In last week’s update we drew attention to the fact that for most of last week, we saw the equity markets moving to new highs at the same time as bonds, gold, and the $US were rising.  This was telling us that the much larger bond and currency markets were very concerned regarding the coronavirus potential for disruptions to the global supply chain, while the smaller equity markets were not concerned, making new all-time highs.

Then on Monday, the equity markets got slammed with a couple of events centered around the coronavirus.   First we had some countries outside China experience a significant spike in infections.  According the the World Health Organization the virus has reached more than 30 other countries and territories, and is spreading in South Korea,  Europe and the Middle East.  The W.H.O. site shows the total death toll now at 2618, with 78,238 confirmed cases.

The second shoe to drop came from China’s Premier Xi Jinping, who in a rare televised address admitted that the crisis had reached a “crucial stage” and the economy “cannot stand being on hold for much longer.”  Xi said  that it is unavoidable that the novel coronavirus epidemic will have a considerable impact on the economy and society.

Here is a look at some key markets.

US S&P 500:  The S&P 500 was down 112 points and 3.35%. It is now testing its key near-term support.

Canada TSX: The Canadian market chart was also hit but gold prices allowed it to absorb the blow a little better. Still, it was down 1.57% for the day

Shanghai Market: A most interesting development with this cognitive dissonance over deadly-virus supply-chain disruptions is that China is actually outperforming US, Canada, and Europe since the crisis really began

German DAX: The German market took a massive  4.01% hit and is coming close to testing key near-term support.

US Bonds: As we noted earlier the bond market has been warning of trouble ahead. Investors who do not follow the bond market are really missing a key indicator of where global capital is headed. Every week the Trend Letter highlights what is happening in all markets, including the global bond market.  In fact, we recommended a bond ETF on January 3rd and that trade is up 19% today

Gold:  Last week we highlighted how gold  had risen along with bonds, $US and equities, which is unusual. With today’s major sell-off in equities,  gold had a solid day, up 27.80 or 1.69%. Note that gold is overbought here so a pull back would be expected.

Note: This sell-off in equities and rallies in bonds, and gold are getting stretched, so we could see a rebound for equities tomorrow, and decline in gold, depending on the news of the day.

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Stay tuned!

The coronavirus continues to drive markets, and has business activity in China near a standstill.  With China’s streets, restaurants and flower markets bare, a miserable Valentine’s Day is expected on Friday.

Yesterday, the Chinese province at the center of the coronavirus outbreak reported a record rise in deaths and thousands more infections using a broader definition of ‘infected’, while Japan became the third place outside mainland China to suffer a fatality.  Here is a look at some key markets.

US dollar: The $US has been trading in a steep uptrend channel. Note on the bottom of the chart the Relative Strength Index (RSI) shows the $US is getting overbought.

Euro: The Euro has been in a steep downtrend channel, taking out a number of support levels recently. Note that RSI is indicating the Euro is oversold.  Most investors ignore currencies, which is a huge mistake.

Canadian dollar: The loonie is trying to gain momentum after its big decline since the start of the year.

Shanghai Market: After major sell-off once coconavirus was confirmed, the SSEC had a solid rebound after being quite oversold. Today’s news of an increase in deaths and infections pushed Chinese markets lower.

US S&P 500: In addition to the coronavirus we saw US regulators charge  Huawei and two of its subsidiaries with federal racketeering and conspiracy to steal trade secrets from American companies, a significant escalation in the Trump administration’s legal fight with the Chinese telecommunications company. Concerns over the apparent spread of the coronavirus held stocks back, leaving the S&P 500 down 5.521 points.  Currently trading just above its near-term uptrend channel.

Canada TSX: The Canadian market chart looks very much like the S&P 500, trading in it near-term uptrend channel. Note a bottom of chart, the RSI is getting  close to being overbought, so a pull back soon would not be a surprise.

Gold:  Gold has been struggling to continue its near-term uptrend channel. Its recent high at 1587 sits right on a Key Resistance level.  Gold needs to break through 1600, to gain momentum.

Oil: Oil closed up slightly and is trying to form a bottom at just under 50.00. A break below that support level could see oil push much lower.

Stay tuned!

We have been warning our subscribers for a few months of a looming crisis that could be the first domino to fall in what we expect to be a liquidity crisis that would affect the global financial system.

Back on September 16/19 the overnight Reno rate jumped from 2% to 10%. The Repo market is used by banks and big institutions. A repurchase agreement, or ‘Repo ‘, is a short-term agreement to sell securities in order to buy them back, typically the next day, at a slightly higher price. The implicit interest rate on these agreements is known as the Repo rate, a proxy for the overnight risk-free rate.

The Repo market is pivotal to the efficient workings of almost all financial markets. It is an efficient source of short-term funding and provides a secure and flexible home for short-term investments.

On September 16^th when that rate jumped from 2% to 10%, the US Federal Reserve had to jump in and inject over $200 billion in 3 days to quell the funding crisis and bring the effective fed fund rate back down to 2%. Two weeks ago the Fed noted it will pump another $500 billion into the overnight Repo market over the next few weeks.

What happened was the Repo  market ran out of cash, there simply weren’t enough lenders to meet demand. So now the Fed is buying very short-term Treasury Bills just to put enough cash in the system to keep the Repo market afloat.

