Valuation

For over a year now, I have been asking readers to look for the big shift, where bulls become bears and bears become bulls. While we had equity markets like the Toronto Stock Exchange top last September, followed by the Dow Transports last December, it took until July this year to see the S&P Biotech Index and the NASDAQ Composite reach their all time highs.

Yet, whether we are looking at the bottoming of gold, or the topping of equities and junk bond worldwide, the move from boom to busts seems to have lunged forward this week.

Plan of Action

There are millions of investors and thousands of advisors, who are still following "buy and never sell" strategies. We have lived through two 50% declines in the S&P since 2000, and yet because of Greenspan's cutting rates to 1% by 2003, and Bernanke and Yellen following a Zero Interest Rate Policy since December 2008, we find ourselves with no chance that central banks can interest rates BELOW zero to "stimulate" the global slowdown.

QE has had trillions to sovereign debt levels, adding an enormous drag to the world economy, so more QE to remove what little top tiered collateral is left among dealers, is NOT a solution either. Less cash and blowing the financial bubbles larger was never a long-term economic solution.

Never over the last 44 years since the US dollar was removed from the gold exchange standard in August 1971, has the world been facing such enormous problems caused by the school of thought, "with enough debt and central planning, we can kick the problem down the road forever".

Preparing for the coming busts is not scaremongering; it is common sense when looking back over the largest financial experiment in history since 2008.

There are ways to grow one's money in the period ahead. But it requires changes and doing things differently for the bust than were done in the last 4 years of the boom. It also requires admitting that for most, it was just easier not to think, and leave the planning and artificial levitation schemes to central bankers, than to think for yourself and admit that the plan was not sustainable from the start.

There are also changes that will come, that are much larger than merely the investment markets. Phillipp Bagus book, The Tragedy of the Euro, published in 2010 by the Mises Institute, reminds us of how far we have come down the road of "central planning". Clearly, it encompasses far more than investing.

"The institutional setup for the European Monetary Union has been and economic disaster. The Euro is a political project; political interest have brought the European currency forward...economic arguments launched to disguise the true agenda behind the Euro have failed to convince the general population of its advantages.

The logic for interventions propelled the Eurosystem toward a political unification under a central state in Brussels. As national states are abolished, the market place of Europe becomes a new soviet union." [p129]

I have thought about Bagus comments often in the last few years. How did we ever become fooled into thinking that with enough debt and central planning, we were heading back to "normal"? What has taken place since 2008, is that our world and markets have become more and more concentrated into fewer and fewer hands. For those who make no plans or changes for the bust phase, they will only feed that concentration of power, as we look to central bankers for more "bailouts".....which this time, they have told us already, are not coming.

Being a Contrarian, Remembering History

The big shift from longs to shorts and shorts to longs took a major leap this week away from previous trends, and toward future ones. Have you made changes?

Click here to start the next six months reading the newsletters, reports, and group emails as we move from the boom to the bust phase.

On a Personal Note

Check out Living2024. It is my personal blog, not business. I wanted to have a place to write some deeper stories about where this entire drama seems to be taking us all. Check out my latest post, Optimism Didn’t Help Greeks or Chinese.  

Doug Wakefield

President
Best Minds Inc. a Registered Investment Advisor
1104 Indian Ridge
Denton, Texas 76205
http://www.bestmindsinc.com/
doug@bestmindsinc.com
Phone - (940) 591 - 3000

Best Minds, Inc is a registered investment advisor that looks to the best minds in the world of finance and economics to seek a direction for our clients. To be a true advocate to our clients, we have found it necessary to go well beyond the norms in financial planning today. We are avid readers. In our study of the markets, we research general history, financial and economic history, fundamental and technical analysis, and mass and individual psychology

Doug Wakefield Archive

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