up next, a bounce - exceptional bearletter+april...highly-emotional “herd mentality”, lead...
TRANSCRIPT
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April 20, 2013
Up next, a Bounce
Stalled Recovery
According the latest Brookings Institution-FT tracking index of recovery, the global
economy is “stuck in a rut”, unable to sustain a descent recovery. These economic
projections are highly consistent with Exceptional Bear’s Elliott Analysis. Not only is
the global economy unable to achieve lift-off, but once this notion is confirmed by broad
economic data, rather than the expected euphemistic “stalling”, the Market will go into a
tail-spin to dwarf the 2008-2009 plunge.
Funds Flow
As Exceptional Bear forecast over a month ago, funds flow into T-bonds and Emerging
Markets is beginning to materialize as confirmed rising prices. Despite strong financial
markets and a resurgence of false hope in Emerging Market businesses and consumers,
there has been little evidence of bottom line growth since mid-2011.
A Bull Trap!
Emerging Markets are just slightly out of phase, and operating two degrees of trend lower
than developed markets. Although their nascent rally resembles their previous rally,
concurrent with the tanking of developed markets in 2008-2009, this time, Emerging
Markets are a highly treacherous Bull Trap! Linear projections, characteristic of the
highly-emotional “herd mentality”, lead buying & selling at precisely the worst time,
without regard to risk/reward ratios & values. This is certainly no time to be buying
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anything intent on “holding” for the long-term. While Emerging Markets are likely to
have a delayed onset of far less severe “Baby Bear” Markets, like US T-bonds, they are
merely tracing out a “bounce”, within the larger Supercycle Bearish plunge.
Market Patterns Alternate
As we know from RN Elliott’s genius legacy, Market Patterns Alternate, the same
sequence of events never plays-out exactly as the previous time. Meanwhile, investors
invariably project the past event into the future. One blaring example is the obsolete
Bull Market “Buy & Hold” strategy, to which investors became highly conditioned in the
long Bull Market 1982 to 2000.
Even after 13 years of Bear Market, most investors continue to trust that the “long run”,
will eventually secure their financial futures. In the previous Supercycle Papa Bear Market,
of same magnitude ended in 1932, took until 1945 to “get even”, assuming no holding
that went bust, and no withdrawals in the interim, a virtual impossibility. In order to
succeed in any Market we must remain flexible and nimble, in order to rapidly adjust to
changing market conditions. Those remain intractable go the way of the dinosaur. In a
Supercycle Papa Bear Market, like the present, a “semblance of sameness”, imparts false
confidence, and most often leads to catastrophic losses for the greatest number of
investors. That is precisely why safe havens of the 2008-2009 free-fall, T-bonds,
Emerging Markets and Gold, will this time lead investors astray, in sequence, collapsing
like dominos.
Emerging Market shares tend to rise as the dollar falls and vice versa. That’s related to
the relative attractiveness of the dollar vs. commodities prices. In the past, dollar
weakness would indicate “value” and currency appreciation in emerging markets.
Once the greenback strengthened, the flow of capital reversed, moving back into
developed markets. This time, the major difference is that all assets, with the exception
of inverse funds and the VIX analogs, will plunge in a staggered fashion, to previously
unimaginable troughs….once this sequence plays out, the dollar must rise, consistent
with a highly deflationary Supercycle Papa Bear Market.
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So far this year, dollar has strengthened in a short-term bounce currently near
completion, while commodity producers have begun to feel the pinch of lower prices.
China, the major buyer of raw materials stands to benefit commensurately in the short-
to intermediate term. In Emerging Market Indices, China as the second largest global
economy has the highest weighting. What’s more, inflationary pressures in emerging
markets have eased considerably, driven in large part by a 20% fall in food prices over
the past two years, and should continue to abate at a faster clip, in keeping with a
plunge in demand resulting from global economic contraction.
Below is the big perspective Emerging Markets, where the most likely upside is to the
area of 47, followed by a plunge to likely the area of 17.5 on this long-running MSCI
index.
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The TIGER (Tracking Indexes for the Global Economic Recovery) Index combines measures
of real economic activity, financial variables and confidence indicators; proportional to
the degree they are correlated. In this manner, TIGER captures movements of similar
data, as measured on very different basis and across many countries. As you might well
deduce, in the same way in a Panic the “baby gets thrown out with the bathwater”, waves
of fear will ripple through the global economy to contract productivity and consumption.
