weekly market report 6/15: US stocks finally turn down sharply

Once again, I will begin with a brief quote from my report on June 5th:

As for “US stocks and then global oil prices, I have been focusing on the waning momentum in both of those markets across recent weeks. While I stated last week that there was plenty of potential for a continuing “drift upward,” I still expect that to resolve downward (if not next week, then soon after).”

So, oil fell by about 10% across the week, driving up SCO by about 15%.

 

Even more publicity was on the fact that US stocks fell 7% in a single day. That selling activity drove up TVIX by 75% in a single day:

No photo description available.

 

Next, I want to emphasize a few alerts that I posted on Facebook just prior to the big decline in stocks:

This was on June 9th:

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My notes on that chart emphasize the past, although it is also obvious that at the top right, the latest data was even more extreme than early this year. So, my commentary began with this rather dry statement:

I expect stock prices in the US (and elsewhere) to be lower next week than this week….

link: https://www.facebook.com/jrfibonacci/posts/3926066450796845

Later that day I posted these stronger words plus the image below.

I mentioned “unprecedented levels of elevated risk for a large and lasting decline in stock prices in the US. The risk is currently far greater than in early 2020 when I posted several warnings prior to the historic decline in stock prices in the US and elsewhere.”

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link:

Early last week, I was discussing the developments of that day with my newest investing client. Here is the first chart I sent him (on June 8). I was monitoring whether or not oil prices (the 3rd one down) would maintain symmetry with various global stock markets. Oil did not (which is not shown in this chart). It “led the way down” (considering that stocks followed it down within 2 days).

image.png

On June 10th, I was then tracking the symmetry of many stock markets as well as the exception at the time: the US Nasdaq. The new client and I discussed many details about Nasdaq (because he asked me) and the below chart is what I posted on facebook. Note the final 3 words “decline is ripe.”

No photo description available.

link: https://www.facebook.com/photo.php?fbid=3929329373803886&set=a.122407304496131&type=3

 

Next, let’s look at a longer-term chart of US stock prices (6 months).

The point of showing this is to emphasize that the decline across last week was the biggest and longest decline in months. Also, we can see that an instrument called VXZ surged up in value. VXZ is “a much more stable version” of UVXY and TVIX. (TVIX went up 2000% on the same move that drove VXZ up by only a bit over 100%).

VXZ obviously has manifested far more opportunity than just investing in stocks (with only modest mid-term risk… compared to the massive mid-term risks of most US stocks as well as something like UVXY… if not very carefully timed).

So, for some investors, the much smaller downside risks of VXZ (relative to TVIX or UVXY) could be appealing. For anyone who has asked me, I have mentioned my strategy of rotating toward TVIX and UVXY as an unstable stock market BEGINS to accelerate downward, but then rotating away from those toward the much safer VXZ throughout periods in which the immediate risk (as in across a few hours or overnight etc) is too high for me to want to hold TVIX through that time.

As of this moment (11:15 eastern time June 15), I closed all the positions in UVXY and TVIX earlier this morning and have “stayed out.” But oil prices just reached a target level that greatly increases the probability of an immediate sell-off, and such things often “spill over” in to other markets like stocks.

Speaking of oil, next, let’s also look at a longer-term chart of oil along with SCO (an investment that I use to profit from falling oil prices).

Generally speaking, the 10% decline of oil prices last week (in white) does not look especially notable in the context of the above chart. However, note that SCO went up by over a hundred percent TWICE early this year. My expectation is that the 15% rise last week is going to continue at least in to July… but I currently do NOT expect for SCO to repeat the massive gains it did by April.

A better way to trade oil markets at this time would either be to use an account with access to futures and futures options… or to buy “put options” on USO. But for people with larger account balances, some exposure to SCO will also be reasonable.

Well, that is a lot of attention to stocks and oil so far in this update. I do not have much to say about gold except that the potential for a decline is still historic in that market. But the price moves of last week were not very notable.

As for the EUR-USD forex market, I repeatedly referenced lately that the more that prices rose toward or beyond 1.13, the more interested I would be in positioning for a decline.

Several markets recently peaked. The US NASDAQ stock market peaked on the same day as the EUR-USD rate. Oil’s peak was days prior to that. I expect all of those to hold for quite a while… perhaps for a very very long time.

The last market I will mention is the US bond market. Usually I only refer to 30-year US treasury bonds, but today I will show multi-month charts of some shorter-term bonds as well (because there is some interesting divergence between them).


Briefly, I have been expecting bond markets to weaken across the next several months and that remains my bias. The top chart (of 2-year treasuries) made a high a few months ago and just barely reached the same level. I am watching for that market to reverse downward hard, potentially making yet another market with a big long-term reversal here in the first half of June.

I generally do not trade 2-year notes much, but 5-year notes also had been rather strong in recent months and 5-year notes will be quite attractive to me (such as selling them “short”) if US bond markets in general decline.

However, partly because I also expect a big potential for decline in global stock prices, I also have some concern that US bond markets will strengthen further in the short run. My bias for them to decline soon is a bias (a matter of probability, not of certainty).

