Bulls, Bears & Bear Market Rallies: a Global Perspective

Transcription

1 December 7, 2015 (revised Dec. 9) Bulls, Bears & Bear Market Rallies: a Global Perspective Adapting to the Bear Market - Strategic Asset Allocation Swing Trading & Scaling-out Figure #1 Wave (B), the final Bear Market Rally ended months ago the Mother of all Bear Markets Crashes is positioned to blast-off In Bear Markets, most equity longs are wrong. In the midst of free-fall panic-selling, quality stocks get liquidatedd right along with the dogs. In other words, the distinction Page 1 of 14

2 between the best and worst stocks is lost to fear. As a result stock picking becomes an exercise in futility. In this environment the long/short strategy, employed by many hedge funds offsets profits in shorts with losses in longs, for a net gain of zero. Bear Market, Asset-Class Investing In an economic contraction, you want to be invested in the few asset classes that are going to appreciate. These include a few longs in nascent Bull Markets, such as the inverse ETFs, shorts, the VIX volatility index and Natural Gas. Next best are those just beginning Cycle Degree Bear Market Rallies, such as Gold and Crude Oil. When the investment environment turns wildly volatile, even these winning asset classes must be swing traded if you intend to hold onto your gains. Those who persist in a Bull Market, buy & hold mindset experience frequent round trips back to, or below cost. Bear Market Rallies are 3-wave structures, which take back much of the profit from the a-wave in a reversing wave b. However, if you scale-out near the top of the a-wave as the RSI shows highly overbought, and buy back at the conclusion of wave b, your profit in the long wave c, compounds profits from waves a & b. This strategy described above accounts for our continuous #1 Timer Digest Ranking, since January 2014, precisely when the Bear Market collapse began. For the trailing 12 months, our long/short trading signals for the S&P aggregate to 49.31%, versus a minute Page 2 of 14

3 gain of 0.95% in the index itself. As one client attests in a LinkedIn recommendation, when the Timer Digest signals are used to trade the S&P Futures, gains exceed 340%. Only past Bear Market performance has any predictive value of future returns Such Bear Market performance demonstrates the skill to optimally maneuver Bear Markets. On the other hand, a long track record earned in mostly Bull Markets, tends to conceal shorter periods of Bear Market disaster, and therefore is inversely correlated to returns you can project in the upcoming Bear Market dive. If you are going to compare apples to apples, only performance in recent Bear Market declines has any predictive value on future Bear Market performance. Look specifically to performance from January 2008 to March 2009, along with the flexibility to go long in late March-early April 2009, as we did. When markets turn from Mild to Wild, a hold conditioning becomes self-sabotaging. This time the Fed will be impotent against the monstrous bearish trend. Only with the trend in a bounce, will it be able to amplify moves, only to make the subsequent plunge all the worse. This time, the long run will stretch-out far beyond your expectations. To quote John Maynard Keynes in one of his most lucid moments: in the long run, we are all be dead. First & foremost, adaptation requires a Bear Market perspective As a money manager, Family Office or individual, optimal adaptation to the Bear Market begins with the larger perspective which you will gain from this New-Wave Elliott analysis of Global Markets. Hopefully these insights will save you a lot of money. The second step is to radically revise asset allocation to insulate your portfolio from fat tail risks. These are risks that our financial paradigm totally ignores because they cannot be quantified by conventional formulas. Page 3 of 14