Treasuries no longer “risk free”
The World’s big investors are back on a feeding frenzy in US Treasury debt. Rather
than reflecting open-ended Fed manipulation, and the prospects of inevitably higher
interest rates, total return on T-bonds has turned up. This is the classic mindset, which
invariably occurs at long-term market tops, which reflects the primitive herding instinct,
which has not changed since the beginning of organized markets. New all-time highs
serve to “sucker-in” sidelined investors, to insure maximum capital destruction.
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In the Weekly 20-year T-bond chart below, you see the magnified completed reversal of
a 30-year Bull Market beginning in 2009. The (A)-(B) Degree of Trend Morphing, is
tracing out a terminal upside in wave (b), to the area labeled “likely range”. Although
fear sentiment could propel this final transitional bounce to an extreme of 92.5,
afterwards, the collapse already under way will plunge off the lower limit of this weekly
chart entirely.
Next in the Monthly Long Bond chart, TLT, you see the (A)-(B) Degree of Trend Morphing
from the long-term perspective, where the orthodox top is labeled Wave 5, seen peaking in
2009. The (A)-(B) above match those below. For the big picture perspective, we must
usually look to non-levered, indices of longer duration. Regardless the implications within
an asset class, hold true regardless of duration and index. Bonds, whether levered or
unlevered, move in tandem.
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Although gold took an exaggerated plunge in lock-step with commodities, the long wick
at the bottom of the final weekly candle below indicates the likely reversal is already in
process. The smaller Diag > ended in 2013, with the larger fractal, requires a dramatic
reversal to the area of 1885, before a subsequent pull-back to the area bound by 1500
& 1625. Finally a terminal spike will likely ending at an all-time high, and be the last
asset class to peak and subsequently nose-dive. This pull-back, similar to the action of a
catapult, merely allows the eventual upside to skyrocket much higher.
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Unemployment & Commodity Prices
A Downbeat jobs report and slumping commodity prices have been erroneously
interpreted to mean slower growth, rather than outright economic contraction. The
dollar, like T-bonds, are globally “valued” by the assumption that the Federal
Government has an unlimited power to tax. However mass unemployment and plunging
real estate prices, will contract Tax revenues, and compound the National Debt in a
parabolic curve, indicative of an economy living beyond its means on foreign credit, no
longer able to support interest payments, realistically like Greece, Ireland and Iceland.
When unemployment spikes to 25-30%, tax revenue shrinks. Just observe the recent
preview seen in the Municipal Bond market. Overextended, and overburdened by debt
load, the threat of default on T-bonds will become very real. In such circumstances, the
imagined becomes a self-fulfilling expectation, as lenders demand higher interest rates
to compensate for the increased risk. Those who manage to hold onto their jobs though
the contraction, will spend far less constrained by the threat of job-loss of layoffs and
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downsizing. The natural outcome of plunging demand is also an inverted multiplier
effect, as retirement and security “nest eggs” vanish into thin air.
Ultra-Low VIX Sentiment really is a Red Flag
As market indices reach record highs, investors remain far too complacent. Under the
guise of low volatility, the $VIX has morphed two degrees of trend higher, in the
identical pattern as the reciprocal long indices.
Market “fear” sentiment has been highly unresponsive of late, as record highs followed
one after another. In mid-March, the CBOE Volatility Index (VIX), a measure of volatility
and fear, stood at a five-year low at 11.05, before inching back up to 12.84. As you see
in our weekly $VIX chart the Diag II in process, heralds a long Bull Market in volatility:
and a corresponding Panic & Crash in Stocks! Ultra-low readings from this “fear gauge”
now raise a red flag. They definitely signal investors that have grown far too bullish, and
fearlessly complacent. Note the identical 2-stage transition as seen inverted as bearish
in all stock indices
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Although the S&P 500 is up roughly 10% year-to-date, the index is showing all the signs
of an exhausted market, with a rise of less than1% over the past month. In sharp
contrast earlier in the year, double-digit daily moves were the rule.
As you see below, the excess over upper estimate for the S&P of 1560, has been
entirely given back, or retraced.
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The weekly view presents a similar topography, with the next leg sooner or later a Papa
Bear FREE-FALL. For a clearer view of these long charts click here.
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In the daily S&P chart, the b wave will likely drop to the area of 1520, as indicated in the
call-out, and by the red-dotted arrow, before the c wave up completes wave ii. At the
bottom of that b wave we will likely want to lighten-up in the inverse positions.
