On the heels of continued weakness in the stock market, legendary short seller Bill Fleckenstein just warned this mania spawned by central bankers may have just come to an end.
By Bill Fleckenstein President Of Fleckenstein Capital
January 31 (King World News) – I’m not going to bother to discuss overnight markets because they really don’t matter at the moment. What I’d like to turn my attention to right off the bat is the S&P 500 and the chart formation.
When I wrote yesterday’s headline about the decline being about Trump or exhaustion, I was referring to the potential for the island reversal formation that’s been left on the S&P 500 index as a sign of exhaustion. Longtime readers know that I don’t pay much attention to a lot of things in technical analysis, but I do pay attention to exhaustion patterns, as I’ve been involved in taking the other side of various manias spawned by the incompetent and irresponsible central bankers…
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An island reversal is a bona fide exhaustion pattern (head-and-shoulders tops are a variation of that), and in my opinion there is really none that is more telling. After yesterday’s island reversal, we had a doji hangman on the chart (without getting into the gory details, hangmen and hammers are two of the candlestick formations I also pay attention to). I don’t want to debate the efficacy of these potential signals, I just want to make the point that the euphoria from the Trump election may have exhausted itself, as this is certainly the right timeframe.
I have mentioned in other columns that in 1980 the market ran from December until early January (depending on the index one looks at). This recent romp has lasted longer, but with all the free money from central bankers, for it to go longer and be crazier is not exactly surprising. In addition to what I noticed yesterday I received an email from Mr. Skin making the very same point, which to me adds weight to its credence, given his superb ability to read the tape. (I would encourage everyone to read his email in Ask Fleck.)
That Was Fun While It Lasted
What does all this mean? Potentially, it means the stock market is finished on the upside because it has finally exhausted itself, just as the housing market did in early 2008, the stock market in 2000, and perhaps the bond market last summer when we had the big surge in negative bond rates. If that is the case, obviously stock prices will begin to decline in earnest at some point. We could easily see air pockets along the way, given how lopsided the rally has been, but there is going to be no shortage of reasons for people to sell stocks based on Trump.
As I have said from the day he was elected, the only thing I was certain of was that there would be a great deal of uncertainty, but the stock market was not worried about that and assumed anything positive he did would be quick and painless. In other words, no increased risks or a lengthy timeline to accomplish any changes were imputed to stock prices, just relatively pain-free success — a point I have made many times.
As an aside, for the handful of readers who keep sending me emails about what a horrible guy Trump is, please save yourself the effort. I understand all of your points. My reason for discussing him as unemotionally as possible is because his personality, character, and ethics matter less than what he actually does. Having said that, if the market has rolled over, his traits that irritate people could matter to the markets, but ex that development I am going to try to focus only on his actions. Hatemail about Trump won’t be posted and I’m not even going to bother to read it.
Dipping a Toe In the Shallow End
With that potentially important preamble out of the way, I’ll turn to the action. The market declined about 0.5% through midday in rather orderly fashion. In the afternoon, the S&P/Nasdaq bounced back to unchanged, while the Dow was held to a 0.5% loss. I added a token short in IBM and intend to look for some more on the thesis that exhaustion has been seen. I will throw in the towel on that idea if the S&P can manage to get back into the gap, and I may give up on whatever other individual ideas I come up with before then, for whatever that’s worth.
Away from stocks, green paper was hit hard, most likely because the stock market declined and/or there is angst about what Trump may do. Remember that the only market that went crazier on the upside than the U.S. stock market was the dollar. Thus, it could be headed for some rough sledding. Fixed income, predictably, liked the weakness in the equity market, oil was flat, and the metals came to life, with silver up 2.5% to gold’s 1.2%. They are liable to really get some legs if the dollar gets weaker and people start to wonder how they are going to protect themselves from the chaos emanating from America, as well as the rest of the world.
Included below are two questions and answers from the Q&A’s with Bill Fleckenstein.
Bonus Q&A
Question: Fleck I just heard a radio ad for a real estate finance company that is offering 0% down mortgages with a 3% kickback “So you immediately have 3% equity in your house!” (I presume they jack up the interest rate to make up for it.) This can’t possibly end badly… 😉
Answer from Fleck: “Subprime auto loans are where the abuse really was in this cycle, but it is much smaller than the abuse in the prior housing bubble.”
Question: Hi Fleck, Hope all is well. As you may know, in July 1944, just weeks after the successful Allied invasion of Normandy, hundreds of delegates from around the world gathered in Bretton Woods, New Hampshire to determine the future of the global financial system. The vision was simple: America and the USD would be the center of the universe, and every other nation would revolve around the US. This system provides a huge incentive for the rest of the world to hold trillions of dollars worth of US assets– typically deposits in the US banking system, or US government bonds. It’s what makes US government debt the most popular “investment” in the world, why US government bonds are considered extremely liquid “cash equivalents”. As long as this system continues, the US government can continue to go deeper into debt without suffering serious consequences. Just imagine being totally broke… yet every time you want to borrow money there’s a crowd of delighted lenders eager to replenish your wallet with fresh funds. This has been the US government’s #1 advantage. Now there really is an alternative. Technology. Ripple, a blockchain-style protocol that’s funded by Google Ventures (among others), is now being utilized by international banks to send and receive transactions directly. The way international bank transfers work now relies exclusively on the US financial system. So now, banks don’t have to use the US banking system anymore; they can send real-time payments internationally using the Ripple protocol without the regulations of the US Banking system through correspondent accounts. Blockchain Will Be Used By 15% of Big Banks By 2017 … Blockchain Will Be Used By 15% of Big Banks By 2017
So what do you think is going to happen to the US banking system when Blockchain becomes more predominant? Will it reduce dependence on US Dollar causing it collapse and therefore the US Bond Market is impacted as well? Is this not bullish for Gold and Commodities? Thanks
Answer from Fleck: “I think it is way too early to have a strong view of where these block-chain-based payment systems may take us. They could undermine the dollar to some degree, as could other issues, but I don’t have a strong opinion at this juncture.”
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