I’ve watched for several years now has one analysts after another has tried to call the top of this bull market. I would argue that the world is in a severe deflationary environment and in order to hold those deflationary forces at bay central banks simply can’t allow stock markets to top.
The Fed made the mistake of allowing stocks to crash in 2008 and it intensified the recession. They made another mistake in that they let the inflation in the stock market leak into the commodity markets in 2008 causing oil and gasoline to surge higher exacerbating the pressure on consumers.
They almost made the same mistake in 2011 when QE 2 came to an end. I would argue that they learned their lesson and realized it’s easier to prevent a correction from getting out of hand rather then trying to repair it if it does.
Notice it took them almost 6 months to get the market back to making new highs after the crash in 2011. By 2013 intermediate corrections had become few and none of them were allowed to retrace more than 38% of the previous rally.
I would argue that they will not make these mistakes again. Stock markets will be propped up this time to hold off the next recession for as long as possible.
I’ve watched over the last several years as one correction after another has been terminated prematurely. It became blatant in Oct. when Bullard and Williams threatened the market with more QE if it didn’t reverse. And most recently what should have been a deep intermediate correction was aborted and the market pushed back to new highs.
Let me explain. Any professional trader knows the old Wall Street saw that triple bottoms almost never hold. Three weeks ago the market was poised to break a triple bottom. It was still early in a left translated cycle (bearish pattern). The daily cycle still had another 1-3 weeks before entering the usual timing band for a cycle low. Once that triple bottom gave way the market should have dropped down heavily into an intermediate degree correction. But miraculously on the very day that support broke the market reversed and the triple bottom breakdown failed. The daily cycle bottomed a full two weeks before it should have, and a crash or semi crash move down into an intermediate bottom was avoided. So one has to ask themselves, if every professional knows that triple bottoms don’t hold then who were the buyers that bought into the break and stopped the decline. It seems blatantly obvious that the powers that be recognized the crash risk and took action to stop the move before it got started.
Most recently the crash in oil has threatened the banking system as the fracking industry is likely to go bankrupt dumping billions in bad debt back in the lap of Wall street. However based on what is happening in the high yield market it looks like that sector is going to be rescued also. Which makes me wonder if oil has just been added to the list of markets to be artificially propped up.
Come to think of it I haven’t seen any OPEC statements lately. Several months ago they made it a point to trot a spokesman out every other week and inform the market that they would not cut production. That negative campaign seems to have come to an end.
So with central banks propping up markets, the easy money is to just buy any and every dip. But how long can this go on you ask? I would venture to guess that it will continue until the Fed makes the mistake of allowing the next bubble to form and pop.
In my opinion that bubble will occur in the bio tech sector. So I’ll be watching the bio tech market for parabolic behavior as a sign that the bull market is nearing an end. When we see IBB or BBH rally 100% or more in less than a year then we will be getting close to the end. Once the bubble pops and the parabola collapses no amount of Fed intervention will be able to save the market.
So while I think we will probably get at least a temporary top once the Nasdaq has tagged 5100 (or more likely marginally above that level) I doubt that will be a final bull market top as the biotech sector clearly hasn’t entered a bubble phase yet, and I question whether the Fed will allow the next correction to dip much more than 5%. I suspect they don’t want a repeat of October, and they will certainly avoid at all costs a correction deep enough that would force another round of QE.
Hi Gary. UkIBT was 250 last April and has hit 515 in Feb, that is well over 100%
I wish I had read this article last April 🙂
http://moneyweek.com/biotech-slump-is-buying-opportunity/
What is KUIBT?
I think he means the biotechnology ETF IBT that is listed on the FTSE.
http://www.google.co.uk/finance?cid=671687
Not enough volume in that one to use it as a bellweather for the sector.
At some point though I think IBB and BBH will start to go vertical as the retail public starts to pile in.
Very interesting reading Gary – thanks.
Are you still expecting a 5% to 10% dip on the S&P before 5100 on the NASDAQ?
I suspect it will be closer to 5% than 10%. I doubt the Fed wants a repeat of October.
Interesting article published this week about bio tech companies and their stock prices. Some good facts and figures.
