This Week's Stock Market Analysis & Warning in Layman's Terms

As you likely know, the stock market, trading, and even long term investing are not easy. That’s why in this post we want to make the complex simple for you. We will do this in a way that will give you that “Eureka!” moment regarding knowing what the stock market is doing now, and where it is headed over the next 12-36 months.

Last August we spotted trends in the underlying financial system that are very early warning signs that the bull market in stocks will be coming to an end, along with this growing economy. There is a ton of data taken into account for this information, but we have broken it down into simple bite size points that simply make logical sense, from a technical analysts perspective.

First Warning

Back in April 2017, we posted an article showing the first set of data that most traders and investors do not see or follow, mortgage delinquency rates. Delinquency rates in Single Family Residential Mortgages and other Consumer Loans began to climb through the second half of 2016 and continue to rise today. We shared with readers a way to take advantage of this using the Real Estate Bear Fund (DRV). This fund is now up over 20% and climbing as it rises when real estate falls. The rise and timing of this delinquency rate increase coincide almost identically with the Fed when they raise rates. And the problem is not just mortgages defaulting, the same is happening with commercial loans, and credit card debt.

Just look at what has the fed being doing like a mad-man of late? Ya, jacking up rates like they are going out of style!

The graph below shows a red line which is the fed rate, and as that rises so do loan delinquency rates (blue line). You will also see the grey shaded areas on the graph, and these are bear markets (falling stock prices). It’s obvious that we are headed towards financial issues once again with debt and the stock market.

Mortgage Rates and Delinquency Rates on the Rise

On March 18th 2018 we post an update showing how real estate foreclosures are starting to rise dramatically! Subscribers to our Wealth Building Trading Newsletter took advantage of this as we got long SRS inverse real estate fund which jumped over 5% in the first two days of owning it.

Second Warning – Asset and Business Cycles

Because we are traders and investors our focus is on making money, so we are only looking at the blue wave/cycle on the diagram below. The blue cycle is the stock market, and the numbers posted along that cycle indicate which stocks/assets should be the most in favor, rising.

As you can see the numbers 9 and 11 at the top are both commodity based (precious metals and energy). And knowing that commodities typically perform well just before a bear market in stocks unfolds, we are on the cusp of a new trade that could last a few months and post significant gains.

COMMODITY PRICE INDEX

Take a look at the commodity index chart below. Without getting to deep in to stage analysis I will just say commodities have formed a very strong “Stage 1” and are primed and ready for a multi-month rally.

Third Warning – Psychology of the Market

This market appears to be in a EUPHORIC “wonderland” moment driven by the fact that the global central banks have created a waterfall event of cheap money that is driving all of this asset valuation recovery. And, as capital is continually searching for the best environment for ROI, it is moving into the best areas of the global economy for survival purposes which we feel should soon be commodity-related assets, then eventually cash once the bear market takes hold.

Stock Market Conclusion

In short, as long as the capital continues to flow into the securities (stocks) and commodities in search for the best return on investment, we will continue to see markets hold up. But, stay cautious because when the markets turn and money is no longer looking for the next top performing sector or commodity, but rather just wants to exit investments as a whole and convert to cash (cash is king), that is when the bear market starts, and it could be very quick and violent.

Additionally, as we’ve shown with these charts and graphs today, we are entering a frothy period in the markets, and we would urge all investors to be critically aware of the risks involved in being blind to these facets of the current stock market and housing bubbles.

With 53 years experience in researching and trading makes analyzing the complex and ever-changing financial markets a natural process. We have a simple and highly effective way to provide our customers with the most convenient, accurate, and timely market forecasts available today. Our stock and ETF trading alerts are readily available through our exclusive membership service via email and SMS text. Our newsletter, Technical Trading Mastery book, and 3 Hour Trading Video Course are designed for both traders and investors. Also, some of our strategies have been fully automated for the ultimate trading experience.

Chris Vermeulen
Technical Traders Ltd.

The Next Silver Bull May Have Already Started

By Laurynas Vegys

Silver is down 7.1% this year. Will this weakness persist? To find out, let’s look at the key factors in the silver market this year.

• Like gold, silver fell as the US dollar rose on the back of expectations that the Fed will hike rates.
• World demand for physical silver fell 4% in 2014, largely due to a record 19.5% drop in investment demand.
• Silver exchange traded funds (ETFs) did not see big liquidations in 2014. ETF holdings grew by 1.4 million ounces and recorded their highest year end level at 636 million ounces.

The first two factors helped push silver 19.9% lower last year. That’s more than gold or any other precious metal fell. Despite this, silver production rose 5% in 2014. That added to the pressure on prices.

Why did miners produce more silver when prices were falling? Because of:

• By-product metal. Around 75% of the silver mined is a by-product at gold or base metal mines. These producers will keep mining silver, almost regardless of price.
• Reduced cash costs. The primary silver producers have cut costs since they peaked in 2012. The main way miners do that is by boosting production to achieve economies of scale.
• Bull market hangover. Precious metals were in a major bull market from 2001 to 2011. Producers built a lot of mines in response. Nobody wants to pull the plug on a new mine that’s losing money if they think prices will go higher.

