About a year and a half ago, I was sitting on my couch watching a healing service on television when the Apostle Maldonado suddenly pronounced anything can happen from that moment on. He wasn’t kidding. About a half hour later, I felt like an air conditioner went through my bronchial tubes and I was healed of a 25-year affliction with asthma. Right through the television set. If you’ve ever wondered if those healing services you see on television are real, they are real. I’m a living testimony. Folks, this is a true story and now that I got your attention be advised I am going to pronounce the same possibility over the stock market.
Starting on Friday, literally anything can happen to the market. It’s a five-year bull market? It could end at any time. Could it break out to the upside? It could turn into a bubble although I doubt that will happen. We could have a smaller correction or an extended trading range. Or we could end up with a five-year bear like 1937-42 that retests the bottom. I doubt we get anywhere near the 2009 pivots, but a bad storm could get us a retest of 2011.
This time window also applies to other markets.
What will happen to the dollar? How about commodities? Have you seen natural gas or coffee lately? You know that the oil complex is threatening to break to former highs. With all the lousy housing numbers, all we need now is gas going through the roof. Last week, there was a smorgasbord of lousy housing statistics and at first they tried to pawn it off with the weather, but they are slowly figuring out that higher rates and a stagnating job force is impacting affordability.
What I see starting to happen here is similar to July 2007. You’ll recall the Russell 2000 topped for good that month, but what I remember most was my real estate friends complaining that after July 20, housing activity came to a grinding halt. Deals that were in escrow fell out and were not replaced by new ones. It’s not quite that severe right now, but we have a different situation where hedge funds have bought up single family homes by the bushel in my town Phoenix as well as other hot real estate locales such as Florida, Las Vegas and California. You know it if you try to rent a house, it will be rare to find an actual homeowner managing a property. Just about every house you look at has a rental management company attached to it. I want to know what happens in a year from now when interest rates are even higher and the equity market takes a hit. Will the hedge funds bail on the HGX?
A little over a week ago, an article made its way around the Internet where the author compared this market to the Dow of 1929. I’m not going to name names, but I do respect the technicians behind this article who have an excellent body of work. However, we have an excellent body of work as well, and even as I’m telling you the bull can end within a week in no way do I think a stock market crash is around the corner. Anything is possible, but I’d put the odds on a stock market crash at 28-1. That’s a long shot. How did I come up with that number? There have been three crashes in 84 years since 1929. It’s just not good business anticipating or projecting the market to crash. I think the market this one resembles most is 1937. I spoke about this before and the similarities are remarkable. Both are five-year bull markets and have hindrances that are tying up the economy. In 1937, unions flexed their muscles for the first time and it hurt the economy. Now Obamacare is proving to be the same kind of hindrance.
There is usually one or two times a year where there comes a day where everything that was going up comes out going down and everything that was going down comes out going up. Finally, with the VIX as low as it is, I’d like to know just exactly who it is that continues to buy this market.
Most people don’t stop to consider who is buying and it’s unfortunate because that’s the most important aspect in projecting what a market can do. Last week they bought a lousy housing number. When they bought the lousy jobs number earlier in the month on the surface it seemed like we were climbing a wall of worry until we saw the low for the VIX on the Feb. 7 was 15.09. That’s complacency in anyone’s book. It’s one thing to buy bad news after an extended period of selling like 2009 or 2011. It’s another thing to buy just shy of the five-year anniversary of the bull. It was Marc Faber who just said last week this was one of the longest running bull markets in history. The only people buying this market are folks who are chasing and didn’t get involved when they should have. Let me show you something.
This is the SOX and the move since the low is one of the best moves this sector has had in several years. On the surface it looks great, doesn’t it? What if these people are as complacent as the VIX says they are? Isn’t it true that the last man in is usually the first one out? In the very least, if there is a gust of wind some of these people won’t have staying power. These buyers are not the kind of money that initially bought in late 2009, 2010 or even 2012. What if we get a selling wave that retraces most of this last leg? Won’t most of these people get trapped? If we get a leg that unwinds this action, we could be at 450 by the middle of the year. That’s not a prediction but if for some reason a real market correction gets this chart under the recent low, it will end up retracing everything back to last August. The reason most people can’t imagine that is because economists and market pundits always project the next 12 months based on the prior 12 months. The only reason I think a massive trap is possible is because the last man in has no staying power. So while this buying streak looks impressive in reality it could be a paper tiger.
Next page: Where we go from here...