Over the years and in particular since the last financial crisis, I have always maintained that the crisis would return and the stock market would collapse. The natural progression of the stock market is a reflection of social mood and it follows an Elliott wave pattern. This pattern is terminal which is telling us the stock market will suffer a bigger decline than that of 2007-2009. What I underestimated was the ability of central banks to delay the next crisis. They have succeeded in delaying the next collapse but today, I am afraid, they are losing the battle with deflation. Deflation is what they wanted to avoid at all cost. Deflation occurs after a stock market collapse. The day of reckoning looms.
Today we see the beginning of the end. We have many negative signals:
The FTSE 100 index is the leading index, it has gone down from 7727 to 7020 in less than a month. The move down is impulsive which is an indication the trend has turned down. The FTSE is weaker than the S&P 500 due to the large proportion of banks, miners and oil companies in the index. These stocks as a group are a leading indicator of the global economy, when they are depressed as they are now, they tells us the global economy is in trouble. This is why the FTSE is depressed. The FTSE tends to turn down before other indexes because when the global economy is suffering there is less demand for oil, metals and low interest rates are bad for banks. So the FTSE is leading us in the right direction, it is telling us the trend is down.
Bond yields are hitting multi-year lows, the amount of negative yielding bonds has increased dramatically. That is what happens when deflation takes roots. The global economy has been artificially inflated for too long, it is now deflating and the central banks are running out of ideas to save it.
Gold is hitting multi-year highs. There is demand for gold because investors fear the central banks are losing control. The truth is, they are losing control, they are running out of ammunition. When the Fed cut interest rates recently, Fed Chairman Powell struggled to answer questions about why the cut was necessary. You need to ask the question, why would investors buy gold if they thought the global economy was fine?
Everything is becoming clear now which should be very profitable to trade. The strategy will be to sell the rallies but we can’t stay short for too long. There will be many rallies triggered by Trump and the Fed. You can see what happened last Friday and the subsequent rally on Monday caused by Trump. These rallies will provide opportunities to add new short positions.
These rallies will happen because Trump and the Fed will intervene many times to reassure investors that everything is fine. When people finally lose confidence in Trump and the Fed, when they realise that their soothing words are lies, they will sell, sell, sell. This is where we are heading. People will see that this trade war with China will last many years. Markets will go down and each time Trump de-escalate the situation and markets rally, it will be a pause in the downtrend, a time to reload the short. We are not far away from the next crisis.
Remember this chart I posted in July, we are getting there.
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