4 Moves that go too far, too fast are often reversed As the investing herd sells long stocks in a panic, it drives up the price of their reciprocal inverse ETF funds too far, too fast. This provides you the opportunity reap profits near a high, then wait patiently for prices to subside, to buy back. Done over and over as matter of course, this strategy compounds portfolio returns second only to Bear Market allocation. For example, in the previous dive from the 2008 high, the market dropped 38% into March However, swing trading unlevered accounts allowed us to reap profits in excess of 240%, while our 2x levered accounts earned over 360%, albeit with a 50% increment in volatility. That previous experience becomes invaluable in this market. The 95% of professionals who fumbled in , can be expected to do the same, only this time the stakes are 16x higher than in A toned-down strategy for Institutions For the investment establishment, market timing is heresy. To insulate your career in such environments, you must learn to tone-down technical insights, and always have a ready fundamental basis to back your tactical trading. Implementation starts with raising cash to the allowable limit, and re-vamping asset allocation to overweight stocks of gold miners, oil & gas producers, and the $VIX volatility index. Some may be able to short via inverse ETFs. The levered, inverse ETFs are highly liquid, the unlevered are not, you can often drive a truck between the bid/ask spreads. To create a synthetic, unlevered ETF, you simply allocate 2/3 of the position to T-Bills, to back-out the leverage. Only History s Bear Market lessons are relevant In Figure #1 you find the history of the US Market since 1900, highlighting Bulls, Bears & Bear Market Rallies. Given the last Bull Market ended in 2000, and the next one is likely 20+ years away, for now focus your attention on Bear Markets. All Bear Market structures sub-divide into A-B-C With only slight variations, all corrections and Bear Markets are A-B-C structures in which waves A & C are plunges, between them there s a B-wave, Bear Market Rally. At Page 4 of 14

5 Supercycle degree there is at least one Crash, as a function of the huge leap in magnitude. Supercycle Wave (II) began and ended in Crashes. From a monthly perspective, the Diag II of the larger structure is reflected in numerous lower degree fractals. Such fractals preview and confirm an extremely long, Bearish dive to follow. These were discussed in a recent piece on Bear Market fractals, if you missed it click here to save it in pdf for later. Figure #2 The $VIX, volatility index the most Bullish of all Asset Classes The Bullish Diag II in the VIX is the most bullish of all price patterns, only exceeded by higher magnitude Diag IIs and a greater number of echoing fractals. The VIX is in a Supercycle Bull Market, the inverse mirror image of the Supercycle Bear Market in Page 5 of 14

6 equities. Just as equities have been gearing-up Bearish magnitude since 2000, so has the $VIX been augmenting Bullish Magnitude, for a unprecedented roaring Bull Market. Obviously this the one long position that should replace many US equities. Figure #3 Gold Beginning a substantial wave B Bear Market Rally Funds Flow out of US Dollars into Gold & the Euro The collapse of the US Equity Market will be reflected in a plunging greenback. As foreign investors sell US securities, they sell dollars to repatriate funds in their domestic currency. The flow of funds will be highly in favor of gold and Euros. The Gold chart above is juxtaposed against inversely correlated US Equities. Log scale distorts the price data near the top to appear far smaller than they are in fact. After so many false starts, both US Stocks and Gold have reversed for the long haul. After such conditioning, few gold bugs expect this rally to last. The nascent long rally in gold confirms the demise of stocks. To view the recent in-depth discussion on Gold click here, as before, save it for later in pdf, and continue reading. Page 6 of 14

7 Figure #4 The $US Dollar is nearing completion of a major Cycle Wave II top, a plummet far below 72 will follow In Figure #4 above, you find the chart of the US Dollar index. In brief, the Dollar Bull Market ended in mid Everything since has been part of a 3-wave Bear Market. The Diag > pattern indicates dramatic reversal ahead. Cycle Wave II at the far top right is a Bear Market Rally, coming to an end. We can expect the high for the dollar index in the vicinity of 103. What s more, further confirming the terminal bounce is its stone s throw vicinity to the most frequent 61.8% Fibonacci retracement of Cycle Wave I, near These targets will likely be met or exceeded within the month. m In the lower section Relative Strength, RSI, the Greenback is more overbought than at any time since Page 7 of 14

8 Most Global Stock Markets are synched with the US have topped in lock-step Figure #5 The Shanghai B-wave Bear Market Rally is complete a Diag II at the beginning of wave C confirms the impending free-fall At Cycle degree, crashes are far milder than at Supercycle magnitude, and the subsequent recovery swifter, to result in a purge of waste, as the foundation for a stronger economy, from which to overtake the US as the largest economy on the planet. Below the DAX, German index, also showing a completed Bear Market Rally (B) wave reversing into a Diag II, to herald the beginning of a long bearish trajectory. The pattern Page 8 of 14