Timer Digest S&P
SPXU Inverse S&P 500; UPRO long S&P 500; Sold full pos UPRO limit 95; cost 85.3
½ pos SPXU cost 34.2 on Fri, Jan 11
Sold half SPXU @ 28.2 Apr 18 off open
Timer Digest T-Bonds
TMF 20-yr. Long Bond; TMV 20-yr inverse bond
Full pos TMV cost 56 (4-2-13)
Sell limit 60 GTC
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TMF average cost 70.38; w/out taking into account the sale of ½ at 75.5
Sold ½ pos TMF limit 70 on Jan 22nd
;
Bot 1/2 pos TMF limit 66; Sold ½ pos TMF at 68.5
Bot 1/2 pos TMF limit 65.21; Sold all at 67
Pension
2/3 pos TMV average cost 49.75
Sell 1/3 pos TMV limit 60
Bot 1/3 pos TMV @ 49.5
TMF average cost 69.19; w/out taking into account the sale of ½ at 75.5
Sold 1/3 pos TMF limit 70 on Jan 22;
Bot 1/3 pos TMF cost 66;
Sold 1/3 pos TMF at 68.5
Bot 1/3 pos TMF limit 65.21
Sold 1/3 pos TMF limit 67
Sold remaining 1/3 pos TMF limit 74
Bot 1/3 pos TMV limit 50
Traders Full pos TMV average cost 49.75
Sell 1/2 pos TMV limit 60
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Bot 1/2 pos TMV @ 49.5
TMF average cost 69.19; w/out taking into account the sale of ½ at 75.5
Sold ½ pos TMF limit 70;
Bot 1/2 pos TMF at 66;
Sold ½ pos TMF at 68.5
Bot 1/2 pos TMF limit 65.21
Sold 1/2 pos TMF limit 67
bot 1/2 pos TMV limit 50
Equity Allocator
35% DRV Inverse Real Estate; DRN Real Estate “One Fund” Strategy
Pension
2/3 pos DRV average cost 22.5
Traders
Full pos DRV average cost 22.5
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35% EDC Long Emerging Markets; EDZ Inverse Emerging Markets
Pension
2/3 pos EDC average price 30.97 (1/[email protected] + 3/[email protected])
cost 99.7; Sold 1/3 pos EDC limit 105.89
Bot 1/3 pos EDC cost 98 (3-15)
Sold 1/3 pos EDC at 96
Bot 1/9 pos EDC 31.64 off a limit of 91
Sell 1/3 pos EDC limit 32 GTC
Traders EDC full pos average price 31.05
cost 99.7; Sold 1/2 pos EDC 105.89
Bot 1/2 pos EDC cost 98 (3-15)
Sold 1/2 pos EDC at 96, day’s high was 96.35
Bot 2/3 to equal full pos EDC limit 30.75
Sell 1/2 pos EDC limit 32 GTC (keep in mind the tax consequences of a wash sale)
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30% FAZ Inverse Financials; FAS Long Financials
Pension
1/3 pos FAZ average cost adjusted for split 46.06
Sold ½ pos FAZ at 43
Sell 1/3 pos FAZ limit 44
Buy 1/3 pos FAZ limit 39.4 GTC
Traders
½ pos FAZ average cost adjusted for split 46.06
Sold ½ pos FAZ at 43
Sell 1/2 pos FAZ limit 44 (mindful of the wash sale)
Buy 1/2 pos FAZ limit 39.4 GTC
TZA Inverse Small Cap Stocks; TNA Bullish Small Cap Stocks
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Pension
Buy 1/3 pos TZA limit 37 GTC inverse small cap
Buy ½ pos TNA limit 37.5 this is the long Small cap for the swing trade
(see second chart below)
Traders
Buy 1/2 pos TZA limit 37 GTC inverse small cap
Buy ½ pos TNA limit 37.5 this is the long Small cap for the swing trade
(see second chart below)
This TZA limit is still a ways away, we will cut back on the other allocations to make
room for it
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Alternate Position (a speculation NO longer)
Full pos TVIX average cost 5.0675 (without taking into account the sales)
Sold 1/2 TVIX at 11; Bot back ½ pos TVIX at 7.41; Sold ½ pos TVIX limit 5.9
Bot ½ pos TVIX at 5.0
Sell ½ pos TVIX limit 4.1
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If you have not taken a look at the Weekly Public charts in a while, there are several
upgrades. To view the long-term public charts, to see the additional ETFs added
this week, click here. I f you are a subscriber to Stockcharts, I would appreciate
your vote. There’s a new chart of the small cap stocks, which I plan to compare for
possible inclusion in the allocation…
Eduardo Mirahyes