Stocks have been going through the roof this year with no let-up in the upside momentum, save for a few minor pullbacks of 3% or so.
The Dow has gained 16% year-to-date. And emerging markets are really on fire, up a whopping 32%!
No question this has been a painful experience for your portfolio, with red-ink in two short trades: ProShares UltraShort Dow30 (DXD) and ProShares UltraShort S&P 500 (SDS).
I’ve been tempted to double-down on these short bets several times in recent months. But the timing has not been right according to cycle analysis as well as to the technical, sentiment and price-momentum indicators I watch closely.
But not anymore, because the tone of the stock market
took a bearish turn this week!
Sure, we’ve seen fresh record highs, almost on a daily basis. But there has been a noticeable lack of conviction in terms of market breadth – fewer advancing vs. declining stocks, which you can see in the chart below – and fewer new highs. Plus, trading volume has diminished steadily in recent weeks.
Taken together, these are big red warning flags in this overvalued and overbought stock market. And they’re signaling that a correction is finally looming.
Don’t get me wrong, I’m not expecting a repeat of the 1987 stock market crash, which took the Dow down 25% in a single day 30 years ago this week. But we’re way overdue for a typical 10% correction, which usually happens once a year.
At this point, the consensus believes that stocks will continue to soar straight into 2018, and why not? After all, we’re nearly through the most treacherous season of the year for stocks … August through October … without so much as a 3% to 5% pullback.
The consensus now expects clear sailing for stocks through the seasonally strong period that begins in November … but I see several good reasons why the consensus may have it all wrong this time …
First, the cycles of war continue to ramp higher, as my friend and colleague, Larry Edelson, correctly forewarned us several years ago. North Korea is the most obvious flash point. But this issue seems to be completely ignored by investors …
“North Korea has upped its war talk once again, warning the United States it faces an ‘unimaginable strike at an unimaginable time.‘ ”
Iraq’s offensive against the Kurds is another hot spot, which could explode, threatening global oil supplies. Then there are ongoing conflicts in Syria, Yemen, Libya, Turkey and the Ukraine … just to name just a few.
Mark my words: A flare-up in any one of these hot spots
would quickly shatter the stock market’s complacency.
Second, part of the war cycles Larry warned us about are conflicts between governments and their own citizens, and we see that on full display in Europe.
Here’s a headline from Bloomberg just yesterday:
“Stocks Drop as Spain Crisis Heats Up.“ Again, stock investors are paying NO attention to this, at their peril. Millions of Catalans want out of Spain. And Spain responds by seizing control of Catalonia, an autonomous region within its domain. Spain’s actions mean large-scale civil unrest and probably martial law in one of Europe’s most populous nations.
And while we’re on Europe … Brexit talks are breaking down – again – with the U.K.’s chief negotiator referring to his EU counterparts as “the enemy.”
Germany’s coalition government has splintered more than ever before in post-war history after the recent election results. Many Germans are appalled by the ongoing refugee crisis in Europe. And, they want their borders closed. Perhaps they will build a wall … a new Berlin Wall, but isolating all of Germany this time.
Plus, elections in Italy, one of the most over-indebted nations in Europe, are slated for early 2018. But they could be called off at any time as the country’s fractured government teeters on the brink of collapse.
When it comes to “headline risks” to the stock market, Europe takes the cake. Do you recall this headline from early 2017…
“EU banks crumbling under 1 Trillion-euro severe debt as toxic loans threaten CRISIS.“
This story broke way back in January. And it wasn’t some pundit of gloom on CNBC who made the statement … it was Andrea Enria, chairman of the European Banking Authority (EBA), the EU’s top banking authority! He said flat-out that the amount of toxic debt held by EU banks has reached “urgent and actionable” levels.
And guess what the EU has done about it since then? NOTHING!
Just because the EU has been relatively quiet recently does not mean their banking and debt crisis is over … not by a long shot. In fact, this ongoing bad debt crisis will soon flare up again … destroying this false sense of complacency in markets!
Third, and much closer to home we still have no Trump tax plan, which the stock market is eagerly anticipating. Plus, a government shutdown can’t be ruled out just in time for the holiday season. Another headline from Bloomberg …
“Congress Rolls Toward Shutdown Fight Over Immigration, Obamacare.”
The partisan divide in Washington is wider than ever, just when action is needed on healthcare reform, immigration, tax and trade policy, not to mention the federal budget and debt ceiling.
That leaves plenty of room for disappointment over the next few months, when markets are less liquid. It’s eerily reminiscent of the stock market meltdown in November and December 2008 … so much for seasonal strength!
In short, there is no shortage of potential risks to the market that investors are largely ignoring thanks to the serenity in stocks this year, but complacency almost always gives way to a spike in volatility, you can bet on it.
Plus, our E-Wave cycle for the Dow (shown above) point to an impending stock market peak, followed by a sharp decline into January 2018, which would be a total shock to the consensus view and could easily trigger an avalanche of selling.
And it’s not just the Dow, the cycles for the S&P and Nasdaq-100 Index are forecasting the exact same downtrend beginning any day now and continuing into next year!
That’s exactly why I recommended you add the ProShares UltraShort QQQ
(QID) to your portfolio yesterday. I expect this ETF, plus DXD and SDS, to pay off handsomely when this long-overdue correction finally strikes.
Recapping other markets and recent trades …
As for precious metals, the brief counter-trend rally to the upside appears over. Gold, silver and mining shares are back on track for a decline into November, as our E-Wave cycles have been forecasting.
That’s why I recommended you reverse your positioning this week, by adding the Direxion Daily Gold Miners Index Bear 3X Shares (DUST). Gold could bounce a tad higher, perhaps retesting the $1,300-a-troy-ounce level once again.
But I expect gold will again fail to hold that level, and it will roll over for a steeper decline. Next support comes in at the $1,250 level. But we can’t rule out a retest all the way back to near the July lows at $1,200-$1,225. Stay tuned.
The dollar meanwhile continues to rally at the expense of the euro, up nearly 3% from the early September low, and just starting what should be sizeable uptrend. That’s good news for your ProShares UltraShort Euro ETF (EUO), so continue to hold.
Bottom line: Investors are fooling themselves if they believe the stock market will continue to “melt-up” forever. Any one out of dozens of potential catalysts could trigger a sharp correction. And our own cycle forecasts point to a selloff starting at any time. Safeguard your portfolio accordingly.
Good investing,
Mike
