Thursday, September 02, 2010

STOCK MARKET CRASH ALERT: 6th Hindenberg Omen on 31 August 2010

SHOOT: If you've been watching global stocks, you'll have noticed a few strange things happening.

- The markets lacking both confidence and direction
- Gold breaking new records
- Oil prices sticking to a band of $75-$85, and always tracking higher when stocks gain
- The markets falling dramatically
- The markets rising dramatically

By 'markets' I am talking about global stocks. The Dow, the FTSE, the JSE.  Have a look at the two-year chart of the Dow at the top.  That first sharp drop [aka CRASH] happens in the month of September [2008].  We're still hoping,waiting, wishing to recover from that. Jump a year forward in time to September 2009 and you can see the markets still trying to claw their way back, but still a ways off the highs of 2008.  And then jump to now. Since November 2009 the market has struggled to remain over a minimum threshold. Can you see what it is? In February, June and July the markets sank to that mystical 10 000 level.  What we're likely to see, soon, is a September 2008 scale CRASH, Part 2.  Why? The Hindenberg Omens (6 of them) is one set of ominous signals. Fundamentally, the markets cannot go anywhere but down because fundamentally resources are both more expensive and increasingly scarce.  By resources I'm talking about fuel and food. They're the most basic resources of an economy.  Both are inflationary and are behind the contraction of GDP and reducing disposable income [or spending, or consumption]. 

It's reached levels now where people aren't buying houses any more, on a scale large enough for house prices around the world to slump, which then causes the contraction of finance and the disappearance of banks.
Unfortunately we used our bailout cash to bail out companies that had no future, and to rescue banks that were swindling the middle class.  Fundamentally, nothing has changed, except that energy prices remain high in spite of slack growth. 

Now look at the JSE in South Africa - this is a graph looking at the past year.
Notice the 26 000 level, a floor touched in November, February, June and July.  At the end of August the markets swung towards 26 000 once again, before rebounding wildly, which is where we are now. The market insists on correcting one way, then fluctuating in the opposite direction.  It's trying to break through the 28 000 band but a year after going through 26 000 it keeps sinking back to that level.  Why?  Because spin and words like 'recovery' and the odd spending stimulus aren't the same things as jobs, there's certainly nothing fundamental driving growth, like huge new resource discoveries, or game changers.  People who have lost their jobs during this recession have cashed in their pensions, cashed in their unemployment benefits, used up the credit of family and friends, and it's simply postponed the inevitable.  What is the inevitable? 

We don't want to hear it, or even face it, but we face a global contraction.  In fact if you want to give the current state of the world economy a label, here's a good one: compressive deflationary contraction. But those three words are very bad news.  Forget double-dip recession, this is a long term contraction.  This is a Depression.
It's come about because you need cheap and abundant resources to breathe fire into the world's economy, such as it configured today - based on suburbia, and suburbia is based on cars driving around, and cities are based on long haul trucking and air freight.  It's this lifestyle that has no future, and we can attempt to maintain it, but it will simply become harder, and more expensive.  And we'll see economies wilt [contract].  That includes China by the way, and America.

The current rebound on the JSE resembles the shortlived June/July peak.  I believe we have depleted all our other resources too - credit, hope and wishful thinking.  The Hindenberg Omen which signaled the 2008 crash is back, clanging loudly in the background.  The ship is going to go down at any moment now.  If you have money in stocks, get it out, all of it, now.

Further Background:
Markets triggered another Hindenburg Omen on 31st August - that is the 6th one so far. The fact that CNBC and Yahoo Finance have Hindenburg Omens in their headlines and technical traders drawing a clear line in the sand with abated breaths makes us concern at shorting the current rally - the Dow is now 10112 pre-open. Up 1%. Not a bad move pre open - a 1 % handicap before tee off is a good trade. BUT, as we said, when the world stops and watch expectantly for a crash, it seldom occurs.

Real crashes occur usually after a rally. Call it a clean up of weak bears, shaking off the shorts. So if you plan on shorting this market today, do it carefully and with stops. We suspect a quick (about a week or so) huge rally, followed by a crash. Obviously there is always 2 sides to a coin - one could easily come up with a competing conspiracy theory such as the one we proposed above to support a crash. We do not like the odds, and either way we have loads of shorts in India! India’s NIFTY is giving us a headache! See you in the battlefield…

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