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Rarely have I seen a greater dichotomy between the dangers looming for traditional investments and the amazing opportunities in a wide variety of alternative investments!
But first let’s talk about the three immediate danger signs:
Danger Sign #1
A Major New Debt Crisis Striking
Thousands of Local Governments
Throughout the United States
This debt crisis is very different from the sovereign debt crisis we warned you about last year, which struck Greece and Ireland … and is now hitting Portugal and Spain.
Why is it so different? Think about it …
In prior debt crises a major central government or bank came to the rescue. This time …
- The Federal Reserve has neither the authority nor the will to come to the rescue; and
- The U.S. Congress is even less inclined to open the Pandora’s box that a city or state bailout would involve.
In the European debt crisis, it was far away for most Americans. This one is striking at the very heart of the U.S. economy!
Result: A big threat to U.S. GDP growth in the second quarter AND to the U.S. credit markets at the same time.
Danger Sign #2
A Major Divergence in the Stock Market
In last week’s Money and Markets column, I explained why I rate the current stock market environment as extremely risky.
Now, let me elaborate on a key indicator that confirms and double-confirms that view: The number of stocks hitting 52-week highs.
This number is reported daily for the New York Stock Exchange (NYSE) and other exchanges. And it contains valuable information on the overall condition of the U.S. stock market …
- During a healthy, durable bull market, as the major indices move to new highs, there should be an increase in the number of stocks making new highs, as a growing number of issues participate. And for the rally to continue, stocks must repeatedly hit new cyclical highs. But …
- At the tail end of a bull market, this picture starts to change. The breadth of the move weakens. More and more stocks enter topping formations or start to roll over. And the number of stocks making 52-week highs levels off or actually declines.
That’s precisely the picture I see now: Although the broad indices are still making new highs, fewer stocks are doing so. In other words …
The whole rally now depends on a shrinking number of stocks!
That’s what technicians call a “negative divergence” — a broad market index like the S&P 500 makes new cyclical highs, but a key indicator like this one fails to do so, or even goes the OTHER way.
For the evidence, look at the chart below. It shows the S&P 500 since 2007 and, in the lower panel, the number of its component stocks hitting 52-week highs. As you can see, the current move to new index highs is not confirmed by the number of 52-week highs.
The indicator’s high for the current cycle was way back in April 2010. So the market is actually showing multiple negative divergences: A succession of higher highs in the index and … at the same time … a succession of lower highs in this indicator.
This is a double- and triple-warning sign that the U.S. stock market is on weak footing.
And the number of 52-week highs is a time-honored indicator. Historically it has often given important warning signs well before a major bear market commenced. Just look at 2007 and you’ll see an example of a negative divergence similar to the one we’re experiencing now!
Danger Sign #3
Great Overvaluation
Fundamentals are the long-term driver of all markets, whereas technicals are the tools to get additional perspectives of what is going on.
And right now, traditional valuation metrics — such as dividend yield, price/earnings ratios, and others lead to the same conclusion:
The U.S. stock market is severely overvalued … possibly by 50 percent or more!
No, valuation measures don’t help you pinpoint exactly when the next bear market will begin. As long as other major drivers like money supply and investor sentiment are mainly bullish, a rally CAN continue … no matter how expensive the market has become.
But the fact is that since August of last year …
- The debt crisis in cities and states has deteriorated rapidly
- Interest rates have risen strongly
- Sentiment indicators are showing too much investor complacency, and as I explained above
- Technical indicators, including the 52-week highs, are also in the danger zone.
Taken together this adds up to a very dangerous picture. Now let me tell you about the great profit opportunities this generates …
First, you have an opportunity to profit from the decline itself. I mentioned the ProShares Short S&P 500 (SH) last week. Another idea is the ProShares Short QQQ (PSQ).
This ETF seeks daily investment results, before fees and expenses, that correspond to the inverse of the daily performance of the NASDAQ-100 Index. So the more these decline, the more you stand to make.
Second, you can profit from the government’s overblown response to the dangers.
You see, Washington — along with governments here in Europe — have the power to pour trillions of dollars into the economy. But they do not have the power to tell global investors where to put that money.
All that money has to go SOMEWHERE and it is flooding into investments that naturally — and almost inevitably — rise in this environment.
Best wishes,
Claus
{ 20 comments }
Claus,
You are a smart guy and have, at times, dared to admit this is a bull market. I think deep inside you agree with Nilus that stocks are where one should put their money in 2011. Yet, I still see you make the bearish call albeit to show some solidarity for the perpetual pessimist Martin Weiss. I wouldn’t be surprised that it was your voice that made Martin Weiss capitutale in October 2009 that the market was going higher. Unfortunately, many of Martin’s subscribers lost money following his bearish advice in 2009 and then again in 2010 with his constant calls to get out of stocks.
DOW 15K here we come.
I agree with Manuel. I have missed a lot of opportunities on the stock market because I think these bearish forecasts are mistimed.
