December 11, 2013
Sell Stocks Now
Buy Treasury Bonds
And this is NOT what the “experts” are telling you
It seems that every few years I put together a “mother of all newsletters”. Usually they just sort of happen as I plow through presenting my opinions and the reasons behind them…and all of sudden I end up with a massive newsletter. With this one, I’m going to say I already see a quite lengthy piece coming…maybe the biggest ever...as I know I’m sitting here with an extremely thick stack of notes and charts made during the past month while doing hopefully objective research in my quest to “decipher” what I think various markets will be doing in 2014. As always, I’ll be trying to be brief but my list of topics suggests I’ll be covering a LOT of ground so I’ve decided to put this newsletter out in several stages over the next few days…So I’ll just call this “Part 1”… Anyway, If you read this whole thing, and those that hopefully will quickly follow, I salute and thank you.
Let’s start with the stock market, which I suppose is the biggest question on most people’s minds today…
Late last year and continuing non-stop through May, I kept recommending long stocks while repeatedly pointing out how virtually all the “pro’s” were spouting doubt on the stock market, pretty much unanimously cautioning against buying stocks for a wide range of “reasons”, http://www.crokerrhyne.com/newsletters/10-17-12.htm. In the same vein, last December I also reiterated my bearishness in Gold while making the point that seemingly every bank and brokerage house in existence was deliriously bullish on this market, then trading $1750-$1800 an ounce, as we headed towards 2013, http://www.crokerrhyne.com/newsletters/12-13-12.htm…And we now know both of those “pro” opinions, supported by tons of “LOGIC” from herds of well heeled, articulate and highly well known analysts/prognosticators all over the planet, were just about as WRONG as any market predictions ever could be. Stocks have had a stellar year while Gold has been whacked by almost 30%.
I do not put this out there to make me look smart (I have been right and wrong in 2013) but simply to point out, one more endless time, that ALL of the markets are nothing more than a giant mob psychology game. No values are real. No market is ever “fairly priced”. The markets, supposedly based in reality, are nothing more than the investing crowd’s ever changing PERCEPTION of flimsy pieces of paper…or nowadays…electronically registered digits. All the gobbledygook you hear about the importance of this or that statistic from the painted faced yakheads are only well worn and accepted talking points…Assuredly, you can find moments when ALL of those stats can prove to be “accurate” as indicators, but, for my money, most of them are perennially meaningless when you get down to the subject of what matters more than anything…that being: Where a market is going next.
For sure, all of the 1000’s of economic statistics (economy, stocks, commodities, interest rates, earnings, etc.) that come out monthly are relevant, but my experience has been, roughly stated, that when ANYTHING begins to matter to the pundits, it’s either worthless to consider, or being viewed incorrectly, or, as they say, “already in the market”, and if you are making investment decisions based on the latest popular/hot topic or perspective, generally guised as “reasoned analysis”, you are going to find yourself all too frequently on the wrong side of what the markets are doing.
Yes, this is just another version of contrarian thinking…that you are better off trying to do the opposite of what the masses (led by the media and its personalities) are espousing, but it IS something I think needs to be periodically reiterated. Think for yourself. Believe nothing…especially when you can find as few as 3 or 4 internet “experts” all unanimously going, “Oh yeah. This is what’s up!”. Understand that the OVERWHELMING majority of people who are market advisors/prognosticators DON’T know which way the markets are going…and beyond that, even the great ones (I have my favorites) can be as dead wrong as anyone else.
Although I am lately seeing a handful of established names speaking of stocks as in a “bubble”, I can’t help but also note there is now a very long list of people who “hated” the stock market early in 2013, when it was a major buy, who are now generally saying, “Nowhere to go but up. Stocks are the only place to be!”. Predictions of the Santa Claus Rally and January Effect are all over the media, almost as though they are foregone conclusions. And the Economy, which until very recently was a major worry for all those forever wrong “experts”, is now being viewed as truly cranking up again…and formerly negative expectations now seem to be overwhelmingly looking for a solid performance in 2014…in both stocks and the economy. Think about it…This IS quite different from a year ago when Obama’s reelection was supposed to be a “job killer”, not to mention the thoroughly negative effects of “too slow job growth”, the Deficit, the Government Shutdown, the Fiscal Cliff, the Sequester and whatever else I’m missing…the point being, a year ago, according to the majority of analysts, there was “no reason to buy stocks”, but now? “it’s the only place to be”?
