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business newsGet to a Maximum Defensive Position as Risk Rises
By
Ron Coby
Nov 29, 2010 9:00 am
The same warning signs and sell signals that went off four days before the flash crash are also flashing yellow and red now.
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It appears we're about to see a movie we’ve seen before. Back in April 2010, we had a similar setup in our indicators as we have now. We got a timing sell signal last week and it looks just like the setup and signal we got on April 29. We also have a similar backdrop now like we had in April of this year. We have a European debt crisis where credit default swaps are on the rise just like we had back in April. We have a complete lack of fear today using the Volatility Index as our guide just like we had back in April this year. We received euphoric levels of sentiment after the QE2 announcement just like we had back in late April. Now all that's missing is a crash like the “flash crash” back in early May. That came only four trading days after we issued the “sell short stocks” call in this program. Monday will be the fourth full trading day since we got the same sell signal as we got back on April 29. That simply means that risk is extremely high right now so stay in a maximum defensive position.
There are so many events that could tip global equity markets over right now. The European debt crisis is the most obvious. The Grail has both timing and trend sell signals on the following global ETFs (which could be the next dominoes to fall after Greece and Ireland). Portugal is a foregone conclusion so we’ll put it on the fallen domino list. Spain (EWP) and Italy (EWI) are both on trend sell signals so hedge funds will be selling all rallies. Spain and Italy will be two very big shoes to drop when those two European dominoes fall. These are the most obvious “PIIGS” (Portugal, Ireland, Italy, Greece, and Spain) but there are other PIG nations about to get slaughtered because they too gorged themselves on debt. According to the Grail, we have trend sell signals on the UK (EWU) and France (EWQ), so those also look like future dominoes to fall as the contagion from the European debt crisis spreads.Every single global equity ETF is on a timing sell signal right now. Brazil (EWZ), Belgium (EWK), Switzerland (EWL), Austria (EWO), South Korea (EWY), India (PIN), Israel (ISL), Russia (RSX), and Singapore (EWS) are all on trend sell signals (or are very close). The point here is that we may be facing a synchronistic global equity sell-off and the secular new bear market trend may be reestablishing itself. The US dollar is on a buy signal and just about everything else that trades is basically on a Grail sell signal. This inverse trade continues to play out well. The NASDAQ 100 and the Russell 2000 have been the most resilient of global markets but they're both extended and vulnerable here. The US averages were also resilient in April as global markets sold off but they eventually followed suit. That would be our concern here as well as the world equity markets head south.
Other than the low VIX (no fear), the high bullish sentiment (investor sentiment polls), and the record low levels of cash in equity funds (3.5%), there are plenty of other bearish warning signs. The Dow Jones Utility Average is often regarded as a leading indicator for the upside or downside performance of stocks and bonds. The Utilities Select Sector SPDR (XLU) is on a timing and trend sell signal and that could portend for higher interest rates and lower stocks looking ahead six to nine months. The Broker Dealer Index is also a good leading indicator to watch and the iShares Dow Jones US Broker-Dealers (IAI) looks vulnerable in here on a timing sell signal (but no trend signal there yet). The iShares iBoxx $ High Yield Corporate Bond (HYG) is on a timing and trend sell signal so the junk bond corporate bond-buying frenzy looks to have come to an abrupt end. The HYG has the same sell signals as it had in late April before the flash crash took it from 90 to 78 in just a matter of days. Finally, the banking stocks (JPMorgan (JPM), Bank of America (BAC), Wells Fargo (WFC), etc.) look very weak and this isn't a good sign for the financial sector or the stock market.The Fed has done everything in its power to create an illusion of prosperity by propping up both the bond market and the stock market artificially. This phony stimulus is finite so the question on everyone’s minds is how will the Fed unwind its bloated balance sheet? If stocks and bonds go back into a secular bearish trend then the Fed stands to take on enormous losses on the inflated assets it purchased. Bullish US investors and traders are whistling in the graveyard right now being long as all these warning signs are flashing yellow and red. Any cartel that creates phony demand will only create high and artificial prices to be sold heavily into until another price collapse begins again. The free market brings prices to their true value, the free market will ultimately win out because you can’t solve a global debt crisis with more debt and “money created out of thin air.” The piper (the free market) is now saying to governments (right now Europe) and all central banks, “You can pay me now or you can pay me later but you will pay me.” By the look of these falling dominoes of the PIG nations (Portugal, Ireland, Greece) it would appear that the piper is going to get paid from all PIG nations sooner than any one of us would like to admit.
It would also appear that the bear has gotten everyone “all in” to the equity markets before he came back out of his cave. The typical downside cushions for stocks are all but gone. Ben Bernanke has done a great job of forcing shorts to capitulate so that buying power on the coming decline won't be there. Mutual fund cash is at a record low so there will be no buying power there either. The only downside cushion will be “the invisible hand” that has now made itself very public and visible. The 800-pound gorilla in the room is humongous US deficits being monetized by the Fed. This has been referred to as a “giant ponzi scheme” by a world-renowned figure in finance, Bill Gross. If Gross is correct then we all know how a “ponzi scheme” ends -- in tears. Folks, we’ve seen the previews to this horror show in the May 2010 flash crash. What’s coming now could be the main event so strap on your chin strap because this could be a wild ride.
As if all of these concerns weren’t enough to worry about, we have yet more bearish items to address. The Fed just lowered its growth forecasts for GDP growth and on jobs for next year. The US real estate depression continues and 2010 is on pace toward having the lowest level of sales since the real estate collapse began. Thirty-four percent of all sales are foreclosures or other forms of distressed sales. How can this be after many trillions of dollars have been printed and pumped into the US economy by the Fed and the US government? Even more shocking is this question: How can the European debt crisis spread after nearly $20 trillion has been pumped into the global economy? The answer is a four-letter word that's the leading cause of a possible deflationary death spiral: DEBT. Debt is the enemy of every central bank, government, and citizen throughout the globe. The world for far too long has underestimated the destructive power of debt. Mortgage debt, margin debt, credit card debt, college debt, auto debt, excessive government debt, corporate junk debt are all strangling the global economy.
In summary, the debt contagion is spreading all throughout Europe in the form of a government fiscal crisis. The US economy also continues to struggle as factory orders slow and the real estate depression continues. The strong BRIC nations of Brazil, Russia, India, and China have seen their stock markets all top out and are heading south. The same warning signs and sell signals that went off four days before the flash crash are also flashing yellow and red now. Central banks are printing money to help the whole world fight off the destabilizing effects of too much debt. Unfortunately, the mass number of bailouts by governments is now leading to a fiscal crisis in PIIG nations that gorged themselves in burdensome levels of debt. The piper is now calling as he wants to get paid. The best thing for you to do now is to take a maximum defensive position because Santa Claus and his rally may not be coming to town in 2010.
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No positions in stocks mentioned.
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