Claus, I always appreciate yopur cogent commentary. The state and local high debt HAS to have a deliterious impact in 2011. Unless Cogress folds and bails some out you’ve called it correctly in my opinion. Problem is nobady can be sure what tghe damn politicians will do!
Claus,
I tend to agree with the previous writers comments about you and Martin. I always enjoy your perspective because you use technicals and fundamentals to argue your points. We are certainly in a tug of war economically in the US and worldwide. Some of the pluses being the positive growth in the US and fast growth (inflation) in the BRIC countries, with corporate profits continuing to rise (especially the US banking system). Some negatives include unemployment and housing with the debt in the US and inflation taking off everywhere.
So what side wins? The US economy with Bernacke’s help is trying to money print the short term until growth takes hold and then we’ll worry about the deficit. Congresss may for the first time have an idea of some of the right things to do–but don’t hold your breadth they will get it all right! Some of the hot world economies are putting the breaks on with interest rate hikes in hopes of cooling things down. This strategy appears to be working at least in the short term!
Since we know that nothing goes up or down in a straight line all these fixes can work for a time and if the US economy doesn’t turn fast or far enough we will really be in trouble. Remember the Cycle Theory you guys always talk about–makes total sense. But in the short term things are really going well in the US stock market. WE NEED AND ARE EXPECTING A CORRECTION. Your smart charts above and the 52 week high declines show this very well. So your advice to get into reverse EFT’s will soon be right, in my opinion. In the meantime I think we need to ride the upswing with protection– options, higher stops and getting in cash for a portion of your assets.
I would look for a 5-15% correction as a significant buying opportunity and the potential to make some serious money on the continued market and economic upswing. I don’t think we are going back to a recession or depression, merely a correction. This is true for the short term and as I said above, all bets are off when the stimulus is completed and if our growth doesn’t come fast enough. That is down the road and right now we need to “deal with the hand we are dealt”. It is about making money, isn’t it?
In summary, ride the wave with protection in the short term and use some stored cash for the correction that inevitable will come in the next week or six months. Take advantage of smart guys like you who always offer insightful information and thought about what is on the horizon to change your long term strategies.
Sincerely–Greg
I would be a bull except………………the US is upside down and is not even close to being able to work out of the huge debt overhang or even for that matter the huge deficit that now powers financial markets from a medicine bottle that is very close to empty. Now the fed has joined hands with the rest of government to cover up what is a disaster about to overtake us. If you can explain to me how we can pay off $14 trillion in accumulated deficts and reduce the currnet $1.3 trillion one without pain I need to see it. If we doubled tax rates we would still be shy of accomplishing the above and of course any tax increase will reduce the pot we draw from………………hope I am wrong.
dl
Manuel, I couldn’t agree with you more. I read Marty’s negative commentaries, and the consulted w/ Point & figure charts provided by Dorsey Wright-their indicators, which I have learned to trust over the past 10 years, show that the market is still on Offense (as opposed to defense) but is at extended levels. I ignored Marty’s advice and am much the better for doing so. I would also sned you to Larry Edelson’s weekly Thursday update video, complete w/ chart analysis of the Dow, the Dollar and gold-he’s been very good. Best of luck to you in the future.
Your chart of SPX new highs gives mixed signals. When it hit a peak in April, 2010 that’s when the market corrected and the new highs sank like a rock. A high value seems to indicate a market top. Now it has moved back up and appears to be swinging within a reasonable range indicating the market could go higher. Between March and June of 2009 the market made a huge move up but the indicator looks like it was 0 for that entire period of time. The stock market is always risky and a market correction can set in at any time but any correction should be viewed as a buying opportunity as we are definitely in a bull market.
Another thing I notice about Weiss Advice is they keep repeating the same old news. The housing problem, unemployment situation, rising interest rates, municipal debt crisis and sovereign debt crisis are all known about and have been factored into the market. It will take some really bad new news to shake this market. Don’t fight the Fed and don’t fight the tape but Martin Weiss loves doing both. I subscribed to his newsletter and if I recall correctly he was bearish on U.S. stocks between 2003 and 2007 when they were in a major bull market.
Manuel,
I think you are both right. I have the utmost respect and confidence in Claus and Martin. I believe near term the toilet needs to be flushed to get rid of the excesses before we can resume to your 15K. This is no different than what occurred during the big one in 1929 and years afterward. Since forecasting isn’t an exact science, covering your long positions as suggested or protective stop losses might be the most prudent compromise.
I would like someone to elaborate on where the “SOMEWHERE” is for the money to go.
Manuel : There are none so deaf as those who refuse to hear. AJF.
I BELIEVE ALL THE AMERICAN PEOPLE HAVE NO KNOWLEDGE OF THE SEVERITY THIS COUNTRY IS FINANCIALY. I THINK MARTIN WEISS AND ALL HIS CREW SHOULD TAKE WHOLE DAY BEFORE CONGRESS TO EXPLAIN IN EXTREME DETAIL EXACTLY WHERE THIS COUNTRY IS HEADED BEFORE ANYTHING HAPPENS. I KNOW YOUR CREW HAS BEEN BEFORE CONGRESS, BUT IT DID NOT DUE ANY GOOD. THIS PROBLEM IS VERY DIFFICULT FOR ALL CONGRESS REPS TO REALIZE THE BAD PROBLEM WE HAVE.. I BELIEVE15% TO 20% OF CONGRESS KNOW WHAT YOU WILL BE TALKING ABOUT. I JUST HOPE YOU WILL BE INVITED SO THE AMERICAN PEOPLE WILL REALIZE HOW BAD THINGS ARE.