With the exception of a brief bearish call in May of this year, I have pretty much only recommended Buying the Stock Market for over three years now. And while I still expect equities to continue being a great investment in the long term, I currently believe we have reached the point where the odds greatly favor some potentially serious downside during the coming year…and am therefore now beginning to establish Short Positions using the Dow Jones Futures.
Before getting into a list of brief thoughts and observations as to why I am now bearish, here are a few charts that I think lend perspective…that at the very least, do beg the question, “ Is this really the place where buying stocks really looks historically wise? And if they aren’t a buy, are they not therefore a sale?”.
Take a look and answer that question for yourself: DOES buying on the tail of one the biggest up years in history…and after almost tripling in the past 5 years…really make sense at all from a risk vs reward standpoint? Are we at one of those “blood on the tracks” buying moments (like March, 2009) or IS there more of a “no real worries” attitude toward stocks right now?
Here’s the Dow…
For sure, all of them could continue streaking higher, but for my money, they are all ripe for SOMETHING either sideways or lower, with even sideways minimally representing 150-200 points lower in the S&P, or 1500-2000 points in the Dow…and I consider those to be reasonable numbers if all they now do is mark time sideways…In other words, if we were to enter a truly “corrective” market phase, it could easily be much worse than that…
Therefore, for the first time in years, the bottom line for me is: I think this is NOT the place to be doing ANY buying in equities…and beyond that, even though I am not an equities investment advisor, I also would say this is probably a good place to take as much money off the table as you ever would as a stock investor.
Here’s a brief skip to some technical chart work...
As many charts as I use, I am NOT a big trendline guy as it seems like 98% of them prove to be violated and/or meaningless…that usually they are just a point for some dumb broker (like myself) to say, “Look. It’s breaking the trendline! Get on (or out) now!”, but the fact is, sometimes they truly do have significance…This is digressing, but maybe 25 years ago I started keeping a daily chart of the Dow (since the August, 1982 lows) on one of my office walls, such that I could sit across the room and truly get a “big picture” feel (hopefully) for what the market was doing…And it was on this chart (now 9 feet long), and on subsequent Dow studies going back to 1900, that I long ago made the observation that there are times when the Dow, which is easily the single most recognized investment index in the world, does just absolutely “nail” some very important trendlines…more often than not, where the connecting points were years apart, to the extent that I placed a bold print label, “Respect the Lines”, on that chart just to remind me that big trendlines on the Dow should not be ignored…that sometimes, particularly the further apart they were…they could represent significant turning points.
Here are a few historical examples…followed later by what may be the biggest trendline I think I have ever encountered…
Here’s a longer look at what followed that January, 1996 high…Sideways for 17 years…
Here’s another significant line…that actually begins with the end of that 18 year consolidation…
As I said, maybe those lines occurred only coincidentally…and I do not look at any “indicator”, such as a trendline, in this business as an absolute…but I DO take note when MAJOR trendlines are being potentially established and factor this observation into my analysis…
And here is where we are now…on a line that’s just about as big as it gets…and the actual reason for this little discourse on trendlines…
Maybe this is important…maybe not…but I am keeping it in my sights…
The highs made in January, 1966, January, 2000 and October, 2007 are obviously major points in Dow history…which well may be the case with the highs we have just as we end 2013.
