A 2019 Bear Market Event May Trigger a DJIA Move to 40,000
$DIA, $SPY, $QQQ, $RUTX, $MTAFF, $GLGDF, $RGLD, $FNV,$WPM
Chances are you’ll recall in January 2016, the DJIA was buying and selling on the 16,000 mark, when Yves Lamoureux, President of macroeconomic analysis agency Lamoureux & Co., stated DIA would prime 25,000 inside Three-Four years. It didn’t take that lengthy, it occurred.
Now, with DJIA holding that milestone, Mr. Lamoureux is making one other Very Bullish name: Dow 40,000.
However no achieve no ache, Sure?
He’s saying, “We see a large panic event taking shape now that continues into next year, the melt-up we forecasted is done,” “Investors should be out of stocks for most of 2019.”
Mr. Lamoureux moved principally to money this Summer time, predicts that the inventory market might lose as a lot as 33% of its worth within the coming yr, prompting a “hyperinflation of financial assets at an impressive rate” that finally carries the DJIA, all the best way up to 40,000 within the years that come.
The Huge Q: How?
The Massive A: Mr. Lamoureux says the Fed, which President Donald Trump simply described as “loco,” will look to prop up markets.
“The Fed most likely steps up early in Y 2020 and starts buying shares,” he stated.
Final month, IMF’s chief economist steered such beforehand extraordinary insurance policies could also be wanted to fight the subsequent extreme recession.
As it’s now, the Fed can solely purchase Treasury’s and mortgage-related belongings, however, one of the best coverage going ahead could also be for the central financial institution to load up on belongings with excessive premiums like shares.
This might do the trick, however solely after an unsightly Y 2019.
Right here is a deep look into why.
- Deflation appears to be the first theme out there as we come to the top of October.
The final time the Dow Jones noticed its BEV worth at -Eight% was in early July of this yr (BEV chart under). It took fifty-three NYSE buying and selling periods for the bulls to work up to a new all-time excessive on September 20th. The final Dow Jones all-time excessive was on October third, from the place it took Mr Bear solely fifteen NYSE buying and selling periods to deflate the Dow down to -Eight.37% on Wednesday this week.
Wanting on the Dow Jones’ BEV chart, we see the identical factor occurring on the finish of January; the Dow Jones breaking down sharply, correcting by 11% on the finish of March. At which level the venerable Dow started a six month restoration that included 4 new all-time highs in late September and early October.
That would occur once more, after which perhaps not. Two elements working towards a repeat of the January / October correction and restoration state of affairs are bond yields proceed to rise, and the Federal Reserve’s coverage of elevating its Fed Funds Fee appears intact, regardless of the present issues within the inventory market.
One other issue working towards a continuation in a market advance is the Federal Reserve is draining the monetary system of the “liquidity” it injected into it with its three bouts of quantitative easings (QE 1-Three under). In October it lowered its stability sheet by $37.91 billion dollars.
Small potatoes in comparison to the will increase seen within the spring and summer time of 2009, however sooner or later this “quantitative tightening” (QT) by the Federal Reserve goes to set off deflationary forces now latent within the inventory and bond markets.
Right here’s a desk itemizing how the main market indexes I comply with are doing. The BEV column exhibits the share declines from their final all-time highs, and the 27-Oct-16 column provides their proportion advances prior to now two years, or how a lot of the superb President Trump’s post-election market advance they’ve retained at week’s finish.
The financials are a bit regarding to me (#14, 18 & 19). The NASDAQ Insurance coverage index is down 12.58%, and has managed to maintain on to solely Three.91% of its positive factors of the previous two years. This tells us that the two-year achieve for this index wasn’t a lot to start with.
Seeing the NASDAQ Banks and NYSE Financials on the backside of this desk isn’t good. These have been the businesses that lead the inventory market down in the course of the sub-prime mortgage disaster.
Are we’re seeing this creating once more?
Nobody speaks of it anymore, however a decade in the past to get the monetary system again on its ft in the course of the mortgage disaster, the “policy makers” despatched trillions of dollars into the banking system to hold it afloat. Additionally they altered the banking system’s accounting requirements to permit rubbish belongings to stand as viable banking reserves.
It was all a fraud, a deception that stands to today.
If subsequent week it was introduced that the banking system’s accounting requirements have been to return to the place they have been in 2006, what do you assume would occur to the Dow Jones as this information hits the wires?
