March 16th, 2015
by William Kurtz
The major Indexes have been moving stair-steps lower, like a "Slinky," to a landing place and a bounce. The declines have been in five waves at multiple small degrees of trend, which is evidence (but not incontrovertible proof) that the larger trend is Down. Since we appear to have a completed series of five waves down, an upside partial correction could occur at any time. The question at hand is, Has the bounce (which is the same as a partial correction) already started, or will the apparent fifth wave Down extend still further down before the bounce begins?
In either case, we would not expect that new Highs would be set. If the bounce has already begun, the S&P 500 could move to fill an open gap just above 2076.14, which would also be a 50% retracement of the decline from the High of March 2. On the other hand, if prices next week were to break below recent lows, that probably would mean that prices are headed still lower down the stair-steps before a landing place for a bounce will be found.
Either way, next week may look like a swarm of ants around an anthill: The Fed Open Market Committee's report will be published on Wednesday, and Chairman Yellen will decode it all for us in the clarity of language for which the Fed is famous. Of great interest is whether the Fed will set a date for increasing the basic interest rate. It had indicated some time ago that such was in the wind; however, the trend across the globe is for central banks to DECREASE their basic interest rate, not to increase it; so an increase at this time by the Fed would seem to fly in the face of what is happening everywhere else. Is the USA such an "interest rate island" that our economy is insulated from interest rate decisions being made in other countries?
Deflation is grabbing hold all around the world. Our Fed has tried for years to inflate our economy by various versions of "quantitative easing," but all that it has managed to accomplish so far is to stave off Deflation - and it is losing that battle now. The upshot is that it is hard to see how the Fed could justify an interest rate increase now - or that it would have the brass to do it. The MARKET is telling us that interest rates at the market level - the "real world" level - are rising; and it is difficult to see how the Fed could buck the market forever.
If I had to make a guess, and I will, my guess is that the Fed will get cold feet and that Ms. Yellen will again ask for "patience" with respect to announcement of a change in interest rates at the federal level.
Also lending excitement to the week will be impending climaxes in the U.S. Dollar (on the upside) and in Gold (on the downside). The Dollar is so desperately loved that "this love affair is too hot not to cool down," while Gold is so despised that it probably is a good investment at current prices and would be an even better investment were the prices to decline further.
To cap it all off next week, Friday will be a "quadruple witching day," the day upon which Index futures, Index options, stock futures, and stock options expire. It should be fast and furious.
What's levitating the stock market? To a large extent, it's companies that are doing it, buying back their own stock. Managements have convinced themselves that the best use of their companies' money is to buy back their own stocks - this, at a time when the market is expensive. It's a self-reinforcing phenomenon: Companies buy their own stock in order to keep the stock price up, and when the stock price does go up as a result, it becomes even more "attractive" as a purchase, and round and round we go. This is crazy. Of course, Managements sell their own stock into the rise, and profit personally thereby. The effect is even enhanced by the fact that some companies are BORROWING money in order to buy back their own stock. (The proffered justification is that money is cheap to rent, so let's do it). What they ought to be doing, instead, would be to forgo these buybacks and, instead, sock the money away for a rainy day or for a better opportunity. The right time for a company to buy its own stock (if ever) would be when its market price is cheap - like, say, in March 2009.
There's another sign that something is cockeyed: In the lineup of the companies included within the "Dow Industrials," Apple is going to replace AT&T - this, at a time when the long-term charts of Apple show a complete, or nearly complete, series of "five waves Up" at a trend of large degree - that is to say, it is riding for a fall.
Moving Target Benchmanrks
"Benchmarks" can be useful as a means of judging performance. The term "benchmark" presumes, or ought to presume, a certain level of stability; but fallacy enters the picture and the presumption fails when the benchmark itself is driven by unreasonable expectations or by the algorithms of high-speed computerized trading. In such a case, a fund manager who ties himself to a benchmark is always trying to play catch-up ball, and he finds that he can't do it no matter how fast he moves or how smart he is.
The proof is in the pudding: More than half of the managers of fixed-income funds underperformed their benchmarks last year. In the funds specializing in big-capitalization issues, only about 13% of managers beat their S&P 500 benchmark last year; only about 13% of them beat their benchmark over the past five years, and only about 18% over the past ten years. About one-third of managers of mid-capitalization funds beat their benchmark last year; and about 27% of managers of small-capitalization funds did so.
The poor guys are like hamsters on a treadmill, running faster and faster, to no avail. It goes to show that the only performance that counts is ACTUAL performance, not performance to a benchmark. One is led to ask the question: Is it worthwhile for me to put my money into a managed account?