When you are moving into a hyperinflation enviroment it will lead to temporary inflated valuations that will cause the last gasp of the stock market bubble. When the DOLLAR crashes so goes the stock market. You may see dow 15,000 the gift QE 2&3 but sooner than later the bubbles will burst.
Hey Guys…This may sound REALLY out of the box but I have been pondering the GOLD issue for sometime! When G. Gordon is pushing gold on T.V. I scratch my head! I GOOGLE “Who is the largest holder of GOLD in the WORLD?” Answer U.S.A.. Weird theory but I’m a”thinkin” the US government WANTS use to trade our paper dollars in for GOLD so they can keep the printing presses running without devaluing the dollars!?!
I remember being in an Economics class YEARS ago when the Professor …on loan from HARVARD.. stated in a lecture “WE DO NOT HAVE TO WORRY ABOUT DEFICITS , IT’S LIKE BORROWING MONEY FROM YOURSELF”! WHOA!!! I said. Please repeat what you just said I want to make SURE I heard you CORRECTLY! Her answer was “We will just ” PRINT ” more money! I asked “Won’t that make our money look like MONOPOLY money?” (and this was when we were still on the GOLD standard…I am dating myself aren’t I!) She dismissed me and carried on with her lecture.. Now I understood why some Universities put the ECON DEPARTMENT under SOCIAL SCIENCES NOT THE BUSINESS SCHOOL..I changed my major to FINANCE!!
Back to the GOLD THEORY…WE will keep printing MONEY until the gold reserves run out and GUESS what…GOLD will be WORTHLESS TOO!!! I hope you have SOMETHING to trade me that I can use….a cow,a chicken,a horse, some wood to burn in my fireplace,vegetables from the garden, a gun, some ammo……We will return to a BARTER system. WHAT DO YA”LL THINK?
Nernii
I believe you! Gold may eventually become worthless, sometime in the future.
I don’t believe gold will become simply worthless. It is a precious commodity in demand for differenct reasons. What I am concerned about is the pitch by gold salesmen that one should hold pyhsical gold. What, pray tell, will one do with physical gold if fiat money loses all of its value? Will you trade a 1-oz gold coin for a chicken?
I don’t think that fiat money will become totally worthless even though inflation will rob us of much of its value. That’s where commodities will be important as storehouses of value.
But we will need to have commodities that can be conveniently traded.
Ron
The sure barrier to truth is the perception that you already have it. Do your homework!
I agree with King Ralph. The SPX charts are at best questionable.
Not only that, I also disagree emphatically that the Federal Reserve has neither the inclination nor the authority to bail out the various states that are in financial difficulty. The Fed can do whatever it wants. For the time being it has plenty of authority being virtually independent of Congress. Now Ron Paul might change all that, but he is not close to doing so yet and his historically single handed efforts have not been reinforced by enough real conservatives to ensure getting control of the Fed even now.
If the Fed perceives that bailing out the states will kick the can down the road a piece then it will bail them out. After all it first allegiece is to its member banks many of whom own muncipal bonds or whose customers own municipal bonds.
Finally congress does not march to the tune played for it here. The House of Representatives might, but even that is not yet clear, and it it is doubtful at best that the Senate will follow suit even if the House does go according to forcast.
The bottom line is that stocks may decline as projected here or they may continue to go up for some months to come. You pays your money and you takes your chances.
Short, sweet, to the point, FREE-eaxtcly as information should be!
All these writers are basing their theories and predictions on their individual education, reading/research, and experience. Part of the problem is that the world has never faced a similar situation. Also, the extent to which economic affairs are manipulated by bankers, politicians and computer-trading algorithms have so distorted the actions of individuals, investors, businesses and governments that any predictions would have to be based upon ALL FACTORS CONTINUING DOWN THEIR CURRENT PATH/TREND. Any unexpected actions by any player could change the situation almost instantly. Economic principles become less and less reliable as more manipulation is introduced. All countries, all bankers and all investors are manipulating whatever they can to their benefit with no regard for any unintended consequences. One need look no further than Golden Sacks and their government revolving door as a blatant example.
History will look back and decide which of the numerous economic “gurus” guessed correctly.
In chapter 11 of Jim Cramer’s 2009 book “Getting Back to Even” he spends most of the chapter explaining why Proshares Short ETF’s are a bad idea. His logic certainly seems sound. Then I read Martin Weiss’s book “The Ultimate Depression Survival Guide and Claus’ article and they are recommending the same funds Cramer says to stay away from. (Cramer pretty much said that brokers are the only ones who make money off these ETFs)
I guess they are agreeing to disagree.