That’s the backdrop. Now let’s look at this year’s fundamentals.

Supply

Silver mine output has risen for 12 consecutive years (silver mine supply is a little different, due to hedging, but also trending upward). This year could break this trend. Industry experts at GFMS forecast up to a 4% decline in silver output in 2015. Why? It’s not rocket science. There are now fewer major new mines under construction due to lower metals prices. That leaves scrap supply. But scrap comes from jewelry, and sellers are price sensitive. People like to sell granny’s silver tea set when prices are up. We expect subdued scrap supply until silver heads much higher.

Demand

Investment demand - that’s us - is a big chunk of total silver demand: 18.4% as of the latest figures.
There was a big drop in investment demand last year: 19.5%. This tells us that most short-term investors and sellers have left the market. We don’t know any “silver bugs” who were selling. That means that today’s bullion is in stronger hands. And that means that any new buying will have a strong impact on prices.
But will there be buyers?

The Silver Institute expects more silver demand from investors this year. They say that the first half of 2015 sales of silver bars were the fifth highest on record.

Photovoltaics (PV) is another source of silver demand that many analysts expect to rise in 2015 and beyond. Global PV demand is set to increase by 30% in 2015, according to IHS analysts. China alone has plans to install 17 gigawatts of solar capacity by the end of the year.

The solar industry consumes a small amount of silver compared to jewelry and other electronics. Yet, if PV demand delivers in 2015, it will become the third-largest source of fabrication demand for silver.

Wildcard: Tesla plans to put batteries big enough to power a house in every home. What happens if that takes root is anyone’s guess… but it will be big. Really big. And the impact on demand for silver would be just as huge.

The Deficit

Silver supply went into deficit during much of the big run up from 2001 to 2011. That may happen again. Silver Institute expects the silver supply deficit to grow to 57.7 million ounces in 2015. (Note that even if physical mine supply is up, net supply can be down if a lot of the mine supply was forward sold as hedges.) If the institute is right, it’ll be bullish for silver prices.

The Dollar and the Fed

We believe the dollar is grossly overvalued, and we are not alone. HSBC thinks the greenback’s rise since 2014 could be in its final stage. For the three months between April and June, the US dollar fell against every developed-market currency (save for the yen and the New Zealand dollar).

Many investors seem convinced that the Fed will raise interest as soon as September. We view this as unlikely at this stage. Yes, tightening US monetary policy would propel the dollar to new highs. But an even stronger dollar would mean slicing billions off the US GDP; not exactly a desirable situation from the standpoint of the Fed given the sluggish growth of the economy.  We think the Fed could delay raising rates until 2016. It might even stop talking about rate hikes indefinitely. Each delay, the dollar will get whacked, and that’s good for precious metals.

On the other hand, if the Fed does nudge rates higher this year, it would likely dampen the stock market. That would increase demand for silver and gold. This could push silver prices much higher, given the small size of the market.

The Gold-Silver Ratio

The gold-silver ratio (GSR) tells you how many ounces of silver you need to buy one ounce of gold. The record shows that the GSR often surges during a recession. (See the shaded areas on the chart below.)

Silver is about 17 times more abundant than gold in the earth’s crust. Silver and gold prices were close to this ratio for most of history. These facts make many investors think that the GSR should be 17-to-1 and that eventually it will be.

They may be right, but we’ve never found the GSR to be a strong predictor of gold or silver prices. To us, the GSR “suggests a lot but proves nothing.”

Conclusion

The fundamentals are positive for silver in 2015: less mine supply, and the healthy demand we already see is bullish. The greater demand that’s possible could create a real supply crunch. As a result, we expect silver to hold on throughout 2015 and perhaps even increase faster than gold, if the whole precious metals sector turns positive this year.

As for guessing the future, we have no crystal ball. We can say that Louis’ case for 2015 as a win-win year for silver is backed by the numbers.

P.S. If silver moves off its current level of $15 and into the $20 or $30 areas, silver investors could make large gains. But owners of a unique silver-related security could make gains that are five... 10... even 100 times greater. And right now is a once-in-a-decade chance to buy them very, very cheap.

Our friends at Casey Research are the world’s leading experts in this sector. And they’re EXTREMELY bullish on this rare opportunity. Read on here for details.

The article The Next Silver Bull May Have Already Started was originally published at caseyresearch.com.