I anticipate it might be a day lengthy remembered, a day when trustworthy accounting proved to be poisonous to market valuations within the inventory market.
Subsequent is a ninety-three yr chart for the every day NYSE Advancing – Declining Points Ratio. Word I stated A-D RATIO, not A-D line. A ratio is important because the variety of NYSE listings because the mid 1920s has modified drastically. In 1926 having solely 500 shares actively buying and selling on the NYSE on any given day was typical; as we speak we sometimes see over 3000. To offer every day’s breadth equal weighting within the plot, I exploit the next ratio:
Advancing Points – Declining Points
Advancing + Declining + Unchanged
There’s a lot of historical past contained within the chart under, and market breadth; the every day variety of advancing and declining shares is a bedrock elementary function of the inventory market. Taking a few moments to research the chart in some element could be very helpful to any critical scholar of the market.
Throughout bull markets one expects seeing extra advancing shares than decliners, ensuing within the A-D Ratio plot progressing upwards. However we word how the A-D Ratio truly turned down in May 1929, 4 months earlier than the September 1929 Roaring 1920s bull market prime. Apparently a number of the points buying and selling on the NYSE started their Nice-Melancholy Bear Market months earlier than the Dow Jones did.
The identical factor occurred in 1956; the NYSE A-D Ratio peaked a full decade earlier than the Dow did in 1966. This ten-year hole between the peaking of the NYSE A-D Ratio and the Dow Jones is exclusive; it hasn’t occurred since. However seeing the NYSE A-D Ratio peak after which flip down earlier than the Dow Jones begins a market decline is regular.
After the underside of a major-bear market, the market begins to reflate taking the Dow Jones and nearly the whole lot else up with it. So, after a main market decline, it’s straightforward choosing winners within the inventory market. Nevertheless because the bull market matures, because the Dow Jones approaches its remaining bull-market prime, the market turns into more and more selective of which teams and shares proceed advancing. For this reason the A-D Ratio typically turns down earlier than the Dow Jones prior to a main market decline.
From 1966 to 1981, 5 occasions the Dow Jones elevated above, or darn close to to 1000, however simply couldn’t keep above 1000; this occurred within the context of a down trending NYSE A-D Ratio (chart above).
With the NYSE having “bad breadth” throughout these years, we shouldn’t be stunned the Dow Jones was fighting its 1000 Line of Doom.
The 1982 to 2000 advance within the Dow Jones was supported with constructive breadth; extra NYSE listings advancing than declining day by day throughout these eighteen years. However advancing shares didn’t dominate the decliners as they did from 1942 to 1956, nonetheless the Dow Jones superior by 1408%.
The really fascinating function of this chart is how advancing shares have dominated decliners since 2002, the underside of the high-tech bear market. The sub-prime mortgage’s -54% bear market was solely a velocity bump for this plot’s astounding advance. But for all that the Dow Jones itself has advance by solely 268% up to now sixteen years. For all their work it appears the bulls didn’t get a lot in return.
It’s no secret the “policy makers” have develop into intimately concerned within the inner workings of the monetary markets. In my thoughts I credit score this superb rise within the publish October 2002 NYSE A-D Ratio as yet one more finger print their “policy” has left available on the market place.
Had the FOMC and its Wall Road minions not accomplished what they so clearly did, no matter that was, the place would the Dow Jones be at immediately? Extra importantly, when the day comes that the “policy makers” discover it unattainable to proceed their “policy” of a perpetual bull market, the place will the Dow Jones, and other people’s IRAs and 401s be then?
Precisely what’s it that the FOMC has been doing within the monetary markets? It has to do with “injecting liquidity” into them. And each time they “inject liquidity” into something, they first have to monetize (buy with inflation) some asset, like US Treasury bonds. Right here’s a chart for US Treasury holdings for the Federal Reserve (Pink Plot) and Overseas Central Banks (Blue Plot).
Within the wake of the Excessive-Tech bear market (2000-02) overseas central banks started monetizing US T-debt in massive means, till November 2012 once they determined sufficient is sufficient.
The FOMC started monetizing US Treasury debt with abandon within the wake of the Sub-Prime Mortgage disaster. Starting with the Fed’s first bout of quantitative easing (QE-1/December 2008) they initiated their largest program of financial inflation of their historical past in a determined (but to date profitable) try to reflate valuations within the inventory, bond and actual property markets.
