Stock markets ready for a major reversal, and why “Bitcoin is a fantasy, gold is gold.”
By Bill Fleckenstein President Of Fleckenstein Capital
December 4 (King World News) – Late Friday afternoon, well after the market closed, we found out that the ABC News story about Michael Flynn was only partially correct and potentially nowhere near as problematic for the Trump administration as it first seemed. Then, early Saturday morning, the Senate passed the tax bill (as expected). Thus, I kept a close watch on how the market opened Sunday night and how it traded today, with the most important potential development being if the market sold the news…
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Up, Up, and Not Away
The SPOOs opened about 16.5 points higher last night, then traded in a tiny range. I only bring that up because I was sort of shocked how so many various markets opened at a particular level and then just sat there, which didn’t really strike me as what one would see if the trends in force were going to continue motoring in the same direction. That is not the sort of observation I would normally act on, but I did think it was odd, so I’m passing it along.
The first hour of trading today saw the S&P about 17 points higher, i.e., 0.75%, while the Dow was up more than 1%. Interestingly enough, however, the Nasdaq was red, with the SOX particularly so, and sporting an ugly pattern in that it had a big “hangman” candlestick on Friday and then traded down. Often patterns like that are quite meaningful, which is why I pass that along as well. (I took a little action by shorting Skyworks and Nasdaq 100 futures, the latter for the first time in about 20 years, but both were small positions.)
In the afternoon, a Nasdaq rally trimmed the losses to almost nothing and it looked like I would get stopped out on my futures short (which was set at unchanged), but that rally fizzled (just in time) and it rolled over to trade back to the day’s lows. It then tried to stabilize, but instead slid again to close down 1%-plus. The Dow gained 0.3% while the S&P was slightly lower. I decided to wait to see how tomorrow goes before doing anything else, but I intend to be very careful and under no circumstances will I let this trade go against me. I would grade today’s action as being supportive of (but inconclusive) regarding my exhaustion thesis.
From Tax Bills to Dollar Bills
Away from stocks, green paper was the beneficiary of the Senate passing the tax bill, but here too I am looking for a sell-the-news development because I also think, while the tax bill has almost certainly been discounted, the potential skirmishes between Trump, the Democrats, and the Republicans are only likely to intensify because the Democrats want to believe Trump stole the election (because how else could he have won) and is somehow guilty of doing something illegal, and of course Trump is fed up with all that. Meanwhile, the Republicans take turns being mad at him or the Democrats.
The bottom line is I think the ugliness of the infighting won’t be especially bullish for foreigners, which is why I think it has a chance to have more of an impact on the currency markets than anywhere else. If by chance the stock market does sell the news, then any of the conflicts between the political parties could be cause for angst (after being laughed off as long as the market was going higher).
While I’m on that subject, the possibility of the market feeding on itself on the downside remains quite high. The most important takeaway from last Friday morning was how much damage was done so easily in the space of no time! It doesn’t take much imagination to see that if action like that lasted for very long, it could really feed on itself as volatility sellers and adherents of all the other “clever” strategies would be beating up on each other.
When the Going Gets Weird, the Pros Say, “No”
For those who are feeling sane and left out of the party, I would just like to share that you are not alone. Paul Tudor Jones, who is as smart about investing as anyone, and as great a trader as there is, has decided to close down one of his funds because he hasn’t been able to do that well in this crazy environment where nothing makes sense.
There were various quotes from Jones over the weekend, but I wanted to share this one:
“In the face of a shock, investors may be surprised to find
themselves jammed running for the exit.”
That is just another way of saying that the market is very brittle and liable to feed on itself on the way down. Howard Marks recently made the same point, but said it differently:
“The amount and quality of liquidity is lower than people recognize…hidden leverage in the market will make a mass exit even more challenging.”
As I say, these are just other ways of describing the brittle and crash-like structure that I have been discussing for a while now.
As for the other outside markets, fixed income was slightly weaker, oil lost 1.5%, while the metals fell about 0.5%.
Included below are three questions and answers from the Q&A’s with Bill Fleckenstein.
What Tax Cuts?
Question: Hi Will. Am I missing something here? My wife is a CPA and equity partner in her firm. She pulls in about $400K a year. She ran the numbers on both the House and Senate bills as it stands now. If we use last years return were going to owe $3000 to $4000 MORE a year on our taxes if this passes!! So they want the middle class to pay for a tax decrease on corporations? Does the public know this? This is the biggest screw job ever!! Have a good day.
Answer from Fleck: “You and I are of the same opinion. Maybe the final plan will be different. Some will get cuts, but many will pay more, so that corporations can pay less.”
CNBC Being Turned Off
Question: Hi Fleck, I went into the Fidelity Investments office today to deposit retirement funds for our company. After a minute or two I realized that CNBC had been replaced by HGTV. I could’t believe it! I admitted to the rep that I have a poor understanding of the retail mindset and asked what happened. He said the “manager” decided that the financial news was making people “anxious” and they were trying to create a “calm” environment for their clients. One wonders if Fidelity is actually capable of front running an increase in volatility. Thanks for all you do.
Answer from Fleck: “Well, almost anything is an uptick over Bubblevision, but I get your point.”
“Bitcoin Is A Fantasy, Gold Is Gold”
Question: Fleck, No question but just musing and seeing if my thinking is credible. The mania in crypto currencies has me thinking that this might be a generational thing. In these times older people would tend to gravitate toward precious metals; younger people are more comfortable with tech and therefore tend to gravitate to things like Bitcoin. Also when precious metals rose in 2009-2011, maybe part of the crowd has now shifted to crypto currencies from metals in order to protect them in what is very apparent a dangerous time for regular currency and equities. With the tax plan essentially passing we could be looking at a depression in the future.
Answer from Fleck: “You are way overthinking it. This is mostly about momentum and wild speculation, caused by central banks, than anything as cosmic as millennial preference for Bitcoin over gold. Bitcoin is a fantasy, gold is gold.”
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