And just so you can see that 1966 high a little more clearly…Here is a the trendline from the chart above extended back to 1966…
Ok…To be sure, I am not just sitting here saying, “We’ve hit a line! Sell! Sell! SELL!”. There are all sorts of factors that go into any opinion I have…and this particular chart is just one part, which in this instance, does dovetail with a long list of other reasons leading me to believe we have reached a significant “juncture” in the Stock Market…I would also add that I also do not ever look for any line to be hit just dead to the decimal point…When you are talking in multi-year charts, as is the case here, I do not consider a few 200-300 points to statistically significant…In other words, IF the Dow trades 200-300 points beyond its current high, I will not be throwing in the towel…POSITIONING ON THE SHORT SIDE OF STOCKS HERE…OR HIGHER…IS WHERE I WANT TO BE NOW.
I don’t want to drone on forever here…but here are some snippets of other reasons I am now going Short the Dow (and at some point the S&P and/or NASDAQ).
Let’s face it. The economic forecasts and general news outlook has been consistently dismal for the better part of the past 2-3 years…which made it easy for all those yakheads to “justify” their insistence that investors should NOT be expecting higher stock prices…But now, where are they?...”IT’S ALL GOOD! Nothing really to worry about…maybe a little overbought…but the fundamentals are good.”
The truth (as I see it) is, when you take the better, and better and better economic numbers (including last Friday’s drop to a 7% unemployment rate) and combine it with stock market prices that seemingly just won’t stop rising, the result is you have FINALLY convinced all those wrong-way painted TV faces that maybe things are not so bad after all…and that even though stocks have basically gone straight up for 3 years, their battle cries have now become, “There’s still more to come!” and “Well, you gotta be in this market!”. Yes, they suppose the Fed is going to start the long awaited “tapering” but Bernanke/Yellen have also made it clear they are NOT going to be tightening for a LONG time to come…Europe? Remember that “crisis” 3000-4000 points ago in the Dow that was supposedly going to bring down the world economic system? No problem now…Or that China and Asia were seriously slowing…? Or the Arab Spring…? Or Syria…? Or Iran’s nuclear ambitions? Or all the political, budgetary and congressional bullsh*t? ALL in the rear view mirror now...From what I hear and see, the formerly angst ridden outlook has recently become, “Nothing But Clear Sailing Ahead”. And if you don’t recognize the change in attitudes from every corner of the “advisory” media…or if you dismiss its potential significance regarding the way this investment GAME is played, I think you are kidding yourself.
For me, it’s quite clear…For years, the preponderance of supposed intelligent analysis has argued AGAINST the stock market…now they all LOVE it.
Does this axiomatically mean stocks have to go down…that they can’t keep on screaming, or just grinding, higher? Absolutely not…Believe me, the 1990’s taught me to be very careful about calling a top in the stock market (I got eaten alive a few times), and so I am fully aware that anytime you look at a bull market and say, “It’s over!”, the percentages are against you being right…But what I always try to do here is stick my opinion out there exactly as I see it…And my very definite impression now is, IT’S TIME TO BE SHORT. THERE IS NOTHING BUT GOOD NEWS EVERYWHERE I LOOK…AND AGAIN, WHILE THERE ARE CERTAINLY STILL SOME BEARISH PREDICTIONS BEING MADE OUT THERE, THE MAJORITY OF WHAT I HEAR IS DEAD OPPOSITE WHAT IT HAS BEEN FOR 1000’S OF POINTS ON THE DOW.
In theory, the rally we HAVE HAD is supposed to be signaling great economic numbers ahead….which is exactly what I think we will be getting. For quite some time I’ve been saying we are in the beginning stages of a worldwide boom (due to, among other factors…two wars ending, cheap money worldwide, cheapening energy, the technology revolution, and the “conversion” of several billion formerly communist consumers to the capitalist system), and in the coming year I think we will perhaps be seeing some surprisingly positive economic statistics to substantiate both my optimism…AND the 2013 rally in the stock market…BUT…Great economic numbers do NOT mean stocks can’t be going down for a while…and maybe going down a lot…In fact, for at least the next 6 months, my very specific view is we will be seeing all sorts of glowingly “better than expected!” reports, which will be LOVED by the yakheads and incessantly referenced as “another reason why this ‘pullback’ represents a buying opportunity”…the only problem being, the “pullback” might just be something a hell of a lot more serious than that, as, MY OBSERVATION IS THE MAJORITY OF BEAR MARKETS ARE ACCOMPANIED BY MORE “GOOD” NEWS THAN BAD.
