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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Jungle Jim's picture

I think there are only about 5.3 Billion Troy ounces of gold on Earth.

TongueStun's picture
TongueStun (not verified) Jungle Jim Aug 23, 2015 3:14 PM

What is 5.3 billion times 124?

silverer's picture

Take heart: What can't go on forever, won't.

lasvegaspersona's picture

JJ

they will 'til they can't...

...the question is..can they..?

At some point some big important 'can't say no to them' person or institution will demand physical. If they can't be satisified...then we have a problem...and it isn't Stanley Drunkenmiller...

ebworthen's picture

Take away, the bailouts, 7 years of ZIRP, and Trillions in QE slathered on Wall Street and what do you get?

Dow 6,000 and S&P 666!

natxlaw's picture

That sounds high to me. I say it belongs at 4000. Wasn't it around 6000 when they came up the the bailout, b/c everyone was too big to fail.

kumquatsunite's picture

Since the Shanghai Index has Doubled in the last year (round numbers, from 2,000 to 4,000) a reversion would be to be to 2,000 or 8,500 on the Dow.

silverer's picture

I was thinking about 8,500.  But you know what?  I don't think I'd bet against your #.    The only thing we have to look forward to now is how many people Trump will fire in the first two months if he's elected Prez.  Best entertainment ever!

PlayMoney's picture

Exact DOW number i gave a friend of mine yesterday when he asked me where i thought this terd was headed. Got this highly constipated look on his face. 

fowlerja's picture

It is so interesting to look at the past and predict the future...wonder why this isn't done more often...think I will start a newsletter called...Past, Present and Future"...

KnuckleDragger-X's picture

We're still playing the game using Wall Streets dice and the big players will be doing their damnedest to float the market, at least until they can get to the short side.....

PlayMoney's picture

So does the PPT go after the S & P futures or gold tonight? Or do they try to pull a 2fer?

KnuckleDragger-X's picture

That's the trillion dollar question.....

Hope Copy's picture

Don't count earning, as the company still controls the money...  they can hold for a crash and do a stock buyback at the bottom and the remaining stock holders get no income..   You guys need to get off the mythical earnings horse as it can break a leg at anytime and you are dumped having gone no where (still on the race track and not in the real world)...  gambling without a clue but the horse's name...

In a crash, cash is king, as margins have to be covered.  The tals will ose some also and will be bought by those that have cash and want a safe haven, but only at a discount.  It is when Bonds also dive and liquidity is provided, the metals will rise.  The FED will buy gold and all refinable metals that are easily transportable.  This I suggest to them if they are to do another QE.. at least get omething of value for the release of cash.

PlayMoney's picture

Companies rarely do buybacks near the bottom. Just as right before the crash in 2008 it peaked, it is peaking now right before we fall again. Same with M & A they tend to peak at the tops. Nobody said these guys were smart with company funds. But it surely gets them big bonuses.

the grateful unemployed's picture

nirvana in the stock buyback game is when you have almost all your float, you buy it back (from yourself) and you go private. the problem with buybacks is when you start losing share value jsut because the indexes are crashing, the only shares being traded are being sold, as bob prechter says it only take two a buyer and seller to make a market, buying up your own stock only works on the upside, with low volume. at the bottom there is no easy money to buyback stock and theres a good chance you held on and still have most of the float, worth less than half what you paid for it with borrowed money. a crash is the one thing the share buyback program is not going to like

EurGold's picture
EurGold (not verified) Aug 23, 2015 11:27 AM

500 x 1oz Silver Vienna Philharmonic Master Box €7,159.69

https://www.eurgold.eu/silver/500-x-1oz-silver-vienna-philharmonic-2015

El Oregonian's picture

Take it outside parasite.

EurGold's picture
EurGold (not verified) Aug 23, 2015 11:27 AM

500 x 1oz Silver Vienna Philharmonic Master Box €7,159.69

https://www.eurgold.eu/silver/500-x-1oz-silver-vienna-philharmonic-2015

the grateful unemployed's picture

the 87 drop included a pretty good snapback rally before we got to monday, (this is august and the crash came in october) then the USG pledged money (we will outdo the Chinese on buying back our stock market I wager) more to the question is this the 2000 nasdaq selloff, which was steady and relentless. that crash came about because of a RATE HIKE. greenspan wanted to pop the tech bubble. the 87 event was as nearly as postiive a crash as you could hope for, most stock had their precrash value back within a year, and the market went bullish, from 2500 precrash to 1500 to 12000 by 2000. it was classic bubble reflating. the nasdaq crash wiped out some really big names, MS never came back instead there were new faces, apple and google. the Nasdaq victims had no earnings, while the current DOW companies have financially engineered earnings (pretty similar on that account) the BTFD crowd was amply rewared on black monday and punished in 2000. currently commodities are in the L shaped recovery, which will confound the BTFD crowd this time, down and flat for a long long time. if the government owns the stock market what should it be worth?

ThrowAwayYourTV's picture

"LOTS of plausible room looking down ..."

What do ya figure swan dive, back flip, or cannon ball?