The positive factors within the monetary markets since March 2009 have all been inflationary market occasions as seen within the rise of the purple plot above. However observe what belongings haven’t been inflating since 2011 – valuable metallic belongings. A lot for the previous market axiom that valuations in gold and silver are pushed larger by financial inflation. Not true! The belongings pushed larger by financial inflation are shares, bonds and actual property.
The day when gold and silver resume their bull market will come when market valuations within the inventory, bond and actual property markets start deflating in earnest. There shall be no scarcity of flight capital looking for security from deflation within the monetary markets by flowing in the direction of the now at present despised financial metals and their miners.
When the markets understand what number of inflationary dollars have been created by the “policy makers” prior to now few many years, and the way few the numbers of ounces of gold and silver can be found for buy, it is going to be a beautiful revelation.
At present the US Treasury studies holding about 262 million ounces of gold in its gold reserves. That’s lower than an oz of gold for every US citizen.
Then wanting on the US Debt Clock right here http://www.usdebtclock.org/
We see that every US citizen’s burden of the nationwide debt is $65,900 as of October 2018 and rising. As for silver, there’s extra above floor gold than there’s silver, and the market capitalization for your complete valuable metals mining business is one thing lower than the day by day change in market cap for a firm like Amazon or Apple. If you would like to purchase low cost; gold, silver and their miners are the place to be in 2018.
Observe too prior to now yr the FOMC has been decreasing their holdings of US Treasury debt. Like rising rates of interest and bond yields, having the Federal Reserve shrink is stability sheet, as seen within the pink plot above, will finally show to be a large deflationary occasion within the monetary markets, however a boon for valuable metals belongings.
Right here’s a desk I publish from time to time; the Monetizing Historical past of the Federal Reserve. In 1937 the US nationwide debt was a then alarming $36 billion dollars, of which the Federal Reserve had monetized solely $2 billion (5.6%) of the nationwide debt. The US Treasury additionally held 370 million ounces of gold for its greenback reserves.
Since then the US nationwide debt has solely grown because the Federal Reserve’s inflationary purchases of T-debt have elevated at an ever higher price. Additionally the US Treasury’s gold reserves have been lowered to 262 million ounces.
I highlighted the Nationwide Debt as of August 1987 and the Federal Reserve’s holdings of Uncle Sam’s IOUs as of this week. At present the FOMC holdings of T-debt is 70% larger than the whole nationwide debt of thirty-one years in the past. I discover this surprising. What’s much more surprising is the informal angle of these in positions of energy to this erosion of buying energy within the US greenback.
I haven’t a clue when this disgusting progress in debt and financial inflation goes to come to an finish – however finish it is going to, and when it does the potential for gold and silver in addition to their miners is thoughts boggling.
I up to date my desk of overseas holdings of US Treasury Debt (under). Federal Reserve knowledge isn’t included within the knowledge set from the US Treasury, however I included it as it’s germane to this knowledge set.
The present largest holders are: The Federal Reserve, China and Japan with the holdings of the Federal Reserve being about twice that of China and Japan mixed. However in May of 2008 the holdings of those three entities have been as follows.
- The Federal Reserve: $479 billion
- China: $507 billion
- Japan: $575 billion
These central banks have been busy these final ten years.
Within the % From (Max Val) column, there are numerous double digit proportion reductions within the holdings of US Treasury Debt. Most are from small nations, however even the Federal Reserve has lowered its holdings by 5.23%, as China has by 11.51% and Japan by 17.04%. It goes with out saying that ought to this development seen under proceed, T- bond yields will proceed rising as T-bond costs proceed to deflate.
When main central banks are promoting their T-debt, a logical query is who’s shopping for? I’ve no knowledge on this, however I think the insurance coverage business and pension funds, in addition to the large banks that handle Wall Road are consumers.
When the day comes that they too need to promote these deflating belongings, who will need to purchase them?
I see Russia has bought 100% of its Treasury debt holdings, or so I’m assuming as Russia is not listed within the Treasury report. Someday within the subsequent 5 years I anticipate a lot of the nations within the listing may have wished they too had achieved so.