Well Oiled Slide
Crude Oil is now down to $44.84 per barrel, as of last Friday. The United States is awash in Crude above ground. We are running out of places to store it. I believe that one result will be a crash in Crude prices below (perhaps considerably below) $33.85, which was the Low on February 27, 2009. There may come a time, quite soon, when refineries will have to shut down, if only because there is nowhere to put the product. A "spike low" in prices may feel good; but as we know, "low prices cure low prices;" and a level of price stability will be discovered - to be followed by an upturn.
The Mother of All Counter-Trend Moves
I continue to believe that the entire rise from the March 2009 Low of 6470 in the Dow Industrials to the recent top is a countertrend move, which eventually will be fully retraced (I like the word "recaptured" better) - and then some.
I think that the upside potential in the stock market is limited to countertrend "bounces," or "partial corrections" - i.e., that it is unlikely that new Highs will be posted. The real money to be made in the stock market will be made to the downside. As noted above, we expect a bounce, now or soon. There should be excellent opportunities for shorting the market in one way or another, at or near the top of the expected bounce. I will do my best to point them out to subscribers of "MarketPeek," which is issued every evening. For delivery of MarketPeek to your computer's inbox, please go to www.CandlesticksOnSteroids.com/MarketPeek/
Cash is not Trash - Keep it Safe
Where to keep Cash? The largest banks are not necessarily the safest banks. Most banks today are covered by the Federal Deposit Insurance Corporation (FDIC). Technically, it is the bank which is insured, not the depositor; but it is generally assumed that depositors will be made safe in the event of a bank failure. The FDIC advertises that it is backed by the full faith and credit of the United States, but there is no legislation that supports such a claim. On the surface, I do not see anything which would preclude the federal government from confiscating deposits (as happened not long ago in Cyprus, so there is precedent for it) - regardless of the FDIC. Desperate governments will do anything to survive; so it might be well to give some thought to where and how you will keep your Cash.
Are There Any Secure Venues?
In the same vein, IRA's and other investment accounts are sitting ducks for a government grab. It's not beyond the realm of possibility that the government would seize such accounts in exchange for long-term government paper. The "MyRA" plan is a step in the direction of all investment accounts being administered by the federal government.
Selling everything and putting the proceeds in the form of $100 bills in a stainless steel can buried in your back yard doesn't solve the problem - even apart from the possibility of discovery by a thief: At any time, the government could decree that all paper money now in circulation is henceforth of no value; you will have to trade in the bills for "new dollars" at the rate of one new one for five old ones, or some such. "Thou shalt not steal" does not apply to governments.
In 1933, FDR issued an Executive Order confiscating gold. His power to issue the order derived from a provision of the War Powers Act of many years earlier, which for some reason (or for no reason) was still "alive." It is no longer "alive," so presumably new legislation would be required in order for the President to confiscate gold now. I say "presumably." The current President has a predilection for issuing Executive Orders without the certainty of permissive legislation; so I wouldn't put it past him to find something or other on which to hang his hat, and then just do it and let the chips fall where they may.
Still, the possibility of confiscation is no reason not to own gold. There are several depositories overseas which are generally regarded as "safe;" but that door seems to be closing now in light of "FATCA," American legislation which has extended the long arm of the U.S. Government to banks and depository institutions overseas which nevertheless have a business connection with the United States. It gets tougher all the time to know where to keep what you've built without fear of theft by government.
Speaking of gold: a buying opportunity seems to be approaching, but it's probably not quite here. The expected bounce after the low should take gold a couple of hundred dollars higher.
The greatest risk to your stock portfolio right now is to not worry about it. You should not be leaving your stocks and stock funds exposed to the weather without a warm blanket. Putting it another way, you should "build a moat" around the dividend-paying "goldies" that you would like to keep.
Notes from the Author
If you would like to have a helping hand in "building that moat," please see www.CandlesticksOnSteroids.com/WealthManagement or send a note to me directly and we will take it from there.
If you would like to discover how to identify likely major changes of trend direction, please go to www.CandlesticksOnSteroids.com/TeachMeHowToFish/ We try to "ride the waves," both Up and Down; but most of all we try to identify - as it is happening - a reversal and change of trend INTO the main underlying trend rather than into a correction. We show you how to do this in live Webinars, where you and I see the screen of "live" market action and I describe to you the growth of the individual patterns and what they mean. It's much more instructive than studying charts of past action, although that's indispensable.
Please be careful now, and take an active hand in managing your wealth. The next few years are not going to be like the last six, where "holding on for the long pull" made sense and mistakes tended to be self-correcting with the passage of time. Now, we can't afford to sit back and blithely expect that our investments are safe, because they're not. You will need to be awake and aware, and very defensive. If you sit back and do nothing, you run the great risk of suffering great damage as this next downturn progresses. The selloff of 2008 was just a taste.