So, if US bond markets rise further, then the “laggards” that have been weaker (specifically, the 30-year and 10-year treasuries) will be my focus for possible trading. The ultimate point here is that in the very short-term term, I remain neutral toward bond prices. Plus, if bond prices do rise, that will probably be while stocks plunge (and I will be much more interested in trading a decline in stocks than in trading what I expect will be an “exhaustion rally” in bonds). By “exhaustion rally,” I mean a rally that has limited upside potential and severe downside potential.

General longer-term comments:

There are similarities between all markets. Investors in general are rather predictable. During “generally favorable economic periods,” such as we have been experiencing, investors tend to reach extremes of presumptiveness (and thus of reactivity). When their presumptions are revealed as flimsy or false, then they tend to react suddenly “as a herd.”

Lots of investors get more excited after prices have been rising for a while (wanting to buy more and more and more). That is the opposite of the most prudent approach.

The “smart money” seeks to sell at higher prices than the buying price, which is not unusual of course, but the method used is very distinct from “presume and react.” The smart money analyzes markets to find opportunities that the masses of investors are discounting (putting on sale / selling for cheap). Rather than being attracted by soaring prices and headlines, they are attracted by “boring prices” (markets that have been flat for quite a while) as well as “plunging prices.”

They respect the profit potentials in many markets, then compare expected risks and expected rewards. They are absolutely certain that they will not always be right across relatively short time periods.

The smart money measures and monitors. Of course they also presume, but they are clear what their presumptions are (while the masses tend to think of their presumptions as reality, not as just presumptions). The smart money monitor reality to update (or even discard) their presumptions, then to respond to market activity EITHER conforming to their expectations or “dispelling” their expectations.

While the smart money is measuring and monitoring (and re-positioning across time), the masses of investors are pouring all over each other to get a seat at the poker table of investment markets. The masses expect that everyone’s wealth will rise together at this poker table. But every dollar of profit comes from someone else’s gamble.

The smart money know that they are gambling… and they attempt to do it very well. The masses do not usually refer to their real estate purchases and stock purchases as speculation or gambling, right? So, when reality confronts the masses with the presumptiveness of their past presumptions, they tend to panic.

Some freeze and return to their mantra of “my losses must reverse because I am a long-term buy and hold investor and losses always reverse.” In contrast, when markets change, then the smart money changes their positions.

Generally speaking, markets are a system for long-term redistributions of wealth from the imprudent to the prudent. Naturally, for such systems to produce very sudden transfers of wealth, that would involve the masses acting on presumptions that have been consistent with markets not just for weeks or years, but decades. But by relating to the last few decades as “what must continue in to the future for months and decades,” the masses do not monitor the changing reality. They have no clarity regarding the gambles that they have been lured in to taking.

They may borrow $300,000 to invest in a market with unprecedented instability (risk), then act as if some politicians owe it to them to make their gamble “pay off.” The politicians do not owe the national debt that they create. The population does.

Further, the politicians do not owe the mortgage debt that real estate speculators enter. The speculators do.

In contrast, when an investor gives money to an insurance company to buy an annuity, then the insurance company DOES owe the investor what is promised in the contract. But with “too good to be true” insurance annuities, the probability (or inevitability) is that insurance companies will bankrupt themselves with their enthusiastic promises and then be unable to pay what they legally do owe to their investors.

So, it is not especially important to understand the psychology and biases of mainstream investors. It is not even especially important to understand the details of why or how “smart money” investors tend to do so much better “in the long run.”

Over time, I continue measuring risks and opportunities, then re-positioning in accord with my analysis. There is always uncertainty, especially in short periods of time.

But, to present an analogy, consider any team sport that you are familiar with. Then think of one of most dominant current teams in that sport plus one of the least successful.

Can you easily predict who would win a match between the two? Knowing that you MIGHT be wrong, you could probably predict the winner.

However, to predict exactly what will happen in any particular minute of the match would be “unimportant,” right? When you KNOW that one team is OVERWHELMINGLY LIKELY to eventually be more successful than the other, then you don’t care much about a short series of events in a game (as long as it is not something like multiple key players being seriously injured).

I will make a football analogy. Do I freak out if the “dominant team” fails to score on a certain drive and ends up punting? Not at all.

Because of the confidence in the overall process or outcome, most “dominant teams” will be conservative about punting. Could they also risk “going for a 4th down on their own 35 yard line?” Yes, and they probably would still win the game. But they generally “don’t even bother” with high-risk plays.

So, investment markets are NOT like two dominant teams playing (such as Alabama vs Clemson). It is like Alabama playing a team that you have literally never even heard of, like Southwest Mississippi Tech. (It is “smart money” investors vs “not smart money” investors).

So, if Alabama falls behind 3-0 in the first 3 minutes, that would not worry me (if I was betting money on Alabama to win the game). It is like the Harlem Globetrotters (of basketball) falling behind 2-0 at the beginning of a basketball game against a team of middle-school all-stars. It is insignificant (in terms of a longer-term forecast of who will win the game).

Likewise, when the masses do well briefly (as in for  a few decades), does the smart money get worried? On the contrary, the smart money “starts to salivate.”

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