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Markets Become Scary: Crash Point Or Turning Point?

Secular Investor's picture




 

We cannot remember having seen so many markets at critical points simultaneously. It is truly astonishing. Scary movie or turning points? We do not know for sure, but let's review the strategic assets in order to get an understanding of the likely scenarios going forward.

First and foremost, the TED spread is about to cross a critical resistance level. We look at the TED spread as a fear indicator, a signal that a correction is coming. The steady rise of the TED spread since last summer is not a healthy signal. The trillion dollar question is how far it will go, and which markets it will hit.

TED_Spread_2008_June_2015-590

If anything, the stock market seems to be the best candidate for a severe correction. Purely from a trend perspective (without engaging in technical analysis), it seems that the broad markets have lost momentum, as evidenced by the S&P500 momentum (RSI) versus price divergence. For now, it seems that the path of least resistance will be lower.

s&p500_Monthly_2009_June_2015-590

There is more, much more in fact. The dollar is standing at a critical juncture which has been built since three decades. Again, we do not engage in technical analysis, but focus only on secular chart patterns. Those patterns reveal that the dollar is sitting right at a giga-trendline. If the dollar were to trend higher in the coming weeks and months, we would interepret it as strongly deflationary. On the other hand, we see a false breakout in the chart, indicated with the red circle, which could mean that the secular downward trend is still intact. One thing is clear: the dollar is at a gigantic make or break level.

dollar_30_Year_June_2015-590

Meantime, several key commodities have arrived at another structural decision point, particularly Dr. copper, gold and silver.

Dr. Copper, the indicator of the health of the global economy, is going to tell us shortly what to think of the state of the economy. As the next chart shows, we are right at the apex of a mega trend (triangle); its formation is 14 years in the making.

 

copper_2001_June_2015-590

Gold, the monetary commodity, has also arrived at a critical point. Although the triangle on its chart goes back to 2008, slightly less impressive than copper, it also tells us it is make or break time.

gold_daily_2007_June_2015-590

Unsurprisingly, silver has reached the last retracement level of it's secular uptrend which started in 2004. It goes without saying that this is a critical oint.

silver_2001_June_2015-590

Last but not least, the U.S. bond to stocks ratio is arriving at a decision level as well, although there is still some room within the ongoing pattern. A break outside this pattern could signal a similar situation as in 2008: stocks are about to undergo a (severe?) correction, while bonds would appreciate. The issue here is that there is not much room left for bonds to rise, given the multi-decade low yields. Let's be clear: we will have one of the following three scenarios: either a crash in the bond market, or lower yields than we have today (in other words, negative yields across the board), or a severe correction in stocks.

bonds_to_stocks_2001_June_2015-590

It is truly exceptional to see so many strategic assets at critical junctures, simultaneously. It seems that a stock market correction is becoming clearer with the day. On the other hand, the commodities we discussed could go both directions: up or down. A declining stock market seems is likely to lead copper lower. Could gold and silver react as a safe haven, given the ultra low yields in bonds? Or will investors chose for bonds, driving yields even lower, and making the world we live in even more crazy than it is today?

From our point of view, in a world flooded by paper assets, it seems obvious that tangible assets should be watched closely. In case of a deflationary bust, real assets will preserve relatively more value than other assets, even as their prices decline because prices of paper assets will decline faster. In case our monetary masters will intervene with more stimulus programs, in their attempt to create inflation, we should see tangible assets rise as well. So in our view, commodities should be part of a diversified portfolio.

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Mon, 07/06/2015 - 07:48 | 6275686 lucky and good
lucky and good's picture

The idea the economy will simply be able to adjust and grow its way out of our current funk and muddle along is based on a view of history that often overlooks the many who have "lost it all" in prior periods of economic chaos. A strategy of waiting until just after the last minute to withdraw their funds before joining those already busy hoarding fuel and food is not a great strategy

Our economic future is based on the momentum model of economic growth and rests on the idea we will experience a trend of ever growing year over year increased production. The problem we face is much of this recovery has been constructed on the unstable base of false demand. The easy money policies and artificially low interest rates of the last seven years has simply moved demand forward and created a slew of economic activity that is unsustainable. The article below explores the possibility of a hard landing.

http://brucewilds.blogspot.com/2015/07/hard-landing-scenario-is-not-out-of.html

Sun, 07/05/2015 - 17:42 | 6273817 matagorda
matagorda's picture

There is exectly the same price appreciation in a bond when yields go from 1% to 0.1% as there is when they drop from 10% to 1%.  No big deal.  Look at Japan -- there is no necessary end to an asymtotic death spiral.

Sun, 07/05/2015 - 17:30 | 6273742 razorthin
razorthin's picture

Equity and bond (bullshit) megaphones and commodity (real value) bull flags are what I see.  We'll see.

Sun, 07/05/2015 - 17:23 | 6273718 ramgold2206
ramgold2206's picture

save a few of the remaining soles.. get them into gold

 

www.teamramgold.com

Sun, 07/05/2015 - 22:43 | 6274918 OldPhart
OldPhart's picture

I don't need gold shoes.

Mon, 07/06/2015 - 00:45 | 6275167 jeff montanye
jeff montanye's picture

one doesn't need gold shoes.

but sometimes one wants them:

http://www.aliexpress.com/item/20CM-2015-Women-s-high-heeled-shoes-thin-...

Sun, 07/05/2015 - 17:00 | 6273597 Dragon HAwk
Dragon HAwk's picture

Everything in Finance takes so damn Long to Happen.. it's like watching paint dry or Plutonium decay.

Sun, 07/05/2015 - 19:34 | 6274288 hendrik1730
hendrik1730's picture

Yes, until the critical mass is reached, then it takes milliseconds before the big bang.

Sun, 07/05/2015 - 15:49 | 6273287 KnuckleDragger-X
KnuckleDragger-X's picture

The markets will be fighting panic on several fronts and by Wednesday we should have an idea on what Greece and/or the EU will do. By Friday thins will be semi-stable or starting a death spiral, so place your bets......

Sun, 07/05/2015 - 15:56 | 6273308 erikaappleihzyjtyeg
erikaappleihzyjtyeg's picture

Can't we just get along?

Sun, 07/05/2015 - 18:59 | 6274157 f16hoser
f16hoser's picture

No.

Sun, 07/05/2015 - 20:14 | 6274426 bonin006
bonin006's picture

As Jack Nicholson found out in a most unpleasant manner:

https://www.youtube.com/watch?v=MPMmC0UAnj0

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