The key point here is that banks are not willing to lend to other financial institutions because they don’t know what exposure the borrowers have.

Although this is similar to 2008 when the Lehman Bro and Bear Stern collapsed, and the Fed had to bail out the banking system, there is a big difference. Today the problem is global, and the source of the problem is most likely in Europe and the ECB has made it clear that it will not bail out any banks…this will be a liquidity crisis.

In addition, according to the Institute of International Finance (IIF) global debt is on course to end 2019 at a record high of more than $255 trillion – nearly $32,500 for each of the 7.7 billion people on earth.

There is almost $17 trillion invested in negative yielding bonds. Almost 30% of ALL government and corporate bonds globally are now yielding negative  returns.

When investors see trouble, they move their money to a perceived safer place with a better return. People keep asking us why the $US has been so strong, it’s because investors in other countries are moving their money out of Europe, Russia, China, Turkey, Argentina, and Venezuela.

A catastrophic event is probably going to happen, likely starting in Europe. The Repo crisis could very well be the start. Such an event will cause:

• a banking crisis
• pension plan crisis
• sovereign debt crisis

As an investor you need to understand that such a series of events would cause panic in all markets. Fear moves capital out of the sector or region where the problem starts, and into perceived ‘safer’ places to park capital.

Currently, with the US Fed pumping hundreds of billions of $US into the Repo market, it is causing the $US to weaken. Speculators have been selling off long $US positions and have been covering their short Euro positions before year-end.  We see this as a temporary scenario, with the $US hitting a low, and the Euro a high in mid-to-late January.

With negative rates in Europe, large institutional investors have had to move capital out of Europe and the Euro, and into $US denominated investments. We see this pattern re-emerging in early 2020.

Watch for a crisis to start in Europe, likely in the banking and/or bond markets. If that happens, we will see capital leave the Euro and move to the $US, and likely the Yen and Swiss Franc. US bonds will also benefit. Gold should also get a boost.

But the first move will likely be into $US and US bonds

Ultimately, if we see the Sovereign bond market get hit, then there will be contagion, investors will be asking ‘who’s next?’ and ‘is any bond safe?’

That is when North American stocks and Gold are likely to take off

This is not all going to happen overnight, it will likely evolve over the next 2 years.

As an investor you need to be ahead of the herd, ahead of the flow of capital

You want to be where the global flow of capital is heading. And that is what we do.

Stay tuned!

In December each year Timer Digest asks investment newsletter editors to make their predictions for the following year. In December when we were asked to make our predictions the stock market was coming off its biggest correction since 2008.

Our December forecast surprised many, as there was a lot of doom and gloom at the time. Here are our answers to their questions:

1. In your view, will 2019 be a Bull or a Bear market? Bull
2. What is your S&P 500 (target range) forecast for the 1st quarter, 2019? 2500-2830. Actual = 2834
3. What is your S&P 500 forecast for mid-year, 2019? 2830-3020. Actual = 2964
4. What is your S&P 500 forecast for year-end 2019? 2940-3300. Actual = TBD

Last week the S&P 500, Dow Jones Industrial Average and the NASDAQ Composite Index all set new all-time highs. The S&P 500 is trading above its 10-year uptrend channel, which is very bullish!

Yet despite these record highs, according to Goldman Sachs, US equity funds have seen an outflow of over $100 billion so far in 2019. Meanwhile, more than $350 billion of inflows have poured into bonds, while more than $430 billion moved into cash.

With equity markets setting new all-time highs, the American Association of Individual Investors (AAII) bullish sentiment is at 34%, 4% lower than the historical average of 38%.

Over the last 10 years this bull market has been the most hated bull market in history. There have been so many negative concerns: US-China trade war, Brexit unknowns, Iran conflict, impeachment, you name it, there have been plenty of reasons to be scared.

Fear is keeping the masses out of the equity markets and they have missed out on this bull market.  Despite all the fears in the world, stocks have continued to march higher.  These investors have missed out on the longest bull market in history.

But we need to understand that bull markets do not peak when investors are scared, they typically peak when everyone is bullish, even euphoric, because that’s when there is no one left to buy.

What typically happens is that the masses who have not been in the markets start to get the Fear Of Missing Out (FOMO). Just look at what happened during the run-ups to the 2000 and 2007 market peaks. Investors threw caution to the wind; they were buying with no fear of a major downturn.

In the 2000 tech market bubble, the NASDAQ climbed 237% from October 1998 to February 2000. But the final four months of the bull market saw the NASDAQ spike almost 85%.

While we are not expecting that level of euphoria here, we should see FOMO kick in, and the masses rushing in trying to be a part of the party. The masses are always wrong, and buy right at the top, and that has not happened yet. This tells us, despite all the reasons to be nervous, we are not yet at the peak of this market.

Looking at the markets today we can see that the S&P 500 just set a new all-time high, but  if we look at the bottom of following chart, based on the Relative Strength Index (RSI), the S&P 500 is also close to being overbought in the short-term. This suggests we could see a pullback soon, and that could be a buying opportunity.

Once the masses get on board, we will be looking to get out because there will be no buyers left, and the top will be in.

Stay tuned!