So far, none of the bearishness expressed here has even presupposed any “bad” news on the horizon…but when you think about it, it’s pretty hard to imagine some bad news not being some part of our economic and geopolitical reality in 2014… that there will be at least a few “out of left field” events in the coming year that could serve as periodic downside equity market catalysts…I mean, isn’t there always something unsuspected in the pipe? Some NEW “crisis” that becomes the next month’s ever louder headlines? Really. Who knows what events are going to spring into the news that might be detrimental to stock market psychology? China vs Japanese territorial interests? Upheaval in the Middle East, with the Syrian question getting nastier, not better?…Ditto Iran and their nuclear ambitions? Or Israel? Egypt? The Ukraine vs Russia? Putin vs the EU? This top-of-my head quick list certainly leaves out some possibilities but you must be aware these are just some of the presently “known” possibilities for media hysteria, and I’d suggest you can almost bet the ranch that 2014, like all years, will have its share of blaring, fear mongering, market detrimental headlines…And then, OF COURSE, WHO KNOWS WHAT CRISES CONGRESS WILL GENERATE IN 2014 to potentially scare the selling socks off investors? Do you think the coming year is going to get all “lovey dovey” in Washington…or as we move towards the mid-term elections, the gloves are going to be coming off more and more?
BOTTOM LINE…THERE WILL BE SOME BAD NEWS TO DEAL WITH IN 2014.
And there is one other big question in my mind…Does Obamacare matter to the economy and/or to the stock market?
Republicans will say, “Hell yes! It’s a job killer!”, etc…Democrats might say, “The people needed this! It’s good for the nation.”. My answer is, “I don’t know”. I do see it as an historically significant legislative event, and whether you like it or not, in much the same way as with the establishment of Social Security (a RADICAL “Socialistic!” development when it occurred), or Medicare, it IS here to stay. It won’t be repealed. It will be part of the system going forward…whatever your own feelings are on the subject..
But my real question is: The passage of the Affordable Care Act is possibly every bit as significant, or radical, as was the establishment of the Social Security System…and I have wondered if the 2014 inauguration of Obamacare could possibly produce some degree of the negative reaction the markets experienced following the inception of SS in 1937.
To be specific, following the 1929 Crash (chart following), the Dow finally made a low in mid 1932, then began to climb, and managed an almost 500% increase over the next 4 years…THEN, concurrent with the inauguration of Social Security Taxation, it topped in early 1937…and by a year later had lost almost 50% in value, which is BIG, any way you shake it…Imagine, for example, if the current 16,000 Dow was at 8,000 a year from now (not my prediction)…At any rate, that decline, coincident or not, did begin almost simultaneously with the very first payments/collections of Social Security taxes in January, 1937…and while I am NOT, by any means, expressing the opinion that Obamacare is going to sink the market, as a trader, I do think it makes sense to be aware of how this game did play out “way back when”, and recognize there COULD be some sort of negative reaction in the markets and/or the economy.
Here’s the picture…
Picking a top in any market is about as tough, or stupid, as it gets in this business. Tops are rarely simple and often quite volatile…and I figure taking a look one example, the 2000 stock market top, is worth a few minutes here…
A very quick observation: Most of the talking heads would disagree, but I think the Dow is THE index that really tells the story…that what happens with those 30 “staid” stocks presents the best clues as to the direction of the overall market. The NASDAQ, on the other hand, has a lot of “hot” activity generated by the more speculative nature of these “newer” “growth” companies, and I have therefore long viewed the NASDAQ as the “tail of the whip”, by which I mean, when the Dow ends a bull move, for a while, you easily might have the NASDAQ continuing its rampage…Or so it was in 2000…
Ok, I think I’ve worn this subject out…If you can believe it, I’ve got more but aside from just copying some one-liners out of my notes (that I would have maybe expanded on) I’m going to leave it here…I THINK STOCKS ARE NOW A SALE, FOR AT LEAST THE NEXT 6 MONTHS, MAYBE FOR LONGER THAN THAT.
