originally published Saturday, January 02, 2016

Printable Version

All Misc Articles

While most people were whooping it up over the Christmas and New Year holidays with many entertaining the fanciful notion that 2016 will be better than last year, we have a more dour outlook, and haven’t let a week or two of seasonal buffoonery change our view.

Read this timely article The Hurd is Heading for a Cliff by The Burning Platform, which sums up the situation nicely, and saves me the bother of writing this, so that I can get straight on to the relevant charts. The misspelling of the word Herd in this article as Hurd appears to be intentional, although the reason for this is not clear to me.

Two big themes during this year are firstly the bursting of the tremendous debt bubble, which will occur against the background of intensifying deflation resulting in declining bond, stock and property markets. This bubble is of epic proportions, so it will not burst overnight, but over a long period probably lasting several years, but that doesn’t mean that there won’t be some embedded crash phases within it. The second big theme is likely to be the ongoing campaign to subjugate Russia, which up to now has involved the fomenting of a pro-Western coup in Ukraine, on Russia’s south western flank, the attempt to change the leadership in Syria, which is an ally of Russia, using “freedom fighters” (terrorists), the stationing of missile batteries hard up against Russia’s borders with Europe, the demonization of Russia and its leader Putin in the Western press, and the imposition of an economic blockade (sanctions) on Russia on spurious grounds. The Neocons goal is what is has been since the collapse of the Soviet Union, global hegemony by the US, and Russia and China are seen as standing in the way, so they have to be made to kneel or be overcome militarily – apparently the Neocons are prepared to consider a nuclear first strike against Russia, and perhaps later China, as a means to achieve their ends. Needless to say, this is an extremely dangerous game they are playing that could backfire badly, and it is the chief reason why China has been scrambling to beef up its military. Larry Edelson of Weiss research, who certainly cannot be described as a kook or nut case, has made clear that a number of major war cycles come to a climax in 2019 – 2020, so the next few years are going to be interesting, to put it mildly. Wars and terrorism also serve to distract the ignorant masses from their economic exploitation and servitude at home.

Now we move on to the charts. We have observed what follows already last year, but since it is still just as relevant now, and perhaps even more so, it bears repeating.

First we look at the 10-year chart for the S&P500 index, on which we see that it has broken down from its major uptrend in force from 2009, so technically it is entering a bearmarket. Since this uptrend was converging it makes it a bearish Rising Wedge, which is so much the worse for the market’s prospects.

Next we look at the 5-year chart on which we see that in addition to breaking down from the long-term uptrend, the market is being forced lower by a giant Distribution Dome, with a Head-and-Shoulders top forming beneath the apex of the Dome. Since the index has just risen up to form the Right Shoulder of the H&S top, it is clear that we are at an excellent point to short it (buy bear ETFs, Puts), and to ditch any remaining long positions. Could it break out above this Dome? – anything is possible so stops on short positions can be maintained above the Dome boundary, but the chances of it breaking out upside from pattern are considered to be low.

With respect to our stance towards the market, it is important to ignore the tremendous swirl of fundamental arguments, both bullish and bearish, that are forever doing the rounds, and concentrate on the technicals where at least we have clear parameters. The technical picture is certainly bearish as long as the S&P500 index remains below the boundary of the Dome shown above on the 5-year chart, and even if it breaks above it, it would still have to climb back into the failed channel shown on the 10-year chart to negate its bearish import.

With respect to the bullish fundamental arguments, someone wrote me that the market was going to be towed higher by the stocks of what are called the FANG’s – Facebook, Amazon, Netflix and Google. Old timers would certainly laugh at the idea that the economy is going to be saved by a social networking site, a bookseller, a movie streaming company and a search engine – if this is what passes for a strong economy then God help all of us. Actually such narrow and concentrated leadership is a sign of a bullmarket that is on its last legs. There is an article going around saying that the world economy is going to be rescued by the bonanza of cheap oil. Perhaps you can help me with this – let me see if I’ve got it right: - the global economy, crippled by massive debt, slips into recession / depression, so demand for oil drops and this coupled with high production causes the price to drop a lot. Suddenly a major factor of production costs is cheap, and this feeds through into the bottom line of companies, who are suddenly making a lot more money, and the recession / depression just melts away – I don’t think so.

The grizzled old guy in this film clip could just as well be addressing the broad swath of people who think that the broad stockmarket is going to go up a lot this year, when he describes his younger fellow gold prospectors as “dumber than the dumbest jackass” – listen carefully for this. This clip is from the 1949 classic Humphrey Bogart film The Treasure of the Sierra Madre which is a film that anyone interested in gold will always find highly amusing.

End of update.

Posted at 7.20 pm EST on 2nd January 16.