1. You, Your Investments & Isaac Newton’s 3rd Law

   by Michael Campbell

Issac Newton’s 3rd law states “For every action, there is an equal and opposite reaction”. We have seen this physical law govern the investing world when for example the dot-com bubble rose spectacularily in 4 years to its highs, then reversed and collapsed all the way back to its starting point three years later. Anticipating when a major trend is going to change is arguably the underlying factor determining profits and losses. Newtons 3rd law is also applicable to to society in general, and with the rise in societal extremism the only thing we can count on is that there will be an equal and opposite reaction. The question? How will that reaction manifest.  

…read more HERE

2. Todd Market Forecast: Two Indicators Mark a Trading Bottom

Five day RSI is again oversold and the VIX (volatility index) is above 15. Lately, both levels have marked a trading bottom.

….continue HERE

3. Running Out of Gold: Buyout Phase Imminent

Peak gold production may be at hand, says Tom Beck, founder of Portfolio Wealth Global, and explains why he believes the market has entered the buyout phase.

….read it all HERE

Mad Magazine introduced Alfred E. Neuman (What, Me Worry?) in the 1950s. He did NOT become a central banker. That is “fake news.”

Global central banks, including the Federal Reserve, created “What, Me Worry?” markets after the 2008 crash.  There has been little worry since the November election, until now. But the market worry level may have increased.  Changes between highs and lows in two days – until time of this writing:

Date                       Aug. 8                   Aug. 10

DOW                     22,179                  21,920

Gold                      1251.6                  1287.2

Consider the 50+ year chart of the Dow Jones Industrial Average.

Black line:  Nice move up.

Green Line:  Acceleration out of the nasty 2008 crash

Red line:  What, me worry? (Too far, too fast!)

In a world where markets are “managed” by “bots” or computer driven buy and sell programs, fundamentals hardly matter.  Human analysis is of little importance, and valuations are just numbers.  What matters is liquidity – flows of digital currency units into markets.

The central banks entered markets aggressively in 2008.  Stock markets also rose because of the Rise of the Machines – High Frequency Trading!

“Print” more dollars, euros, what-have-you, buy stocks and bonds to support the paper markets, and watch them fly to the moon.  What, me worry?  As long as the central banks print currencies, increase debt, levitate the markets and inspire confidence … the game continues.  But what happens when “the music stops?”  Russian sanctions and North Korean war tweets may puncture the confidence bubble.

We know about black swans, exponentially increasing debt, wars, weakening confidence in currencies, government decisions, leaders, the debt ceiling dance and so much more.

In the short term it is all about liquidity. Create enough liquidity and fundamentals and valuations become less important. But from a larger perspective valuation matters, overbought and oversold are important, and technical analysis is useful.

Where are the stock markets in early August 2017?

• Valuation: by any measure, P/E, P/Sales, P/GDP and more, valuations are high, so high that we should expect minimal returns for many years.  Read John Hussman, Ph.D.:
• Overbought and Oversold: The Dow has moved too far, too fast and is overbought.  More upside is always possible, but the next big move is more likely down. [Train wreck?]
• Technical Indicators: Consider the RSI (Relative Strength Index), MACD (moving average convergence divergence), and TDI – Trade Signal – another momentum indicator.
• Analysis: Use MONTHLY data so short term manipulations are less important.  Use the above three technical indicators and look at the “danger zones” from the past:  1987, 2000, 2007, 2015.

The S&P 5oo ratio has only been higher a few times in the entire history of the stock markets… during the dotocom bubble and just prior to the financial crisis. The bubble could continue inflating, but those were truly unprecendented moments in the markets. Setting those two bubble periods aside, stocks have not been this overvalued on a price-to-earnings ratio since 1895!

The Shiller PE ratio is the cyclically-adjusted price-to-earnings (CAPE) ratio of a stock market. This ratio is one of the standard metrics used to evaluate whether a market is overvalued, undervalued, or fairly-valued. As you can see below, the Shiller PE ratio is flashing overvalued and is currently as the same lofty reading as it was on Black Tuesday back in 1929. This was the worst day ever for stocks and effectively ended the Roaring ’20s and led the global economy into the Great Depression.

Danger Zone when:

RSI:  Greater than 75 (high and rolling over)

MACD:  High and rolling over

TDI:  High and rolling over

TDI:  P/E ratio over 20

Conclusion:  These conditions were met in 1987, 2000, 2007, and 2015 before the Dow took a nasty tumble. (Note: The RSI did not reach 75 before the 2000 crash.) Compare to 2017.

What, me worry?  No problem, this market can go up forever.  Dow 36,000 here we come.  Technical indicators, shooting wars, valuations, trade wars, political risk, debt ceilings and more – no problem!  The central banks of the world will protect the markets – that’s their job.  Maybe NOT!  DOW 36,000 may occur only after hyperinflation.

DOW CONCLUSIONS:

• The DOW has moved too far, too fast.
• It may move higher, but downside risk is considerable.
• Technical indicators parallel conditions prior to the 1987, 2000 and 2007 crashes.
• Depending upon central bank created liquidity to levitate markets is dangerous. What if the powers-that-be cash out early, crash the markets, blame a “scapegoat,” and then buy back at a 60% – 80% discount in two years?

GOLD MARKET:

What about the gold market and gold stocks?