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Bubbles, Bubbles Everywhere

By John Mauldin

The difference between genius and stupidity is that genius has its limits.
– Albert Einstein

Genius is a rising stock market.
– John Kenneth Galbraith

Any plan conceived in moderation must fail when circumstances are set in extremes.
– Prince Metternich

I'm forever blowing bubbles, Pretty bubbles in the air
They fly so high, nearly reach the sky, Then like my dreams they fade and die
Fortune's always hiding, I've looked everywhere
I'm forever blowing bubbles, Pretty bubbles in the air

– Burr and Campbell

You can almost feel it in the air. The froth and foam on markets of all shapes and sizes all over the world. It’s exhilarating, and the pundits who populate the media outlets are bubbling over. There’s nothing like a rising market to lift our moods. Unless of course, as Prof. Kindleberger famously cautioned (see below), we are not participating in that rising market. Then we feel like losers. But what if the rising market is … a bubble? Are we smart enough to ride it high and then bail out before it bursts? Research says we all think that we are, yet we rarely demonstrate the actual ability.

My friend Grant Williams thinks the biggest bubble around is in complacency. I agree that is a large one, but I think even larger bubbles, still building, are those of government debt and government promises. When these latter two burst, and probably simultaneously, that will mark the true bottom for this cycle now pushing 90 years old.

So, this week we'll think about bubbles. Specifically, we'll have a look at part of the chapter on bubbles from Code Red, my latest book, coauthored with Jonathan Tepper, which we launched late last year. I was putting this chapter together about this time last year while in Montana, and so in a lazy August it is good to remind ourselves of the problems that will face us when everyone returns to their desks in a few weeks. And note, this is not the whole chapter, but at the end of the letter is a link to the entire chapter, should you desire more.

As I wrote earlier this week, I am NOT calling a top, but I am pointing out that our risk antennae should be up. You should have a well-designed risk program for your investments. I understand you have to be in the markets to get those gains, and I encourage that, but you have to have a discipline in place for cutting your losses and getting back in after a market drop.

There is enough data out there to suggest that the market is toppy and the upside is not evenly balanced. Take a look at these four charts. I offer these updated charts and note that some charts in the letter below are from last year, but the levels have only increased. The direction is the same. What they show is that by many metrics the market is at levels that are highly risky; but as 2000 proved, high-risk markets can go higher. The graphs speak for themselves. Let’s look at the Q-ratio, corporate equities to GDP (the Buffett Indicator), the Shiller CAPE, and margin debt.






We make the case in Code Red that central banks are inflating bubbles everywhere, and that even though bubbles are unpredictable almost by definition, there are ways to benefit from them. So, without further ado, let’s look at what co-author Jonathan Tepper and I have to say about bubbles in Chapter 9.

Easy Money Will Lead to Bubbles and How to Profit from Them

Every year, the Darwin Awards are given out to honor fools who kill themselves accidentally and remove themselves from the human gene pool. The 2009 Award went to two bank robbers. The robbers figured they would use dynamite to get into a bank. They packed large quantities of dynamite by the ATM machine at a bank in Dinant, Belgium. Unhappy with merely putting dynamite in the ATM, they pumped lots of gas through the letterbox to make the explosion bigger. And then they detonated the explosives. Unfortunately for them, they were standing right next to the bank. The entire bank was blown to pieces. When police arrived, they found one robber with severe injuries. They took him to the hospital, but he died quickly. After they searched through the rubble, they found his accomplice. It reminds you a bit of the immortal line from the film The Italian Job where robbers led by Sir Michael Caine, after totally demolishing a van in a spectacular explosion, shouted at them, “You’re only supposed to blow the bloody doors off!”

Central banks are trying to make stock prices and house prices go up, but much like the winners of the 2009 Darwin Awards, they will likely get a lot more bang for their buck than they bargained for. All Code Red tools are intended to generate spillovers to other financial markets. For example, quantitative easing (QE) and large-scale asset purchases (LSAPs) are meant to boost stock prices and weaken the dollar, lower bonds yields, and chase investors into higher-risk assets. Central bankers hope they can find the right amount of dynamite to blow open the bank doors, but it is highly unlikely that they’ll be able to find just the right amount of money printing, interest rate manipulation, and currency debasement to not damage anything but the doors. We’ll likely see more booms and busts in all sorts of markets because of the Code Red policies of central banks, just as we have in the past. They don’t seem to learn the right lessons.

Targeting stock prices is par for the course in a Code Red world. Officially, the Fed receives its marching orders from Congress and has a dual mandate: stable prices and high employment. But in the past few years, by embarking on Code Red policies, Bernanke and his colleagues have unilaterally added a third mandate: higher stock prices. The chairman himself pointed out that stock markets had risen strongly since he signaled the Fed would likely do more QE during a speech in Jackson Hole, Wyoming, in 2010. “I do think that our policies have contributed to a stronger stock market, just as they did in March of 2009, when we did the last iteration [of QE]. The S&P 500 is up about 20 percent plus and the Russell 2000 is up 30 percent plus.” It is not hard to see why stock markets rally when investors believe the most powerful central banker in the world wants to print money and see stock markets go up.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best-selling author, and Chairman of Mauldin Economics – Please Click Here.

Important Disclosures

The article Thoughts from the Frontline: Bubbles, Bubbles Everywhere was originally published at Mauldin Economics

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