weekly market report 6/20: US stocks are beyond the risk levels of January 2020 & mid-2007

I will focus this week mainly on a longer-term analysis of US stocks (including some charts showing a widely-available “leading indicator”). First, as you may recall, lately I have frequently referenced that I expect two markets to peak and fall along with US stocks: the EUR:USD forex rate and crude oil.

So, starting with that forex market, let’s review my comment from June 1st and what has happened since then. The vertical blue highlight marks June 1st.

That market so far is “leading the way to the downside” among stocks, oil, and that one. While there is huge potential for a sharp and lasting decline, there is also still a slight potential for a new high first.
The drop so far has only been “modest.” But there is a very long way down for currency traders to take that forex rate… and they may go there quickly.

(To confirm my reference to 1.13 on 6/1, my current clients as of then can find it in the email I sent them that day. Otherwise click here:
https://jrfibonacci.wordpress.com/2020/06/08/weekly-market-report-6-1-last-week-markets-were-rather-flat/  )

In the last 2 weeks, Oil has been much more resilient. However, the new high on Friday was only a few cents above the 6/8 peak and was followed by a notably sharp drop. I’m still expecting a lasting and significant multi-week dip, although the data I have seen on oil is not as extreme as for US stocks or for the EUR:USD rate.


I won’t get in to any complex analysis of trendlines this week for US stocks (or anything else), but there is actually a lot of remarkable patterns that I will just reference vaguely and then move on. Briefly, there is a tremendous potential for a sharp and lasting decline. I say that with ZERO reliance on “chart pattern analysis,” though the chart patterns are strongly supportive of that analysis.

(Basically, I consider “chart analysis” to be much less reliable / valuable than the main data I use. I do use trendline analysis to time my entry and exit from positions in the short-term, but not as a primary factor in my long-term forecasts… which inform which positions I take or avoid).

I’m almost ready to comment on some much longer-term analysis. Briefly, as for gold and US bonds, there is room for both of them to make new highs. While I remain “long-term bearish” in those markets, the elevated probability of an immediate and sharp decline in global stock prices could also briefly “bump up” prices for gold and US bonds.

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Next, I mostly just report very simple patterns in these reports plus give my forecasts (typically without much data to support them). Today, I will provide one dataset (out of MANY) that correlates to an elevated risk of a rapid decline in stock prices.

Here it is. The top chart in red is a type of “oscillator” (like a pendulum). This shows nearly 20 years of data.

For times when the oscillator was indicating elevated potential for a long and lasting rise in stock prices, I marked some of those times with a green b (for BUY) across the middle of the image. Across the top I marked an orange S at times signaling elevated risk of a long and lasting decline.

The primary reason I am showing this data this week is marked by that extra large S in the top right. In recent weeks, this very reliable leading indicator for a mid-term decline is at an ALL-TIME EXTREME (suggesting that the worst time in modern history to own or buy US stocks is here now). In other words, it is a great time to hold or buy things like VXZ, UVXY, TVIX, and SQQQ.

Note that the lower portion of the image shows the “weekly rate of change” in the US stock market (S&P 500) as well as actual prices of the S&P 500 across the last 2 decades. Next, let’s analyse together what has happened after the marked times for “buying” and “selling.”

So, I added the thin vertical orange lines for every one of the Ss across the top. That way, you can easily see what happened right after those “sell signals.” I also added some diagonal orange lines across the bottom to show the magnitude of the drops after the various sell signals.

There were dips right after those “sell signals” quite consistently. However, the magnitude and duration of the dip did NOT highly correlate across these 20 years to the specific level of “excess” measured in the top chart.

Keep in mind though that not only did I accurately publish forecasts prior to 2007 that a massive decline was imminent, but I also said in January of 2020 that the imminent decline would be bigger than the one that I also repeatedly forecast in late 2018. (Note that the one in late 2018 was not even “strongly signaled” by this chart.)

My point is that this is one of many indicators. This indicator is great for mid-term probabilities. However, the of using just one or just two indicators is “foreign to me.”

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My primary goal is to anticipate “the really big reversals” with the most precision… even if I am sometimes “way ahead” (which is rather important for illiquid markets like real estate). The smaller the expected duration and magnitude of a reversal (according to my analysis), then the less interested I am in trading it (or forecasting it).

The top chart above does “present a clear sell signal” prior to the “big reversals” of the last 19 years (although not for the peak in March of 2000). It is a very valuable indicator of risk and opportunity. However, it is one among many.

Again, in recent weeks it has reached unprecedented historic extremes (as have several other indicators). While it is certainly possible that I am wrong, my current analysis is that the most “epic” decline in the modern history of stock markets (in the US and worldwide) is “right in front of us.”

There has been soaring enthusiasm, especially in the US, based on the partial recovery in stock prices after the the huge decline early this year. The enthusiasm is remarkable because it has become even more extreme than in January… even though the “breadth” of the recent rally has been “incredibly thin” (as in just a handful of very large companies making new highs in recent weeks).

