Are Stock Markets Setting Up For A New 'Black Monday'?

Secular Investor's picture

black_monday

The major U.S. stock market indices finally corrected after a 9-month sideways trend. The 'big' news this week for stocks was undoubtedly that the four indices all closed below their 200-day moving average, which IS an important breakdown.

The key observation on the chart below, is the violation of the steep uptrend (highlighted with the rising green dotted line), which started with the announcement of the 'QE infinity' program in the autumn of 2012. We have marked the violation of the uptrend with a red circle. Make no mistake, this is a major event, with potentially a big impact!

s&p500_1999_August_2015_599

Even more so, when we consider recent market conditions and the fierce pullback, things are setting up a lot like the week before the horrific 'Black Monday' in 1987, when the Dow Jones Industrial took a punch of -22%! Check this, from Wikipedia:

On October 14, the DJIA dropped 95.46 points (3.8%) (a then record) to 2,412.70, and fell another 58 points (2.4%) the next day, down over 12% from the August 25 all-time high.

 

On Thursday, October 15, 1987, Iran hit the American-owned supertanker, the Sungari, with a Silkworm missile off Kuwait's main Mina Al Ahmadi oil port. The next morning, Iran hit another ship, the U.S. flagged MV Sea Isle City, with another Silkworm missile.

 

On Friday, October 16, when all the markets in London were unexpectedly closed due to the Great Storm of 1987, the DJIA fell 108.35 points (4.6%) to close at 2,246.74 on record volume. Then-Treasury Secretary James Baker stated concerns about the falling prices.

A >20% correction would bring us to 1.580 points on the S&P 500, the previous break-out level! Coincidence? We don't think so...

One thing is clear: the central bank driven QE program had a one-to-one correlation with the stock market. With a supposed 'recovery of the economy' it will be interesting to see how deep this correction will go, and how the monetary masters of the central banks will handle the correction. Is QE4 around the corner? Are we about to experience a Japan-style monetary stimulus leading the debt to GDP ratio to stratospheric levels? The chart suggests caution. Note that the MACD indicator fired a sell signal shortly after the 'QE infinity' program was ended. That was clearly a reliable early warning sign.

The precious metals market, however, is getting very interesting. Gold filled the gap after breaking down below $1,135 in July. This is a strong performance and important for chart analysis.

But didn't most financial insitutions, investment banks, market experts, and other pundits, predict that gold would fall below $1,000 /oz? What about their forecasts?

Those forecasts were meaningless. Consider HSBC, who revised their gold price forecast upward this week, saying gold will be up 10% by the end of this year, worth around $1,225 an ounce.

Only three weeks ago, the same HSBC revised the gold price forecast downwards. On July 27th, the bank said that gold would average $1,160 per ounce in 2015 from $1,234 previously.

How meaningful are those forecasts?

From our perspective, the secular bull market in gold is resuming. We believe there is a fair chance that the trend change occurred two weeks ago, when China 'de-pegged' its currency from the U.S. dollar. Think about it, the second largest global economy said 'goodbye' to the dollar reserve currency. With their massive gold accumulation in recent years, China is more than ever relying on its 'real' monetary reserve, i.e. GOLD.

What happened with the Chinese currency is the opposite of what happened in September 2011. Uncoincidentally, the Swiss National Bank pegged its currency (the Swiss Franc) to the Euro exactly the same month the gold price peaked. The Swiss Franc, being a safe haven currency, was rising too rapidly ... until the monetary planners of this world decided to break that trend. Gold stopped rising in the same month. We believe China did the opposite and instigated the rise in gold prices two weeks ago.

chf_peg_euro_september_2011

Based on the latest COT data from Friday 21st, it seems that gold's recent rally is only a warm-up. The key indicator in the COT is the net short position of commercial traders, and its rate of change. The good news for gold bulls is that the net short position of those commercial traders is at all-time lows, even after the rally of this month. That means, in our view, the rally has considerable upside potential. With stocks correcting, and stock market optimism index at all-time lows, we believe the potential money inflows into the gold market are significant enough to launch gold prices much higher!

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JailBanksters's picture

I'm sure this is the usual suspects on Wall St, telling the FED, No you don't, you're not raising rates.

NOW let is us Cheat, or we'll crash the whole frickin' system

Painful Facts's picture

If and when Wall st collapses again I think it won't be as bad because most people don't invest anymore after 2008. They lost a generation of investors due to massive fraud. Similar to how a lot of new young voters voted for Obama but is betrayal was unprecedented in modern politics so they lost a generation of voters.

lucky and good's picture

Most investors think that even if things go downhill fast that they will be smart enough to get out of the markets. After the debacle in 2008 where they saw the market do nasty and violent swings they learned a few things, this time they figure they will make the right moves before it is to late. But what if it hits like the flash crash on steroids?

