Part one analyzes global stock and bond markets. Watch out below!
Part two will address the U.S. dollar and gold prices.
2017 was an outstanding year in many markets.
- DOW up 24.7%
- NASDAQ 100 up 31% (Wow!)
- Nikkei up 19%
- DAX up 12%
- Gold up 13.6%
- Silver up 7.1%
- XAU (gold mining stocks) Index up 8%
- Dollar Index DOWN 10%
We can be certain of the following:
- Death, Taxes and Politics.
- When markets move too far and too fast in either direction, they correct.
- Bubbles crash!
We live with the inevitability of death, and the predations of taxes and politics. Stock markets rise as the dollar inevitably devalues, and as investors become optimistic (higher P/E ratios). Stock prices fall when investors lose faith in the narrative that things are good, central banks are in control, this time is different… whatever. P/E ratios fall as investors lose confidence or earnings weaken.
Where are stock prices now?
Examine the 28 year chart of the DOW.
a. Prices accelerated into a near vertical rise. Corrections and crashes follow vertical moves, but maybe it’s not over yet. We’ll see.
b. The monthly RSI (Relative Strength—one of many timing indicators) is at a 30 year (dangerous) high. The DOW has moved too far and too fast.
c. A high RSI (like now) shows high risk. It does NOT guarantee a turn down. Bubble markets often move from crazy to even more craz
Examine the 28 year chart of the NASDAQ 100.
a. Same as the DOW – a near vertical rise and up over 30% in 2017.
b. RSI and other indicators (not shown) suggest high risk.
c. The NASDAQ (including Apple, Amazon, Facebook, Netflix and others) reminds me of 1999 when people were glued to CNBC watching their “internet stocks” rise to the sky. The consequences were ugly and the NASDAQ 100 fell 84%
Weekly Dow Prices:
a. Examine the chart below. The weekly RSI is over 80 and has turned down as it did earlier in 2017. A declining weekly RSI is no guarantee that the DOW has rolled over, but it is the first step.
b. Weekly and monthly RSI are both over 80. The last time they both exceeded 80 (very over-bought) was more than 20 years ago.
c. The DOW has moved too far and too fast, as indicated by the vertical chart and RSI’s extreme readings, and has indicated it is rolling over.
Examine the German DAX. This market has (probably) rolled over and looks ready to fall. The peak was in early November. We shall see if central bankers can manufacture another rally, or not
CONCLUSIONS AND ACTIONS:
Stock Indices have moved too far, too fast, are over-bought and ready to correct, or are correcting downward. The daily peaks, so far, have been:
DAX November 7, 2017
Nikkei November 9, 2017
DOW December 18, 2017 (high daily tick)
NASDAQ December 18, 2017 (high daily tick and close)
Action: Acknowledge that stock market risk is high while potential reward is low. Consider moving profits and capital into something with less risk and more safety. Silver, gold, platinum and cash come to mind.
What Others Think:
From the always brilliant John Hussman, Ph.D.: Three Delusions: Paper Wealth, a Booming Economy, and Bitcoin
“So even given the level of interest rates, we expect a market loss of about -65% to complete the current speculative market cycle.”
“At present, U.S. investors are under the delusion that the $37.3 trillion of paper wealth in their equity portfolios represents durable purchasing power. Unfortunately, as in 2000 and 2007, they are likely to observe an evaporation of this paper wealth. Nobody will ‘get’ that wealth. It will simply vanish.”
Note to readers: If you cash out paper wealth from overvalued stock markets (and bonds and Bitcoin) and place that capital into gold and preferably silver, the wealth and purchasing power will NOT vanish.
Stock market capitalization ratio to GDP (Buffett Indicator) is high. Price to earnings ratio (not shown) is far too high, and the price to sales ratio is at all-time highs. These indicate bubble valuations and high stock market risk
From David Stockman: Gold and Silver Only Safe Asset Left
“Stock prices are going to collapse big time when the underlying predicate of cheap debt, massive stock buybacks and M&A deals and everything else supporting the market today finally reverses. So, we are going to have deflation in the canyons of Wall Street, and that will not be a happy day.”
From Wolf Richter: Peak Good Times? Stock Market Risk Spikes to New High
“The growth in margin debt has far outpaced the growth of the S&P 500 Index in recent years. The chart below (by Advisor Perspectives) shows the percentage growth of margin debt and the S&P 500 index, both adjusted for inflation
“In other words, the stock market is far more leveraged than it has ever been before.”
BONDS: They Move Opposite to Yields
Martin Armstrong: We Are In the Biggest Bond Bubble In History
A declining or crashing bond market means much higher interest rates. After 35 years of declining yields, most people have no memory of higher rates.
From Armstrong: “Our computers are showing that interest rates are going to go up faster than anybody has ever seen in history.”
How long can central banks maintain near zero rates (U.S.) or negative rates (Europe)? Such craziness cannot continue forever without massive and destructive consequences.
Graham Summers sees “The Everything Bubble,” a breakout higher in the yields on 10 Year Notes, and higher consumer price inflation.
“When the Bond Bubble bursts, the EVERYTHING bubble follows.
Bonds have risen in a bull market from the early 1980s until 2016. But yields are now rising from mid-2016 lows. However, other astute individuals believe yields must fall again, partially because over-indebted global governments will demand suppressed yields so they can spend less for interest expense. We’ll see.
With yields so low (negative in several European countries), how much lower can they go? Bonds look like a high risk and a minimal reward investment during 2018 for most investors. Consider moving capital out of the debt markets and into something real.
How sensible is buying dodgy debt paper from insolvent governments – yielding peanuts – when those governments have assured you they will repay you (if they do) with devalued currencies? Argentina sold 100 year bonds to “yield starved” investors. Insanity!
Stock Markets: Prices and valuations are too high. John Hussman, Ph.D. expects a drop of 65% or more. Do your own due diligence, but consider moving capital to less risky and far safer investments, such as silver bullion and coins.
Bonds: The 35 year bull market looks tired or dead. Yields are negative in much of Europe. Pension plans are increasingly insolvent (Look at CalPERS) thanks to central bank and government created low yields on dodgy debt. The bubble in sovereign debt could implode in 2018 with ugly consequences for currencies, bonds, economies, governments and central bankers. Gold and silver prices will rise.
Convert over-valued stocks, idle cash, Bitcoin (current clients only), devaluing currencies, corporate debt and dodgy sovereign debt to something more real.
Call Miles Franklin at 1-800-822-8080 to convert digital and paper promises to real silver and gold, including 100+ year old coins minted when people appreciated silver and gold as real money.