With recent turmoil in the Markets, I thought it would be helpful for Readers and for myself to have a look at the Markets with regard to the ‘Bigger Picture’ and help give some perspective and hopefully calm us all down a bit.
Obviously from an immediate News angle there is plenty for Markets and Participants to worry about - Grexit, China Stockmarket Meltdown and even a Computer glitch at the New York Stock Exchange today.
If you follow me on Tweeter, you will have seen ooodles of text from me on this. My current view (I say ‘current’ - I reserve the right to turn on a Sixpence - or a Drachma), is that Greece will leave the Eurozone and I expect some fudgery around this such as the EU will pretend they are having a temporary absence from the Euro - utter bollox of course. The latest situation is that we are sort of in Limbo until Greece submits ‘Detailed Proposals’ to the EU tomorrow by close of play (Thursday 9th July 2015) and then the plan is that the EU Leaders will discuss these Proposals in their Summit on Sunday 12th July 2015. If “Serious Negotiations” are seen to be not taking place, then the ECB (European Central Bank) will cease Emergency Funding (ELA) from Sunday Night - leading to utter meltdown of the Greek Banking System and they would have to start printing IOUs (effectively moving to a New Drachma). It would also mean a ‘Bail-in’ for Bank Depositors where Greeks stand to lose maybe a third of their Savings - this happened in Cyprus.
After the utter fiasco yesterday (Tuesday) where the new Greek Finance Minister turned up at an EU Leaders Meeting with no Proposals whatsoever, who knows what the next few days will hold? Can you imagine the look on Merkel’s face when the penny dropped that he had turned up empty handed? Apparently Christine Lagarde left early………..
From what I am gathering, it seems like it has become less of an issue about the Numbers now and it is a matter of Trust. After the Tsipras shock announcement of the Referendum Vote, the EU has lost all trust in his Syriza Government. So, even if the Greeks arrive with superb looking Proposals in terms of Numbers, if the EU Leaders don’t trust them to implement, then it is game over. I suspect this will be the case although it is even unlikely that they will come to the Table with sensible suggestions on the Numbers.
Therefore, I see Grexit as nailed on for Next Week but the good news (yes, there is some !!) is that the EU have clearly been working on Contingency Plans for many months and they will bolster the Financial System with gallons of Quantitative Easing (QE) from the ECB and no doubt some other measures.
However, there is big scope for uncertainty here as Markets worry about any impact of Grexit and possible ‘Contagion‘ - up until now, it is my view that the Markets still mistakenly think a Deal to keep Greece in the Euro will get done - I do not agree one little bit. In simple terms (ignoring the Trust problem), Greece wants to be let off a bit more lightly but German Taxpayers will not agree to this - and there is a German Election in 2017 so it is fairly obvious how Merkel will react. Forget the French, Italians etc. - they have no cash.
If Markets worry about Grexit actually happening next week, then there could be more downside and I am keeping my FTSE100 Short Spreadbet Hedges and my Cash Position until I am more clear on what is going on.
I won’t dwell on this as it doesn’t seem to be having a horrendous impact - clearly Commodities have been punished and this may happen more. It seems to a large extent that this is a domestic affair for Retail Investors in China but from some stuff I have seen, they make up a very small proportion of people anyway.
For anyone unaware of what is going on, the Chinese Stockmarket (which is very closed to Investors outside of Mainland China) had got pumped up to ridiculously overvalued levels as lots of normal People who are not normally Investors got sucked into a Speculative Bubble - for background on this kind of event, nip over to Wheelie’s Bookshop on WD2 and get yourself a copy of ‘Popular Delusions and the Madness of Crowds’ - which is a cracking little book on how normal people get sucked into Bubbles.
I think there could be a bit of Contagion from the Chinese Stockmarket Meltdown where certain Western Investors (most likely Institutions like Hedge Funds etc.) have got burnt and they are having to dump other Assets to meet ‘Margin Calls’ that they have on Leveraged Chinese Bets - this probably explains a lot of the dumping of Commodities.
The popping of the Bubble could lead to a slowing of Chinese GDP Growth and fears around this are probably also impacting Commodities - but my experience shows that Economists and the usual ‘Experts’ are hopeless at predicting the performance of the Chinese Economy - so I ain’t gonna worry too much about it. I have no direct exposure to China and no Emerging Market Funds or anything.
The Big Picture
As a Long Term Investor, I don’t get overly worried about when Markets go all smelly - it is part of the Game and we just gotta ride it out.
My view is that this is a very healthy and long overdue ‘Correction’ (the official definition of a Correction is a fall from the Peak of 10%) and the overall Long Term Bull Market is still in place. I will do some Charts in a minute to back up this claim.