 For a long time I have been trying to develop a scenario for a market "super crash" and a reasonable map that would arrive at such a situation. Below you will find more on why this scenario could happen. We know that can't happen because circuit breakers have been put in place to arrest panic style moves, but imagine a market that falls, trade is halted, and the market simply does not reopen for days, or even weeks.

http://brucewilds.blogspot.com/2013/01/flash-crash-on-steroids.html

Comte d'herblay's picture

Not being massively short, beginning June 1, 2015, my tendency to make predictions as so many are wont to do, is in the <OFF> position.

A purchase of the VIX, by Comte, will cause an immediate rise in the averages, in the multi hundreds ranges, and the VIX will be at 12 again within a few weeks. 

Watch...here goes.  10 VIX options long, at the market, at the opening. 

foxmuldar's picture

I bet those weekend stock gurus on the morning financial programs were calling the current drop nothing more then a correction. I remember about a month ago when one caller said he had $75,000 to invest and asked about dollar cost averaging. Well the guru said put it all in now. Well if that guy took his advice he's probably down $10,000 or more. Have you ever heard any of those radio talk show financial planners telling the callers to take their money out or to hold back from putting more in?  Never. Best is how they change their tune a week after a collapse in the markets. Oh well we had a great run up so don't worry, maybe in another five years the market will be back to 18000. LOL on that one.

Jungle Jim's picture

And I look and see that gold is ... down, *way* down, from just a couple of hours ago. They aren't kidding, are they? They don't waste any time, do they?

Po Rich's picture

With unlimited digi-cash at their disposal I sometimes wonder if the endgame of all manipulations is not

simply to make more, but to take what everyone else has.....just to be mean I suppose!!!

Paracelsus's picture

I remember when Sandy hit NYC and some Gold dealer declared Force Majure to avoid delivery.Reminds me of the "Dog ate my homework" philosophy of business.The way the shiny stuff has been tearing out of the Shanghai Exchange reminds me of a Bullet train.This week could be very interesting.....

Mr. Ed's picture

What's a person (or a horse) gotta do these days to get a blow-up of a chart ??

I click on the S&P chart above to get a more granular view and a commercial come-on for gold appears instead.  Few blow-ups available in other articles too lately...hey Tylers, some of us would like to see a little detail please!

PS: and there have been some posts recently where the charts don't even remotely support the assertions in the accompanying text...but NO blow-up appears when you click on the chart, so you get eyestrain confirming that the charts DON"T confirm the thesis of the post!

Painful Facts's picture

we need a new program called troll block that makes obvious paid trolls posts invisible.

daedon's picture

Zerohedge ... the web site that cried wolf ... over and over and over again.

Hamsterfist's picture

Eventually the boy was eaten by the wolf, who DID show up.  Only, this isn't a good example anyways.  In our reality the wolf is showing up, everyone is just ignoring the sheep getting eaten.  Eventually, when all the sheep are gone, reality will have to be faced.  To keep with your Aesop's Fable analogy, I suspect people like yourself are grasshoppers.  Always assuming it will be summer.  Even as the leaves fall off the trees.

Dog Will Hunt's picture

Daedon...the Zero Hedge member who cried "Mom, bring me down a new bag of Doritos!"  

MATA HAIRY's picture

you gonna lose half your money real soon

Redart's picture

But but but... Gold is going down, not a sound investment

Cherubim's picture

I think you were joking but it's true. Unbelievable but true. The Asian stock markets are collapsing and gold and silver are going down. What a joke.

ThrowAwayYourTV's picture

Sunday night: Futures have gone from -480 to -80 in just a couple of hours.

Monday morning will be lots and lots of buying. But another bomb crater on the way end of this week, early next week.

My prediction. Markets clutching straws.

Chosenpeople's picture
Chosenpeople (not verified) Aug 23, 2015 7:03 PM

Charts are not particularly useful, since they are by nature bivariate, usually showing some variable vs. time.  The fact is that the stock market can only be modeled using multivariate analysis, if it can be modeled at all.

atthelake's picture

When it happens, there may be supply line disruptions.

Montani Semper Liberi's picture

 In another thread someone was kind enough to post a link to investing.com and it's live future chart, and it looks pretty ugly.