A few more ideas I could develop but…
When I hear, from all over the place, “There’s nowhere else to put your money”, red flags start going up. There is “somewhere else” and it’s always that least, least, least attractive option at an equities top…CASH…especially when it is basically earning you nothing right now, as is always the case…but it also can’t lose the 20%+ of value that is easy to see in any stock market downturn…In the same vein, another angle lately prevalent in the media, and also a red flagger for me, is, “There’s a ton of money on the sidelines waiting to get in”. Maybe I’m way off the mark, but I swear, the ONLY time I ever hear that one is when we are doing nothing but sliding south.
Now, as we begin the decline (I believe), you’ll be hearing the usual chatter about rotation from this sector to another, and that such and such a sector is a good place to be buying…I basically wouldn’t even begin to think about buying ANY equities, in ANY sector, until we have at least seen some sort of fairly sizeable decline accompanied by some degree of quite obvious media FEAR…and some degree of analytic “logic” that suggests “the worst isn’t over yet”.
The Stock Market is not some kind of giant cash register that keeps dinging automatically. Just because the economy may be, or is, on a steady upward slant does not mean stocks can’t spend a year going absolutely nowhere…or substantially lower…AGAIN…I remind you…This is a game.
I would note that one favorite point of reference among the pundits, PE’s, which are perpetually referred to as “undervalued” or “overvalued”, can be supposedly low, at 9, and STILL stocks can go down…Or supposedly high at 23 and stocks can STILL be rocketing higher…But even so, you still see them, as one indicator, ROUTINELY cited as being a determining factor in stocks…”Trailing”, “Forward”, “Smoothed” or whatever, I think the whole thing about market PE’s is pretty close to worthless in deciding whether the market is going higher or lower…The truth is, right now, seems like I see a lot of commentary that says, “Well, PE’s are higher now…but they are REASONABLE”, meaning, “Oh yeah, this stuff is UP there…but it’s safe to buy”, also meaning, “I’m was bearish but NOW I am bullish, and I don’t care what the PE’s are”. In short, all those statisicaly “reasons”, and talk of “fairly priced” or not, are (to me) just useless brokerage house mush.
Have I fabricated all this to suit my case? The truth is, I NEVER have a bias towards up or down in any market. I KNOW the market doesn’t give two hoots about what I think…it’s going to do what it’s going to do…and the best thing for me, always, is to do my best to try to understand what IS coming…and the only way to do so is to be as stringently objective as I ever can be…This definitely does not always lead to the right “guess” but it IS really the ONLY way that really makes sense.
If you agree with the idea of shorting the stock market, here are a few approaches one might take…
Buy a put option…
Or sell the futures contract…
That’s certainly enough for now, except to present a few headlines I’ve clipped recently to demonstrate, at least from what I see, how “happy” the majority of rhetoric and “logic” has become regarding the stock market…which, again, I will say is so dead opposite what it has been for seemingly ALL of the 9500 point rally we have had since March,2009. That’s NINE THOUSAND FIVE HUNDRED POINTS…
I THINK STOCKS ARE A SHORT. HERE. NOW. NOT LATER IN 2014.
The flip side of Selling Stocks is BUY TREASURY BONDS, which I will cover tomorrow…
Also yet to come are: Soybeans, Wheat, Cattle, Cocoa, Coffee, Gold, Crude Oil and the Dollar (hopefully within the next few days).
Give me a call if you have an interest…or even just to tell me you think I am wrong. I’d love any feedback I can get on this.