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Zig Zag Zig and maybe a further Zag Zig

Posted by jdavis on August 26, 2011

A question popped into my head yesterday, as I was writing to long-standing clients as they are about to place significant further funds with us.  “Why shouldn’t private investors increase their wealth in falling markets as well as rising ones?  Why should it only be the likes of Goldman Sachs and JP Morgan etc who do so?”  [Incidentally, I somehow doubt their clients do…]


It is so simple a question yet it seems to set off alarm bells in people’s minds.


What if its not a falling market?  [What if it is?]
Will you get the timing right?  [Will you get the timing right in a rising one?]
Its not what everyone says you should do.  [Maybe that’s the clincher.]
Etc.


Actually, it has the same investment issues as trying to increase wealth out of a rising market – Are the conditions right?  What is the greater probability – fall or rise?  Etc


Well, we have seen the FIRST leg down in the markets – I have a high conviction that it is merely the first leg.

 

 

This Zig has been a circa 20% fall from the May high (that on 23 June I wrote “I am of the view that May 1 2011 … may well be the peak for years.”  Certainly, I then thought there may be one last sharp gasp up however, the sentiment held and holds.


[Incidentally, the high in the UK FTSE was as long ago as February.  Its curious none of the media outlets noticed.]


It appears to us that we are now in a Zag up.  I have written recently that I could see 1250-1300 as the next high.  (I wrote it when there was still doom and gloom around everywhere and markets had stopped falling but the media and the commentariat had not seen it.)


Our analysis leads us to conclude that, subsequently, we will see a further Zig down.  This time to around 1000, the lows of last Summer – and a c 30% fall from the highs this year, and possibly much lower.


As I wrote on the 18th, “We could be in another 2008 mindboggling crash, which would be Zig down [Done], Zag up a bit [Probably in the course of], Zig way down, Zag up a bit, Zig down further, to levels way way below where we are, or even got to in 2009.  That would set up the buy of a generation, as I have pointed out previously.  Whether or not we are in that now, we expect it within 12 - 36 months from now (2013 looks a likely candidate, if not now).”


One of the many many reasons for this view is what has been happening to bank stocks.

 

 

The Bank Stocks’ Index went down to, not just the lows of Summer 2010, but to levels seen in 2009!  Only a few months before these levels did we have the bottom of the biggest economic and financial collapse in history.


See also, how the Bank Stocks topped out way back in Spring 2010 – a full YEAR before the wider market topped.  That, in itself, was a hint that all was not well with the economy and global markets.


I wrote, as the wider market continued to rise, several months ago that without bank stocks’ “agreeing” with the wider market, the market would be most unlikely to stay at the high levels.  At that time buying stocks was all the rage in the press and the media.  To suggest anything other than just “Buy” was tantamount to heresy and was generally viewed with contempt (just like 2006/07 and again now when to suggest buying into property was and remains financially imprudent and was / is treated similarly.)


Yet another reason is the state of Govt Bond yields.  This is the rate of interest the government has to agree to pay in order to borrow.

 

 

This is the chart of US 10 year rates.  [When rates fall, government bond values rise – the yields on the investments reduce when the capital values rise and vice versa.]


Again the level went down to 2009 levels which very strongly implies a new Recession.
In fact, and this is crucial, rates went BELOW those of the 2007/09 crash.  I have also written previously how the bond markets are smarter than the equity markets.
In other words they are usually more right.


If the bond markets are indicating a crash taking us to a level LOWER than March 2009, we really need to sit up and take notice.


Thus, our view is that stock markets may be rising a little now.  Within days I expect to contact clients individually to recommend increasing their holdings of the S&P inverse fund and The Eclectica Absolute Macro fund.


Again, as I said previously, should markets turn down immediately, then we hold our current positions, watching markets fall while we lose precisely nothing.


This view would alter were the market to rise far and with conviction.  Our analysis leads us to believe this is not the most likely outcome.
As I said before, we’re even thinking that whether or not there is QE3 it could turn out like the debt ceiling debacle when, instead of the market rising sustainably (as everyone said it would), it fell off a cliff on approval of yet more debt.


Clients who have cash funds in their bank accounts etc should look to invest with us now to take advantage of this change in medium term direction and for the long term.
Remember, ALL our client portfolios are safe.

 

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