‘Forget the tech bubble. It’s the biotech bubble you should worry about’
http://qz.com/324939/biotech-valuation-bubble/
Just the kind of conditions to spawn a bubble. Bubbles have nothing to do with fundamentals and everything to do with emotions.
I ignored this sector when Yellen said it was in a bubble. Just been doing some research into various biotech ETFs, and individual biotech companies, and most seem to have have had 40%, 50% or higher gains in the past year.
I will bow to your greater expertise than I Gary about them not yet being in a bubble.
Going to have a cup of tea and a biscuit and work out whether I have what it takes to buy into this sector now. 🙂
If you looking for biotech stocks here are my current holdings:
ELTP, CVM, TXMD, CTIC, ABIO
Thanks Crawford – I think I might be late to the party though… or, if Gary is right, the party is still to come.
Are you saying the HCL or the next ICL that wont be allowed to correct more than 5% ?
I’m expecting an intermediate degree correction after the Nasdaq reaches 5100, but I think the Fed will make sure it doesn’t get out of control. So I doubt it corrects 10% and maybe closer to 5%.
Almost everyone on twitter thinks the Fed will magically prop up stocks forever. How will that ultimately work out? Tepper has lightened on stocks lately (while telling people SPX could go 10% higher in 2015…perhaps he knows something that the people he is selling to don’t know)
He’s probably expecting an ICL like I am soon. He’s raising some cash to take advantage of the correction when it comes.
Gary will the same forces that prop up the market keep the gold and silver market artificially depressed by continuously dumping thousands of paper contracts in minutes. Based upon your analogy we could see the previous metals continuously depressed for the foreseeable future. Will the disconnect between paper and physical come to a breaking point?
Lets just say that as long as the stock market comes with a guarantee it’s going to be tough for gold to generate any real buying pressure other than these bear market rallies.
Some of you might find this to be of some interest.
‘Crispin Odey on debt, deflation and downturn predictions’
After reaping the benefits of world trade we are about to harvest some of the pain, argues one of the UK’s most experienced hedge fund managers.
http://www.theguardian.com/business/2015/feb/20/crispin-odey-debt-deflation-downturn-predictions
Thanks Gary,
Do you have a rough timeframe when the bubble will pop? And, what happens after it pops?
I have no idea but I think we need to see a true bubble phase where the public floods into the sector first before we have to worry about it popping.
Once it pops, are you expecting a 2008 style 50% crash, and then moving up again to new highs over a few years, or something different?
When bubbles pop they can lose 70-90% of their value before a bottom is found. It usually takes years to recover. Silver is now three years into it’s bear and oil 7 and it isn’t even close to recovering $147.
This is one of the most informative and insightful summaries that I have read on the involvement of the FED and the importance of the awareness of bubbles in the stock market.
Gary, an important and powerful post which demands attention. With the semi bubble upward action in IBB and BBH (might as well include AAPL), do you recommend stops and if so on what basis? Ten day moving average, trailing percent or what? Thanks again for this well thought out post.
The biggest problem with your analysis is that in the big picture IBB is of little consequence. According to the iShares product page the total market value of IBB as of Feb 20 is less that $8 billion. AAPLs market value is almost $800 billion or 100 x the size. I’m sure that the NASDAQ market value in 2000 was greater than $1 trillion.
http://www.ishares.com/us/products/239699/ishares-nasdaq-biotechnology-etf
In conclusion, you may be right about IBB having a bubble then crashing, but the effect on the broad market would be less than APPL going down 10%. Your idea of the significance of a 2000,2015 dbl top in COMP compared to SPX dbl top in 2000,2007 seems more likely.
IBB is the speculative tell for the market. AAPL is the big cap bellweather. The banks are the life blood.
When any of these three break it’s probably not going to be long before the market starts to stagnate and probably top.
If the market is being propped up, who knows how this will resolve. I see a huge diagonal triangle in the major avgs. – and it’s ending – and this is known for tremendous reversals.
The only way to purge debt is by purging it with assets that actually circulate.
Now that bullion’s trade value floats in real-time , bullion has the debt-free feature and full scalability
to create a new real-time gold-as-currency hybrid with fiat currency ….a yin-yang.
Destroy nothing ….. just add assets and stir.