Below, we look at the most recent views about the DOW and other broad US stock market sectors reaching astronomical heights prior to an inevitable correction. Are such views crazy, or crazy like a fox?
The DOW—Can It Really Double or Can it Crash?
Is this market about to rip higher, even much higher, or is it about to crash?
Our readers know by now that the primary and traditional market indicators (from flat earnings, the undeniable implications of massive debt expansion, the CAPE ratio and rising bond yields) all point to a fundamentally broken and distorted bond and stock market. In fact, we’ve never seen a market this fundamentally distorted.
So, yeah, things could get bad, really bad.
Toward that end, we even offer a proprietary Recession Watch to confirm how worried we are about a massive market iceberg ahead.
In short, we have had, do have, and will continue to have, extremely legitimate concerns about a pending market correction and even collapse ahead. Full stop.
But does that mean we are market psychics? Does that mean we are telling you today to run for the hills? Does that mean this market can’t continue to rise significantly higher—even unbelievably higher—in the near and distant future?
Markets Could Go Higher Despite the Cracks in the Ice
Nope. In fact, markets could go higher, much higher…
As indicated elsewhere, we trade and make market evaluations based on money flows, moving averages and trends, no just fundementals or macro opinions.
In fact, if we traded on fundementals alone, we wouldn’t be trading at all, because today, fundementals do not drive markets. In short, we are in a whole new era of weird. Market risks are everywhere beneath this market wave.
Despite these obvious risks, there are still compelling cases being made for the DOW to not only break 26000, which it has recently done, but to rise as high as 45,0000. To many, such predictions may sound crazy, but in these crazy markets, frankly, anything is possible…
The Case for Stronger DOW
Those arguing for the DOW to nearly double in size are in fact mostly as jaded as we are about market fundementals. They are essentially arguing that the very reason US markets will continue to rise dramatically is not despite the fact that the Fed has ruined markets or that securities are grotesquely over-valued, but in fact BECAUSE markets are so broken here everywhere else that they will continue to rise!
Well, in fact, such possibilities are not as crazy as they might first appear.
The key argument behind these jaded market bulls boils essentially down to this: US markets will rise much higher precisely because the rest of the world’s debt (China, Japan, the EU etc.), lackluster growth, and broken systems will send more of their foreign capital into the US equity markets.
In sum, they are making an argument that yes, US markets, debt and fundementals (from the PE ratios of the FANGS to the yield curve and a broken bond market) are indeed bad—just not as bad as the rest of the world.
Our markets, in short, are the best horse in the global glue factory.
So, if you have to bet on a horse, you might as well bet on the US horse….
Bond and Currency Indicators
We’ve written for months about the over-extended US bond market. We’ve also spoken at length about the critical importance of using the yield on the 10 Year UST as a key indicator of falling bond markets. (Remember, yields rise as bond prices fall.) Specifically, we have said that once the yield rises above 2.6% (and holds), we could be seeing the first signs of a US bond market slide.
Well, guess what? This week the yield hit the critical 2.6% number. If you are not worried about this, you should be. It’s a big deal.
But others are making a strong case that what’s bad for bonds will be good for stocks.
These jaded bulls predicting a 45,000 DOW are also making a strong argument that the stock markets are going to rise much higher because the bond and currency markets are going to tank very soon.
As money flows out of bonds, they argue, it will flow into stocks. Furthermore, as currencies around the globe feel the inflationary effect of over $15T in central bank money printing (and currency diluting), this fall in currency values will in fact push up the prices of stocks.
We’ll see. This is quite possible. Buy there’s an equally strong and contrary case to be made that bond and stock markets are highly correlated, and that what is bad for bonds will also be bad for stocks. In short, there could be flow out bonds as well as out of (rather into) stocks…Again: we’ll see.
Furthermore, these jaded bulls are also arguing that with Brexit approaching and the Euro about to weaken, even our grossly diluted USD is about to be, again… the best horse in the global glue factory…
Are the Jaded Bulls Right or Wrong?
We aren’t sure. And frankly, it doesn’t really matter—because numbers give more guidance than opinions and predictions.
We at Signals Matter can respect the possibility that markets here in the US can actually rise beyond—far beyond nosebleed territory—not because things are going so well in the world, but ironically, because things are going so bad in the world.
Now that’s depressing, eh?
Does that mean we are making a firm macro prediction or time line for our readers or subscribers to go long equities and short the Euro today?
Well, our subscribers know already what we are doing…
What We are Tracking
But in all candor, for subscribers and non-subscribers alike, we can confidently tell you this: we are not about predicting markets based solely upon market views, we are about tracking market indicators, numbers, flows and trends.
Stated otherwise: we trust data, not opinions—no matter how sound or how unsound.
Thus, if the DOW is heading toward 30,000, 40,000 or 45,000 and beyond so be it; similarly, if the DOW and other markets in fact begin to head south and even tank, either way our Recession Watch and Trend Watch will give us more guidance than just the sentiments of bears and bulls alike, be they jaded or high-conviction.
So be you a bear or a bull, jaded, tired or full of hope, you’ll find that we too understand and respect each of these views; but in the end, we follow the markets and watch risk like a hawk—that’s why we (and our performance numbers) are beating the markets yet always with one eye on the icebergs.
And we can do this for as long as it takes, whether the DOW rises or falls…
In the interim, keep your eyes on the signals…
January 19 2018