 What struck me was that their bears v bulls survey of members to the site were 71% on the bullish side. The comments section was even more unreal. I didn't see one bearish comment there, all unicorns and rainbows. I doubt there was anyone brave enough in the room to post something negative.

 http://www.investing.com/indices/us-30-futures-advanced-chart

Palladin's picture

I started working in the Brokerage Business in Feb of 1987 and was hired because the hed of Operations was very impressed with what I could do with a program called Lotus 123 and and IBM PC. At the time all data came throught ADP's mainframe and everything was just a dumb terminal.

When the market crashed in Oct. of 1987 I was asked to do some analysis of the various stocks in the Dow. Being the new guy I jumped at the chance. Everything had to be taken off Green Bar printouts or the dumb terminals and entered manually. No matter what I did, I couldn't get my totals to match the totals on the dumb terminals. I checked the prices and rechecked them. The head of operations checked the prices and the stocks I had entered into the spreadsheet. When I showed them the totals and the average which disagreed with what was displayed on the terminal I was just dismissed as something was wrong with Lotus 123 or the IBM PC or both. And that was that. But I knew that was BS, because Lotus 123 could very accurately add up a column of 30 numbers.

Something was wrong with the Dow, not Lotus 123. But it would be a long time before I figured out what it was.

You can repeat that same experience I had back in 1987 today. Nothing has changed. Here's what you do.

Go to this web site: http://money.cnn.com/data/dow30/ or any web site that lists the components of the DOW. Then copy the table with the stocks and the prices (Ctrl-C) and start up Excel and paste the table into Excel (Ctrl-V)

Then add up the prices in Colum B. What do you come up with. If you did it for the prices as of 8/21/15 it should be 2,463.65. It will be different on any other day but the concept will be the same no matter which day you choose.

OK, now we have the total of the stocks in the Dow of 2,463.65 and there are 30 stocks in the Dow so the average is 2,463.65 divided by 30 = 82.12 but the Dow is reported as being 16,459.75. And that's the problem I was faced with back in 1987 and that's the same problem today.

The Dow Jones Industrial Average isn't an average at all. It's just another Wall Street Marketing gimmick. And the MSM, and everybody buys into it. Hook, line and sinker.

And then consider this as well. In the last 10 years there have been 13 additions and 13 deletions of stocks in the Dow. So 80% of the stocks in the Dow today weren't in the Dow 10 years ago. How's that make any sense?

Well there's more, but most people aren't interested today any more than they were interested back in 1987 when I pointed this out to the head of the Operations Department. And I expect the reaction will pretty much be the same today. Yet you cannot deny the fact that an average is @Sum divided by @Count.

And the Dow Jones Industrial Average isn't an average.

TrulyStupid's picture

The Dow is not a true Average.. but a weighted average with the largest cap stocks having a pro rated input into the average of 30. The true feature that gives the Dow its overly bull bias is the annual cull of the losers and their replacement by the current 30 by market cap.

The components of this years Dow are different (with a bull bias) than last years, making it quite useless as a tool to track the performance of the economy... Its simply a sales promotional tool for the industry. The S&P 500 has similar problems but the lower cap stocks replaced each year has a smaller impact on the total market cap.

 

FredFlintstone's picture

you just blew my mind morpheus

Jungle Jim's picture

This is basically how I feel about the stawk market, the Federal Reserve and everyone and everything connected with that, and the whole so-called "economy" too.

https://brian.carnell.com/wp-content/uploads/2013/03/godzilla-fuck-this.gif

honestann's picture

I do believe gold will soon rocket.  Maybe even when the first markets opens in half an hour or so.

However, if the stock market continues to crash (as it should), margin calls might force enough folks to "sell everything" to push gold down for 1, 2 or 3 days.

Actually, for the sake of a few of my friends who have fiat they'd like to convert to gold now, I hope this PM drop happens.  After a few days at most, though, it appears like PMs will be off to the races.  Or to say it property, the dollar will begin its collapse, pushing the dollar price of gold and silver higher.

But since the world economy is collapsing, and platinum and palladium are mostly industrial metals (catalytic converters), they will likely do poorly or "less well".  I love platinum, but this just might not be the best time to buy, even at current bargain prices.

Jungle Jim's picture

Sometime around 3:00 A.M. Eastern Time, Someone will send the call out: "Release the monkeys! Monkeys, get your hammers!"

http://thumbs.dreamstime.com/x/construction-monkey-4344606.jpg

Supernova Born's picture

Up $4.60 in 12 minutes.

One thing is for sure.

We live in interesting times.