Did the same technical indicators show LOWS in gold prices and the XAU at the bottom of those markets in late 2015 and early 2016?

YES!  Use the RSI, MACD, and TDI.  Wait until they reach extreme lows and turn upward.  That happened in gold and the XAU in 2000, 2008, and 2015.  [Note:  Indicator lows were not as extreme as readings at stock market highs.]

Gold prices and the XAU have been moving upward since their bottom in 2015.  Expect more rapid moves as digital fiat currencies, global bond markets, and stock markets correct toward realistic values.

Other Commentary:

From David Stockman:  “David Stockman Warns…”

“We are in the blow-off stage of the Fed’s third and greatest bubble of this century.  Yet the stock market has narrowed drastically during the last 30 months, as is typical of a speculative mania.”

“The combined $15 trillion of central bank balance sheet expansion since 2007 amounts to a monetary fraud of epic proportions. This massive injection of fiat credit has drastically falsified prices in the debt and money markets, … the prices of equities and all other risk assets have been falsified too.”

[Repeat:  monetary fraud and equity prices falsified.]

From Mish regarding central banks: “Debunking MMT, Keynesianism, Monetarism” [He provides a breath of fresh air and plain speaking about economics.]

“It’s no mystery why central bankers are mystified:  Collectively, they are economically illiterate fools engaged in Keynesian and Monetarist group think.”  [Highly intelligent Ph.D.’s can believe and say foolish things…]

“MMT, Keynesian, and Monetarism all suffer from the same basic flaw:  They promise something for nothing…”  [How well has something for nothing worked throughout history and in your own personal experience?]

“Any economic theory that proposes paying people to do nothing, debt is not a problem because we owe it to ourselves, and/or there is some sort of overall economic benefit to rising prices is charlatan economics.”

“It takes years of training to get someone to believe total economic nonsense, and that is precisely what academia provides.”  [Note: high salaries, prestige, book deals, status, and speaking fees also help economists believe total economic nonsense.  Regardless, it remains nonsense!]

From Zero Hedge:  McMaster:  U.S. Preparing for “Preventive War” with North Korea.

From Zero Hedge: Under Any Analysis, It’s Insanity [North Korea]

From Jeff Thomas:  “The Madhouse”

From Bloomberg News:  “China Bets Trump Won’t Resort to Strike Against North Korea”

From F. William Engdahl:  “US Sanctions … Decline of the US as a Global Power”  

What, me worry?

SUMMARY:   

• The DOW and most stocks are too high.
• Economic nonsense remains nonsense regardless of academic degrees, high IQ’s, and official governmental support.
• Gold and the XAU have considerable room to move higher. Expect huge rallies.  Gold will be “the last man standing.”
• Asian central banks, individuals and businesses understand and value gold. We should also!
• Gold and silver have been valuable and a store of value for several thousand years. They will remain valuable, regardless of disparaging comments from central bankers and politicians in the west.

FS Insider recently spoke with John Derrick, CFA, President of the Derrick Letter, regarding his outlook on the dollar, the US stock market, and more. Derrick believes there is a good case to be made that we are nearing the end of the dollar’s decline and that the risks of a near-term correction in the US stock market have increased (see Derrick: Retail Investors Buying As Institutions Trim Back for audio).

Dollar Weakness Set to Reverse The dollar has traded lower over the course of this year, and it’s now approaching an extreme, Derrick noted.

Right after the election, there was a great deal of enthusiasm for President Trump’s agenda. With the expectation of greater economic growth and fiscal stimulus, the dollar rallied strongly as investors anticipated a shift towards tighter Fed policy in response.

However, for most of 2017, investors have lowered their expectations both on Trump and on the Fed’s response, leading the dollar to reverse all of its initial post-Trump gains…and then some.

As of now, we’re down nearly two standard deviations from the high and right at a key support zone, Derrick told listeners.

“That dollar trade is likely to reverse,” he said, also pointing to positioning in the futures market, which, as you can see below, shows speculators are no longer excessively long and back to a slight net bearish position.

Near-Term Risk of a Correction in Stocks

It’s been over a year since we’ve had even a 5 percent correction, Derrick noted. This is the longest streak of low volatility since 1996.

Though we’ve had a strong earnings season, the market is basically in the same place it was 2 months ago. We’re starting to see churn, and the market is starting to struggle a little bit.

“My thinking is that the trade—particularly in the same technology names—is getting tired,” Derrick said. “We’re getting to the point where seasonals are working against us now, and equities are expensive.”

Derrick sees the opportunity to rebalance portfolios and take gains from stocks that have done well, such as the FANGs, and possibly reposition into defensive plays, such as healthcare, utilities, telecoms and consumer staples.

“The key message is, it’s not the time to take that incremental risk and grab for something else,” he said. “It’s time to take risk off the table.”

Long-Term Outlook Looks Clear

While Derrick sees a correction of possibly 5 or 10 percent in the near-term, the picture is different further out.

It’s important to keep in mind that leading economic indicators are still growing.

“From an economic perspective, that basically signals the economic all-clear for at least the next 12 months,” Derrick said. “With the Conference Board’s LEI making new highs, I think it’s really dangerous to get too bearish and too cautious.”

The global economy is on a good path, Europe continues to show strength, and China has stabilized, he added.

Risks are higher than average over the next 1-3 months, Derrick said, but we’ll want to see more deterioration in longer-term indicators before calling for a top in the market.

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