Thursday, June 9, 2011

Are Global Stock Markets Topping Out?

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I think they are. The top is not yet confirmed, however. Additionally, the next cyclical global equity bear market will be getting into dangerous territory. Evil speculators will have to be careful shorting the markets once the opportunity arises in case the apparatchiks pull out their bazookas and declare that all asset prices except Gold and commodities can only rise and never fall. Don't laugh, because price controls are certain to come in many forms over the next several years as governments fight their losing battles against what is left of the global free market. Being a bear will be fraught with peril once the next downward cycle gets going.

Don't forget the ban on short sales against financial institutions that were considered "important" (i.e. biggest political campaign contributors) in 2008 that proved to the world once again that America is very far from a bastion of free market capitalism. Short sale bans don't work in the long (or even intermediate) run, but common sense never stopped government policies from being enacted in the past, which is why we will again have another round of quantitative easing once things start getting bad even though all it does is reward those closest to the monetary spigots while punishing nearly everyone else.

Though I enjoy trading, the best thing most people can do is buy physical Gold (and some silver) and hold it outside the banking system, away from the greedy paws and prying eyes of the corporatist system that has come to dominate almost all of the developed economies of the world. Though I prefer the word fascist to describe these systems (i.e. the union of corporations and the state, generally with associated aggressive military overtones), some people are put off by terms that are overly "truthy." Things are going to get uglier, as the current rioting in Europe and the seemingly staged uprisings in the Middle East leading to rapid and "secretive" military strikes suggest. I am horrified to learn that the United States has started bombing campaigns in Yemen. Those claiming to fight terrorism have become terrorists. It's an Orwellian world, to be sure.

As John Hathaway stated in a recent piece, we are past the point of no return. He was referring to debt, but we clearly have also done more than lost our moral compass - we have managed to re-jigger it to point us in the exact opposite direction of right.

This political side of things is important to speculators, because you can be assured that being a bear with your trading money will become more dangerous during the next cyclical bear market. Pockets will be picked based on random rule changes and short-squeezes will be engineered more aggressively than usual. Having said all these things, it is certain that all intervention will fail and the markets will find their "natural" levels (at least on an inflation-adjusted and/or Gold-adjusted basis...). Seeing more than one article about 70-90% discounts from the 2005-6 peak on real estate deals in certain parts of the U.S. shows how powerless governments are to stop the things that "must" happen economically. But apparatchiks remain happy to waste more of your future purchasing power trying to stop what cannot be stopped, so bears need to understand this before jumping in once the opportunity presents itself.

I don't think we are there yet from from a trader's perspective. I think the downward slide going on currently could go on a bit further, preferably with a day or two of panic to end it, and then the "risk on" trade will likely come back with a vengeance, as speculation is always alive and well during the extremis period of a fiat currency system. It is all part of the so-called "Crack Up Boom." Working for a living is just a way to watch your standard of living decline further and further via the ravages of co-exisitng inflation and deflation at this point in the cycle. Speculation offers a chance to "get ahead," much like a lottery ticket or a trip to the gambling casino. You can't win if you don't play, right?

Sorry for the rambling, but I've had the week off from my day job and I felt like writing. Back to business...

When it comes to equities, there are a few charts of interest I would like to show related to market internals and some potential warning indicators as they relate to U.S. equity markets. First up, a chart of the number of new 52 week lows in the New York Stock Exchange ($NYLOW) over the past 6 years using a daily linear scale plot:

Same concept using a slightly different chart, the new highs minus new lows in the New York Stock Exchange ($NYHL) over the past 6 years using a daily, linear scale chart:

A significant spike in these charts would be a strong warning sign that the topping process is "for real." Adding quantitative easing (QE) to the fire in the setting of a market that is trying to roll over may only be able to cause a spike in Gold and commodity prices, which might just hasten the bear market's return. Those who say inflation and "money printing" are good for equities haven't studied the equity charts of the 1970s. Another decent-sized oil spike would send the global economy into a nasty tailspin.

The advance decline line of the New York Stock Exchange has held up well so far. Here is, however, the advance decline volume line of the American Stock Exchange (AMEX or $XAX) over the past 2 years and 9 months:

And the medium-term breadth indicator known as the Summation Index for the New York Stock Exchange ($NYSI) has a potentially interesting technical break down. Here is a 30 month daily chart of this indicator thru today's close:

And here's a chart that speaks volumes about the underlying health of the global economy, the Baltic Dry Index ($BDI). If lots of companies are buying and shipping lots of raw goods due to a booming global economy, the price of shipping should be rising, not falling, as excess demand creates a seller's market. I would say the following chart of the $BDI over the past 30 months suggests the opposite:

And one of my favorite indicators, the copper to Gold ratio, predicted the current equity decline rather nicely. It seems to be at an interesting short-term juncture currently. Here is a daily chart of this ratio over the past 18 months, using the JJC ETF to represent the copper price and the GLD ETF to represent the Gold price (i.e. JJC:GLD; thanks very little to for taking away my favored candlestick charting option in the commodities patch, which is why I didn't use the futures contract prices to create this chart):

In all, I think the paperbugs have a decent chance at pushing a few individual global equity market prices to new nominal highs, although I suspect that many markets have already made their final cyclical top and will continue to lag, failing to make new highs if one more strong push higher for global equity markets occurs. However, what the paperbugs will continue to fail to notice (until it is too late) is that the cyclical bull market in common equities has been over for some time when measured in the only current widely recognized hard currency in the world (i.e. Gold). One need only review a chart of the Dow Jones World Index ($DJW) to Gold ($GOLD) ratio over the past 2.5 years to see that a shiny piece of metal has been outperforming equities (yes, that includes dividends and yes, I realize that most people don't like to eat Gold) for almost 2 years:

Though you can't spend Gold at most stores (just like you can't spend stocks), Gold will continue to outperform common equities for the remainder of this secular cycle. This is what the Dow to Gold ratio is all about. Gold will continue to provide a relative increase in wealth in a world where the standard measuring sticks (i.e. paper currencies) have become even more unreliable than usual. All currencies are sinking relative to Gold and will continue to do so. Ditto common equities, real estate and bonds. Gold rising relative to all other asset classes is one of the hallmarks of a secular private sector credit contraction/economic depression, and the one we're currently in ain't over yet. Once the Dow to Gold ratio hits 2 (and we may well go below 1 this cycle), we can talk about "stocks for the long haul." Until then, Gold is the premier asset class and other asset classes are for trading/renting in my opinion.

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