Some people are suggesting that this is the start of a Bear Market - and it might well be. But I doubt it and my assumption is to keep moving forward on the basis that this is merely a Correction not a new Bear (a Bear Market by the way, is officially seen as a Drop from the Peak of 20% - China is in a Bear Market under this definition).
Fundamentally, my experience suggests you need a Recession to coincide with a Bear Market. In other words, there needs to be a trigger to create a Recession that then leads to a Bear Market. In 2001 you had a crazily overvalued Stockmarket during the Dotcom Boom and when the Bubble Popped, we got a Recession and a Bear Market.
In 2007/2008, we had a Bubble in Subprime Loans and Collateralised Debt Obligations which had totally got out of hand. This lot popped and it led to the Credit Crunch and the Deep Recession.
Therefore, if we are to get a Grizzly Bear now, then there needs to be a Trigger - in both the above examples, the Triggers seemed to be unexpected by the majority of Market Players - so this suggests to me that obvious things like Grexit, China, Bond Bubble, QE, Classic Car Bubble, etc. will not be the Trigger this time.
The point is that Triggers tend to be unexpected - proper ‘Black Swans’, not something we all know about already. On this basis, none of the current Issues are likely to trigger a Market Collapse that will result in Recession, and this means a Bear Market is also unlikely.
It’s worth bearing in mind also that “Economists predicted 9 of the last 4 Recessions”………….
I will not come to the conclusion that we have a Bear Market until the Charts tell me that is the case.
That nicely leads us on to some Long Term Charts.
If you look at the ShareScope ScreenShot below, you should see a Chart of the FTSE100 over the last 6 years Bull Run off the 2009 Lows.
I have drawn in a clear Uptrend Channel - with the Thick Black Line marking the bottom of the Channel and the Thick Red Line marking the top. The Blue Arrow marks where the Price is now - sat pretty much on the Bottom Line of the Channel.
On the Chart below, we zoom in a lot to look in detail at how things really stand now. The Blue Arrow marks the Thick Black Line from the previous Chart which denotes the Bottom of the Long Term Uptrend Channel. At the moment, the Price is pretty much on this Line and it would be great if this could hold as Support - if it fails, then that would not be ideal for Bulls.
However, nothing in Charting is really as cut & dried as many will have you believe and you need to exercise some discretion. In this case, I do not think it is the end of the Bull Run if we get a Breakdown of this Uptrend Line - and I have marked several Horizontal Support Areas where the Price could fall to and then recover and we would still be in the Bull Run - this is called an ‘Overshoot’.
As you should be able to see, the Horizontal Support Lines are at 6328, 6298, 6144, 6072. Ideally, none of these will be tested but I would say the most important one here is 6072 - that marks the Low Point where the market rallied from in October 2014 and failure to hold here would be quite a nasty development - and maybe a Bear Market would be on the cards……………grrrrrrrrrrrrrrrr
The Chart below shows a Long Term Chart of the German DAX index since the 2009 Lows and I have marked the Channel like I did on the FTSE100. This time, the Blue Arrow marks the current price and you should see we are a long way off the Bottom Uptrend Line - not much to worry about here.
The Chart below is the same Timeframe for the most important US market - the S&P500. Again we have a clear Uptrend Channel and the Blue Arrow marks the Price Level as at the end of play last night (Tuesday 7th June 2015) - I have not updated ShareScope for the US Charts yet and time is short - and anyway we had the Computer Glitch today so may not be all that relevant anyway. Again, we are a long way off the Bottom Line of the Uptrend Channel, and it is clearly still in a Bull Run.
It’s worth noting also that the DOW and the NASDAQ COMP are similar Charts also. Remember, the FTSE100 and European Charts are hugely influenced by US Markets - if these Markets keep going in their Bull Run, then we will be fine.
Brent Crude Oil
The ScreenShot below is a Chart of the Brent Oil Price Chart since 2009. In this case, the Blue Arrow marks where we are now and the Red Arrow marks a key Support Line - we should be ok if this holds. If it fails, then Horizontal Support from the 2009 Lows at $35 would be vital to hold (I have marked this Low with the Green Arrow in the Bottom Left Hand Corner.)
I am fascinated by the Gold Chart - as Tweet Followers will probably know. I hear so many Gold Bulls going on about this and that Gold Stock and how Gold is such a great Hedge and how Gold Shines and lots of other guff………….for me, the reality is that the Chart is at a very crucial juncture - there is a Triangle Pattern marked by the Thick Red Line and the Shorter Thick Black Line below and if the Black Horizontal Line fails, then this baby’s going a lot, lot lower…………$1000 seems quite likely to me.
For bulls to be right, they need a Breakout above the Thick Red Sloping Line - it might happen, but I doubt it.
Gotta dash, WD
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