Right here’s the chart plotting the T-bond knowledge for China and Japan from the above knowledge set from May 2008. The US Congress plans on issuing one other trillion dollars in T-debt within the coming yr. In the event that they do, and will the world’s urge for food for Uncle Sam’s IOUs proceed to falter as they’ve up to now few years, meaning bond yields will proceed rising (bond costs proceed to deflate); and that’s one more reason to keep away from the inventory marketplace for the foreseeable future.
Subsequent is an unsightly chart; the Dow Jones in day by day bars for the previous 5 months. The submit October third change in every day volatility is in full view. Earlier than October 3rdintraday volatility was subdued, after every day volatility within the Dow Jones noticeably elevated because it started to shed market valuation.
Take a look at the market down development within the chart throughout June of final summer time. It took the Dow Jones down 1500 factors, in little child steps. But the rebound from the Dow’s lows of March continued from July to October. However the submit October third market decline is a utterly totally different animal from what we noticed in June. This beast has huge tooth and sharp claws that if it needed to, might significantly maul the bulls within the inventory market.
In fact ought to every day volatility return to what it was earlier than October third, I might turn into brief time period bullish as soon as once more. However at week’s finish I actually don’t have anything constructive to say concerning the inventory market.
If the Dow Jones sees one or two huge up days within the weeks to come, advances of greater than 2% from a earlier day’s closing worth, its solely Mr Bear luring within the unwary.
Gold is wanting constructive.
Nothing spectacular thoughts you, however gold’s worth and step sum developments are on course – upward. The issue with gold is that it has but to see a rise in its every day volatility.
In contrast to the inventory market, bull markets in gold and silver profit from will increase in every day volatility.
Right here’s the step sum chart for the Dow Jones. With one phrase I can sum up what’s on show under – weak spot. However final February, with this similar chart I might have stated the identical factor.
Nevertheless, final winter the Dow Jones discovered a backside in March, after which rebounded to new all-time highs in September and October. Is that to occur once more, say come subsequent April, or will this market decline do one thing utterly totally different?
Like me, you’re simply going to have to wait to see what 2019 has to supply the bulls and the bears within the inventory market. However contemplating every part happening on the planet, I worry 2019 won’t be type to the bulls.
The step-sum tables for gold and the Dow Jones are seeing a reversal. Weeks in the past it was gold that had to endure down days overwhelming its up days. However since October third’s final all-time excessive for the Dow Jones, Mr Bear is now displaying the inventory market some critical disrespect.
Gold then again has seen loads of advancing days. Because the finish of final week its 15 rely has been a +5 or +7. However the issue for gold is thus far in its present advance, it hasn’t seen a rise in its every day volatility. The final time gold noticed a day of utmost volatility (a Three% day) was in October 2016, and silver hasn’t seen a 5% day since November 2016.
Gee, two years is a very long time to be freed from days of utmost volatility, a two yr interval that wasn’t notably sort to buyers in gold and silver.
So, when is gold and silver to see a rise of their day by day volatility? I don’t know, however I’m wanting on the Dow Jones’ far proper column in its desk above, the Volatility 200D M/A column. It was caught on zero.66% up to October ninth, however after the Dow Jones started its present decline it has moved up sharply, ending the week at zero.73%.
Sooner or later this progressive improve in every day volatility within the inventory market will set off a comparable improve in volatility in gold and silver. Perhaps I also needs to embrace a 200 day M/A for gold’s day by day volatility in gold’s step sum desk.
Anyway, I’m anticipating growing volatility within the Dow Jones can be very bearish for the inventory market.
A rise in every day volatility in gold and silver guarantees the precise reverse; a resumption of their bull market which were sidetracked since 2011. So I’m anxiously ready for these days of utmost volatility: +/- Three% for gold & +/- 5% for silver.
The performs are within the miners, bodily bullion and the royalty & streamers (the least danger, probably the most reward) going ahead.
By Mark J. Lundeen
Paul Ebeling, Editor
Have a terrific week.
Paul A. Ebeling, polymath, excels in numerous fields of data. Sample Recognition Analyst in Equities, Commodities and Overseas Change and writer of “The Red Roadmaster’s Technical Report” on the US Main Market Indices™, a extremely regarded, weekly monetary market letter, he’s additionally a thinker, issuing insights on a wide selection of topics to a following of over 250,000 cohorts. A world viewers of opinion makers, enterprise leaders, and international organizations acknowledges Ebeling as an professional.