9 including a failure in wave (A) in 2011, echoes the US Supercycle (II) Bear Market trajectory from , at the conclusion of the roaring twenties. Figure #6 The structure of the DAX (B)-wave Bear Market Rally echoes the US Supercycle (I II) Page 9 of 14

10 Figure #7 The Euro in a 9-12 month Bear Market Rally to complete a Diag II A nascent Bear Market Rally, such as you see in the Euro above, presents an intermediate-term swing trade opportunity, likely lasting 9-12 months. Appreciation to the minimum of /$, represents an 18% return. Should the move become accelerated by US market dynamics, the annualized return will increment proportionately. A Bear Market Rally of such duration is a swing trade, those who hold the Euro after it peaks, may squeeze a bit more profit from it, but the high probability/low-risk trade ends at /$. Page 10 of 14

11 Figure #8 Natural Gas - a Nascent Bull Market, soon to soar through the roof! US liquefied Natural Gas ports will export to Europe to cut-off Putin s European Revenues Natural Gas is the fuel of the future! While crude oil is in a Bear Market Rally, Natural Gas on the is in a true, nascent Bull Market of long duration. A confluence of factors, including the building of liquefied Natural Gas ports in the US to export oversupply, is motivated by the intent to impose even greater economic sanctions on Putin. For the moment, Europe depends a great deal on Russian Natural Gas. Until recently, there was no alternative. More liquefied Natural Gas ports are already on the drawing board. Such exports will decrease US supply, and given constant demand, prices must rise over time. US liquefied Natural Gas to fuel high-energy demands of Chinese de-salination plants In China where pollution is already too high, and fresh water is as scarce as in California, desalination plants fueled by natural gas are the answer. Chinese coal has been utilized to generate electricity, in order to minimize imports, and enhance balance of payments. This Page 11 of 14

12 cannot last with people dying from pollution inhalation. As any economy progresses beyond industrial age, and the basic needs of food and shelter are met, health concerns become a priority, as they did in the US and Britain post the industrial age. What s more, the equivalent amount of natural gas results in 10x the equivalent BTUs (British thermal units) as oil for power generation. Gas is the future and will cannibalize demand for both coal and oil. New Wave Elliott in a nutshell From a New Wave Elliott perspective, this chart of NatGas demonstrates a outsized, bullish Diag II to kick-off the Cycle Bull Market. The retracement of the Diag II, marked by the dashed purple line at , already occurred in 2012 before Primary wave 1. This low will likely be revisited a third time in the coming days. Cycle Wave III is most often at least 1.618x the perpendicular height of Cycle Wave I, and sub-divides into five Primary waves. Primary 2 is fast coming to an end. Primary wave 3 represents a bullish upside of 10.5, at least 5x the low price. This is one chart you will want to study by copying. The wealth of knowledge is available by simply copying this chart and extrapolating it into weekly, daily and 2-hour increments is far beyond your estimation. While few will take the time to actually do this, tremendous insights into New Wave Elliott, and a lifetime of trading enhanced profits are available for the few who take the time to do this exercise. Page 12 of 14

13 Figure #9 Crude Oil Weekly a Bear Market Rally Crude Oil is in the process of bouncing in a wave iv of a Diag II - in other words, a Bear Market Rally to the area of at least 90 and possibly as high as 105. Subsequently, Crude must drop below 45, find a long-term bottom near $20 a barrel. Note that from the B-wave annotation, this is C-wave to complete the A-B-C Cycle Bear Market. Note the similarity with the uro Chart in figure #7, also beginning a wave iv within a Diag II, Bear Market Rally. Page 13 of 14

14 Figure #10 CRB Commodities Index a Nascent Cycle Degree Bull Market The CRB has completed Cycle Wave II and likely completed the reversal transition in the long wicks shown. Cycle Wave III up next should exceed 465 top of Cycle Wave I by at least 62% to the area of 752. This is the optimal Asset Allocation to ride out the Crash in stocks. Eduardo Mirahyes Page 14 of 14