Jungle Jim's picture
Only what they're going to pound into the ground will not be interest rates, but precious metals prices.
http://www.urbandictionary.com/define.php?term=monkey+hammer
Schroedingers Cat's picture

I want to caution people about something I learned the hard way.  In 2008-2009 my account was doing extremely well on paper but my broker (the company's name will go unmentioned) almost went under.  I would have been left wilth just my checking account if that happened and fortunately it didn't.  It was a very profitable year that I don't celebrate in hindsight.  That's what a severe bear market can do even if you're on the right side.  The stress of that experience was horrible, vomiting, shaking, panic attacks, blurry vision. 

cosmyccowboy's picture

Mine was being long two June cattle contracts on memorial day weekend when the TV starting showing cows being moved around the slaughter house with forklifts because they were to sick to stand up! 

zebrakid's picture

I was in a similar position with MF Global. I got out with a day to spare. Good advice. Being right is only as good as a solvent broker.

Jack Oliver's picture

The FED will most likely pull another 'Rabbit out of their Hat' - Fortunately for the FED rabbit's are excellent breeders !

ThrowAwayYourTV's picture

Monday/Tomorrow will be a HUGE buying spree. HUGE! Then between Wed and Fri comes another bomb crater.

Md4's picture

Respectfully, I don't think so.

I expect much timidity tomorrow...at best. Friday, coupled with an undeniable China has everyone's attention this time. I'm not sure the Fed has the "credibility" it had even a week ago (let alone the screwball pundits). I mean, the debate about some insipid rate rise today is ludicrous. This is serious, and I think the Sharks know it.

The slightest spook tomorrow, and the stampede could kill many.

If it's not clear by now, it soon will be; we are on new ground.

m

ThrowAwayYourTV's picture

Yip, could go either way but I think the fed will try to push it uphill one last time. It could roll back and that will be that, after that.

I'm thinking they'll get some momentum in the beginning of the week but not sure how much and for how long.

(Disclaimer) I could be wong.

didthatreallyhappen's picture

i can't keep track, are we heading towards QE9?

Question Reality's picture

Was that Quandry Elevated 9, or Quintessential Extermination 9?

 

Either way, i prefer to simply label it Dark Ages 2.0

 

 

TongueStun's picture
TongueStun (not verified) Jungle Jim Aug 23, 2015 3:11 PM

SELL YOUR PMS NOW AND BUY THE FUCKING DIP, and don't forget to stock up on BITCOINS for insurance!!!

Jungle Jim's picture

Please, let it happen, in a big, spectacular, epic way

 

http://cdn.churchm.ag/.../2012/02/Praying-Otter-620x836.jpg


atthelake's picture

Depends on how long tptb want to keep this Ponzi floating. If they're not ready for a crash, they'll do something to stop it. If they're ready for a crash, this will be it. If they've lost control of it, hold on to your hats. It's going to be a memorable ride.

Jungle Jim's picture
But what I'm afraid of is that nothing much will happen tomorrow. Just another Big Nothing. No fireworks. No walls come tumbling down. No heads roll.
Instead, the Nice Government Men will just push a few buttons and pull a few strings and click a few mouse clicks and the stock market will soar right back up to its all-time highs again.
Or they may even dump 24.7 Billion ounces of "gold" in a nanosecond in the wee hours of the morning, strictly to move the price. Move it *down*, that is. I don't think there even *are* 24.7 Billion ounces of physical gold, actual physical three-dimensional metal, on this planet. But that never stopped them before.
Honestly, I'm not psychic, but something just tells me tomorrow's going be a dud, just another non-happening.
honestann's picture

Quite possible.  EXCEPT...

-----

At this point, after 7 years of their bankster-enriching, economy-destroying manipulations, the collapse in the world economy plus the need to endlessly repeat these kinds of extraordinary measures (even during their supposed "recovery") may mark...

THE END OF WIDESPREAD CONFIDENCE IN CENTRAL BANKS.

If that happens... nothing they do will stop the carnage.

This attitude shift might take a day or three to sink in, but if it does... look out below.  The dollar collapse would begin (and join the collapse-in-progress of dozens of other fiat currencies).

natxlaw's picture

sounds right to me. Just a feeling though. I have not been following the hurricane, that could be a big black swan.

farmboy's picture

Who knows, one thing is for sure :

1. Margin requirements will rise that is not good with margin debt at all time high.

2. Option expiration on Friday will mean a lot of people get a call to cover this "free put premium"

3. Momo player must switch sides.

But he expect also tap dancing FED members singing with Krugman for "Fly me to the moon" Frank sinatra.