There has been an unprecedented global decline in economic and financial conditions. Speculators in US stocks are almost entirely dismissive of such issues. Many are arguing over masks and riots and whatever else.

To me, this is not “the new normal.” This is abnormal… from the politics to the intercontinental economic destabilizations and the huge price swings in crude oil. As a reminder, European stock markets are still FAR below their highs from 2 decades ago. China’s stock markets are still FAR below the high of last decade. Japan’s stock prices are FAR below the highs of 1989.

There has been wave after wave of warning… but spread out over decades. The typical “mainstream investor” is so comfortable with their presumptions that they do not research the kind of leading indicators that I reference in these reports. That… is a very good thing for those of us who do recognize the value of “due diligence.”

So, let’s imagine that we are interested in identifying time periods that are “unusually favorable” for buying or holding stocks. Could the same data set be useful for that? Let’s examine it briefly.

There are 6 marks of a green b across the middle of the image. I added thin vertical green lines to mark those times.

Of the 6 “buy signals,” 3 of them preceded very large and lengthy rallies. Those 3 are marked with long diagonal lines across the bottom. The gold vertical lines mark the “sell signals” that eventually followed those green” buy signals.”

Also the two green Xs mark “buy signals” that were not so valuable. If we looked at a 20 month chart instead of a 20 year chart, we might find that there was actually some very short-term accuracy to those “buy signals.” For the moment, I don’t care.

I do know that it was not until early March of 2009 that I published my alert that “a significant rally is now imminent.” It manifested within a few days.

So, while I completely reject the idea that “using just this single signal” (the one in the top part of the image above) would be wise, it would also be unwise to ignore it. Is that extremely clear to you?

Moving on, to the far right, a recent “buy signal” preceded the very rapid increase in recent weeks… although again we have already reached a “sell signal” in this indicator. As anyone who has been reading my recent weekly reports would know, I have been rather conservative about “buying” this rally in stocks… for over a month at least.

Here is a quick quote from my May 17 report:

So, US stocks MIGHT have peaked in recent weeks… but the move down so far is not “strong” enough (or “broad enough”) to expect an immediate collapse….

What happened before and after that May 17 comment?

Months and years from now, I am confident that we could look back and find that most of the opportunity in the rally was already passed as of May 17. There has of course been a “second wave / second leg” – although it has been brief and has had just under half of the profitability of the first portion. The recent rise was also formed by a much smaller number of companies actually gaining in price (that data is not shown here but is easy enough to find). In fact, the Nasdaq 100 made highs much further in to mid-June than the broader US stock market.

What else is clear from the above chart about the size of the decline in recent weeks relative to declines in recent months? The recent decline was bigger and longer than anything in the last few months.

Again, what has manifested fits very well with what I would consider predictable. Plus, the historic extremes in enthusiasm in June so far are also consistent with the idea that a VERY long-term high in US stocks already happened earlier this year.

In other words, the more extreme that enthusiasm gets, that means to me the greater the risk of decline and smaller the potential for continuing gains. Plus, when there are several all-time extremes in data that measures enthusiasm AND there are historically unprecedented DECLINES in economic stability (which continue in the US and much of the world), that is a “perfect recipe” for a long-term reversal downward.

What kind of data show economic instability? Delinquencies on commercial real estate loans (and on residential as well). Soaring numbers of permanent closures of restaurants and travel-related businesses. Retail chains closing stores or filing bankruptcy (such as JC Penney). Total purchases of new autos.

While autos are trivia to me, think in terms of excess inventory. The excess vehicles that have not been sold in 2020 are still available for purchase. So, manufacturing will be reduced until that excess inventory gets bought.

But will auto buyers ever catch up? Early this year, sales fell by about 14 million autos (with a typical monthly volume of about 17 million prior to that).

Note that June is in purple because it is only the 20th today. So, with about 2/3 of the month complete, the total this month is on pace to reach back up to at least 17 million.

But there are major problems within the US auto industry. In the chart below, see that the peak in auto sales in the US was in 2017. The decline since then has mostly been modest (until early this year).

However, many of those companies are very deeply in debt. So, if credit markets worldwide destabilize as I expect, then many of those companies will greatly shrink or face bankruptcy or both. Those problems with excess debt would be predictable EVEN IF DEMAND for new cars was stable. But I also expect that to decline.


If demand for new cars in the US continues the decline that started in 2017 and accelerates back toward the 2009 lows (and perhaps beyond), then what will that mean for automakers? Downsizing?

Maybe it will just be that. However, what if most of those companies are financially much less stable than they were in 2007 when the prior decline started? What if the data on that topic is very easy to find and rather simple to interpret? But what if most mainstream investors are just “letting a chunk of their money from each paycheck go in to their managed IRA or 401K?”

Most people have no idea about the financial stability of most US companies because most people choose not to explore that data. They do not know the trends of most industries or most companies. They do not care about that.

What do I say about their lack of concern (their complacent, confident, apathy)? I will repeat what I said already:

That… is a very good thing for those of us who do recognize the value of “due diligence.”

 

 

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