The third round of QE is finally over. And stocks keep edging up. They’ve been slower than in 2013 and the recent correction took them temporarily into negative territory. The trend currently is that investors simply have nowhere else to go with bonds fluctuating constantly and commodities faring even worse.
Despite the slowing of affluent spending ahead in the U.S., it continues to look stronger than Europe. China’s economy is consistently slowing and Germany is not doing well at all… these are all things we’ve warned were coming.
But even after the 10% setback into October 15 for stocks, they’ve roared back stronger than ever. This may be the final hoorah for the “market on crack.” The Fed has rigged the markets so there’s nowhere else to go but stocks and the bulls keep running… and they’ll run until they’re out of steam, which looks like it’ll be very soon at this point.
Today’s latest surge comes from another doubling down on QE from the most desperate country in the world, Japan. This is simply insanity. There’s no other word for it.
I see a big shift coming by looking at chart patterns across financial sectors…
The clearest one is the Megaphone pattern on the Dow (and many other sectors like the Russell 2000 for small-cap stocks).
Each bubble over the past 14 years has taken the markets to new highs in 2000, 2007 and now 2014; but each crash has also taken us to new lows. I’ve been predicting the Dow would peak just over 17,000 and then fall to a level between 5,500 and 6,500 depending on when the bottom trend line above is tested.
Throughout 2013, the Dow gained 25%. Yet if you look at the last bull run from mid-November 2012 to the end of 2013 the Dow gained 33% — from 12,500 to 16,600. At its top on September 19 of this year and the retest of that today on October 31, the Dow only gained 4.2% at best.
It’s hitting resistance at the top trend line of this massive Megaphone pattern… and the Fed is tapering and taking away the punch bowl.
Not including China, the emerging markets are the only ones that still have strong demographic trends but they’ve stayed consistently down since early 2011. Why? They correlate much more with commodity prices than with U.S. and other developed countries stock markets.
Commodity prices are down about 27% since late April 2011 and stocks from emerging markets represented by EEM (ETF) below are down 20%+ in recent weeks. Look how EEM has traded between $36 and $45 since September of 2011 in a long A-B-C-D-E sideways channel.
This consolidation should be about over and it should break strongly, regardless of whether it is up or down. The best interpretation was that the recent high peak (E) that broke back to the top of the channel at $46 was the final wave up.
This pattern suggests a drop to at least $27 in the coming year, especially if it pushes below that $36 level ahead convincingly. That’s 41% down from the recent high… and that’s just the next drop coming most likely in the next year. That would only be consistent with a continued fall in global growth.
In respect to gold, most people are keenly aware that its prices have been plodding along in a sideways pattern since May of 2012, with a distinct line in the sand around the two bottoms it hit when it neared $1,180. Gold broke below that level today. Hence, another drop is likely approaching with the next support at around $700. Oil is also close to breaking down from a long sideways pattern at just below $79. It could fall as low as $10 to $20 in the next several years.
Another commodity that best represents global growth is copper. Its horizontal movement has been going on since about May of 2013. It’s been hovering near $3 recently but keeps bouncing off of $3. If it falls much below $2.90… it’ll be curtains for copper, commodities in general and global growth.
Global growth has been declining steadily from a peak in late 2009 of 5% to a low of 2.2% in mid-2012 and 2.7% recently.
Here’s the bottom line. From late 2014 to early 2015, the scene will be ripe for a major shift in the markets. The chart patterns and our fundamental indicators and cycles all strongly suggest it will begin slipping down starting in early 2015 at the latest.
Be selling on rallies, especially as the Dow hits one more new high at 17,400+. Look to get out a little before rather than after a peak as bubbles like this one will burst quickly… just as gold’s did in early 2013.
My Strategy for the Rumor Mill