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Market turns and bubble peaks often occur in December and January.

Purpose of this article:   

Recognize that most U.S. stock indices and individual stocks have risen into their bubble zones. Bubbles pop! Do your own due diligence, but think about moving capital out of dangerous markets and into something currently undervalued, unloved and unappreciated.

Silver and gold are in the early stages of what could become a roaring bull market. They have a superior risk to reward profile.

Bubbles feel good during their rally phase, but the inevitable crash and hangover is ugly and painful. Remember the 1987 crash and the 2000 tech bubble! Consider historical market peaks and bubbles that occurred during December and January.

  • January 4, 1973: Peak of the Dow Jones Industrial Average (DOW) and the second close above 1,000. First close above 1,000 occurred the month before in December. The January peak was the high for almost ten years.
  • January 17, 1980: Gold price bubble. There is no fever like gold fever, and it manifested in early 1980.
  • January 17-21, 1980: Silver price bubble. Exact date of the highest price depends on your source. Regardless, silver flies higher and falls faster than gold.
  • December 29, 1989: Nikkei 225 Stock Index bubble peak in Japan. The sun set on the Nikkei at the close of 1989. Prices have not approached that level again.
  • January 14, 2000: Peak of the DOW until 2006. The S&P 500 and NASDAQ 100 peaked at more extreme bubble tops in March of 2000.
  • December 16, 2017: Bitcoin spiked near $20,000 and crashed about 45% in days.
  • January 12, 2018: As this is written, the DOW is up over 200 points on the day and priced at 25,803, another all-time high. Based on short term market action and market cheerleaders, 30,000 or 40,000 are “just around the corner.” Maybe!

Or is the DOW at or near a peak?

  1. “It’s tough to make predictions, especially about the future.” – Yogi Berra.
  2. Since November 15, 2017 (a short term low) the DOW has made 19 new all-time highs (through January 12, 2018). Impressive!
  3. The chart of the DOW has moved almost vertically for the two months since November 15, 2017. Vertical moves are signs of bubbles ready to crash.

Examine the recent (daily chart) history of the DOW:

Examine the weekly chart of the DOW:

Observations:

  1. Closing prices have climbed rapidly. Each green support line is steeper than the previous line.
  2. “One way” markets are fun while they last, but they always correct.

HOW EXTREME IS THIS BUBBLE?

According to the (always brilliant) John Hussman Ph.D.:

“…we view market valuations as obscene, with negative expected S&P 500 total returns over the coming 10-12 year period, and a probable interim loss on the order of -65% over the completion of the current market cycle.”

Valuations are extreme per his preferred metric and many others. Repeat: 65% estimated loss.

Other valuation extremes:

Total Market Capitalization to GDP Ratio:

What do timing indicators show about the overvalued DOW?

Relative Strength Index (RSI) is commonly used for timing. It is one of many timing indicators, and is normalized between zero and one hundred. Zero is deeply over-sold and one hundred is unbelievably over-bought. The indicator seldom exceeds 80 or drops below 20.

Examine the monthly chart of the DOW

Observations:
  1. The monthly RSI is a good indicator of long-term over-bought and over-sold conditions. Prices often turn down hard after the monthly RSI drops from high levels. Similarly, prices turn up from deeply over-sold levels.
  2. Higher RSI (>80) readings indicate more over-bought conditions and often indicate higher risk of crashes.
  3. Lower RSI (<20) readings indicate the strong possibility of a deep and lasting price bottom.

The monthly RSI for the DOW is (January 12, 2018) at 89.42. Is that high? 

The last time the monthly RSI was over 89 was … NEVER, going back 116 years. (Limits of my data on the DOW.)

The stock market crashed in 1929, 1987, 2000, and 2007. The maximum monthly RSIs for those four crashes were 81.41, 85.22, 71.72, and 79.21. Yes, the monthly RSI is now higher than before those four huge crashes.

WEEKLY RSI:

The weekly RSI for the DOW is (January 12, 2018) at 89.82. Very high! The last time the weekly RSI was over 89 was … NEVER, going back 116 years. The maximum weekly RSIs before those four crashes were 72.84, 81.38, 67.24, and 73.14. The weekly RSI is now higher than before those four crashes.

DAILY RSI:

The daily RSI for the DOW is (January 12, 2018) at 86.15, and could rise higher in the coming week. The current 86.15 is also high, (3rd highest since 1996) but daily extremes are more common than weekly and monthly extremes. The maximum daily RSIs before the four crashes were 73.60, 81.87, 65.75, and 68.22.

The sum of Daily, Weekly, and Monthly RSI: It should be no surprise that their sum is higher than at any time in the last 116 years.

YES, THE DOW, OTHER INDICES, AND INDIVIDUAL STOCKS ARE OVER-VALUED AND EXCEPTIONALLY OVER-BOUGHT. THEY HAVE RISEN INTO A DANGEROUS BUBBLE ZONE. As measured by the monthly and weekly RSI (and others) they are more over-bought (and dangerous) than in 1929, 1987, 2000 and 2007.

TIMING:

When will the crash happen?  I don’t know, but a huge correction or crash is coming.

The more important question is:

What is the risk versus reward for the DOW as of January 12, 2018?

ANSWER:  HIGH RISK, LOW REWARD. Prices may streak higher for another day, week or month, but will you exit in time? “This time is different,” is a dangerous delusion.

In the 2008 crash silver and gold fell along with the rest of the stock market. Will that happen this time? Clive Maund believes silver and gold will not collapse, and that silver and gold have built a base for a substantial rally.

Intelligent alternatives are:

Silver bullion – bars and coins.

Gold bullion – bars and coins.

Platinum bullion – bars and coins.

Gold numismatic coins. Premiums above spot are low.

Silver and gold are a valuable exit strategy!

Call Miles Franklin at 1-800-822-8080.

Gary Christenson