Weekend Strategy Review March 29, 2020

Posted by OMS  at March 29th, 2020

I don’t have a lot to add to the Comments I made early Friday.  By staying within Thursday’s hi-lo range, the Dow formed an inside day pattern on Friday.  Patterns like this are reversal patterns usually found at the end of a significant move in the market.  So, we’ll need to watch what happens on Monday.  If the Dow begins to move lower next week, especially if it breaks below Friday’s low of 21,469, it would be a strong indication that the next major down wave is starting.  As I discussed on Friday, this next wave could be either Wave ‘C’ down or Major Wave 3 down.  The major difference in these waves is the extent of the decline and its shape.   If it’s Wave ‘C’ down, the decline should resemble a staggered stair step, that stops near the 17,000-18,000 level before the next bounce begins to develop. It it’s the start of Major Wave 3 down, the decline should be impulsive (wave 1 of Major Wave 3 down), then have a small bounce before wave 3 of Major Wave 3 down takes the Dow down to significantly lower levels. Either scenario is possible as we move into Monday.

At this point, I don’t see any possibility for a major move to the upside.  The 50-day moving average, located at the 24,988 level, will provide major resistance to any upside move.  However, I don’t expect this will come into play.  Wave 4s almost never move above the 50 percent retracement level, so IF the Dow rallies, it should be limited to the 23,890 level before falling again.  

So, Monday is shaping up as an important day for the markets.  Again, if the Dow begins to break down on Monday, it could lead to a horrible week.

You might be wondering about what effect the stimulus package will provide as this is all the TV commentators are talking about, besides the virus?  Last week, the Congress approved two major Bills totaling 6 Trillion dollars to help support companies and workers while the medical community fights the coronavirus.  This money was created out of thin air!  While the immediate effects of this massive stimulus package remain to be seen, the one thing you can be sure of is that it will create future problems.  The U.S. already has a debt of $23.6 Trillion. So, adding another $6 Trillion will only exasperate the problem.  BTW, if you have time this weekend, you might want to visit the U.S. debt clock at www.usdebtclock.org.  On the other hand, if you want to have a nice weekend, you might not want to see the numbers.  They’re scary! 

The number that has me most concerned is the Debt to GDP ratio.  It now stands at 1.24.  In other words, our debt exceeds the nations income by 24 percent.  It means the U.S is technically bankrupt!  If your debt exceeded your ability to pay, you would have to declare bankruptcy.  But because the U.S. can print money, it’s debt can continue to climb, as long as other countries continue to buy its Bonds. But now that markets around the world are crashing, and countries like China, Japan, and most of Europe are having problems of their own, I wonder how much longer these countries will continue to buy our debt?   Or worse, what will happen if they decide to stop buying and start selling?  People tend to not think about these things, because the consequences are so horrible.  But any sane investor must.  TV commentators never talk about our country’s debt.  It’s way too scary for their viewers.  They like to talk about re-bounds and V-shaped recoveries.  I don’t see this happening.  Not after the market has lost over $12 Trillion and all the new debt that has been created.  No way!  The President often talks about how our country was strong before the coronavirus hit, and how it will be strong again once the virus is cured.  He’s correct on this, but what he doesn’t talk about is how long it will take before the country recovers and confidence has been restored in the markets.  When I look at the technical damage that has been done to the charts, and the amount of debt and money lost in the current decline, it will likely take years before things get back to ‘normal’ again. This is the reason I believe this Bear Market is only starting.

Many of you don’t remember what it was like back in 1973, when our country had to deal with debt and serious inflation.  Back then the fighting in Vietnam was just about over, but the massive bill resulting from the war still had to be paid.  So, the government began to print money…just like it’s doing today.  Foreign governments realized what was happening, so they demanded gold as payment for the debt they were holding instead of the newly printed paper money. They weren’t stupid!  When Nixon saw our gold stockpile being dangerously depleted, he closed the gold window to stop the flow of gold out of the U.S. The immediate effect was a rapid rise in inflation.  But while most people remember the inflation of the mid-70s and the 12+ percent interest rates, they tend to forget what happened to the stock market.  The markets crashed!  In January 1973, the Dow was trading at 1,067.  Two years later, the Dow had fallen to 582!  Unlike the crashes of 1987, 2001-2002 and 2007-2008, nobody ever talks about how inflation caused the crash of 1973-1974.  But it happened.

So now that the government has authorized the printing of another 6 Trillion dollars, at a time when most of the country is shut down and NOT WORKING, we must ask ourselves what effect this will have on our already high debt to GDP ratio of 1.24?  If the country is not producing stuff, the Debt to GDP ratio MUST increase.  If you don’t understand the negative effects of a high debt to GDP ratio, you might want to go back and look at what happened to Greece in 2010.  Once Greek debt exceeded 13 percent of GDP, credit rating agencies lowered their credit rating and interest rates began to skyrocket.  It caused a financial crisis in Europe.  And while this was mostly a European event, the impact was also felt in U.S. as the Dow fell over 15 percent.  The big difference between Greece and the U.S is that the U.S. can print money. But all that newly created money does not come without a price.  That price is severe inflation.  And the more money the government prints, the more inflation we’re going to see in the years ahead.  Inflation is simply more dollars chasing fewer goods and services.  So, if the government is printing tons of money at a time when only a few people are producing goods, inflation is not only likely, its guaranteed.  

I don’t want to spend any more time talking about inflation and its impact on the equity markets today. It’s not something easy to digest, so I will leave it for future discussions.  For now, all I want you to remember is that massive inflation is in our future.  This will have a significant impact on the Bond and stock markets, even more than the current decline.  I don’t see any way the markets can make a ‘V’ shaped recovery. So, plan on this Bear being with us for a while.

This weekend, I only want you to focus on one thing. Like I said, things could begin to get ugly as we move into the later part of next week. If the market begins to break down, I’ll be looking to buy a few shares of DXD and SDOW. If I see a good entry point for the Model, I’ll post the trade minutes after I make it. But trading is NOT my main concern for next week. Protection is. If Major Wave 3 down is starting, you MUST protect yourself.

That’s what I’m doing.

Have a great weekend.

h

Market Signals for

03-30-2020

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