Bert Dohmen, Founder, Dohmen Capital Research Group Jan 15, 2015
The start of the year has been one of the worst ever for the stock market. The bulls have been shaken, but they haven’t given up pounding the tables with their bullish message. We haven’t even seen concern break out, much less bearishness. Such lack of concern and fear in an environment of great excesses is always a flashing yellow light for me.
I look at the technical aspects of the markets, which includes ‘sentiment’ and measures of money flow and exposure. Here are 15 warning signals I see for investors in 2015:
1. Every money manager seems to be fully invested, and many hedge funds are fully margined. That means they have borrowed money to buy stocks. That breeds instability. When everyone has the same opinion, it’s logical that all capital devoted to stock market investments is already in the market.
2. The AAII (individual investors) survey of its members now has the highest percentage of bulls since the year 2000 market top before that big crash. Combine that with the record high margin debt, and you have the evidence of “everyone being in.” That’s when the change can only be for the cash flow to reverse, from in to out. During such a decline, fundamentals don’t matter. Stocks must be sold just to raise cash.
3. Is Margin debt another measure of excessive stock market enthusiasm? That’s the amount of money borrowed to buy stocks. Margin debt, as a percent of GDP, is now the highest in 85 years. It even exceeds the level of the enormous speculative peaks of 1999 and 2007. It’s a huge bubble and a signal that the market is vulnerable. When so much stock is bought with borrowed money, even smaller shocks can trigger a big margin liquidation episode.
4. The bulls are counting on a strong economy this year. What if the economy weakens in the second half because of the global shrinkage in the energy sector? Hundreds of billions of dollar in credit will implode in the energy sector. Markets look ahead. Even if GDP growth numbers are strong in the first half, largely because of statistical aberrations, there is not enough additional money going into the market to offset the smart money coming out.
5. During the 5-day decline since Dec. 30 and the first part of January, the least weak index was the DJI (30 stocks), and the weakest index in the US market was the RUSSELL 2000 Small Cap index (2000 stocks). That’s a bearish message. Obviously the action of 2000 stocks is more important than that of 30 stocks.
6. My technical indicators have been on short-to-intermediate term sell signals since January 2, 2015.
7. There are large divergences on the major indices, which usually precede meaningful market declines. The widely-watched indices, DJI and the S&P 500, made new all-time highs in December. They are easy to manipulate upward. At the same time, the broad indices, such as the NYSE COMPOSITE, didn’t make a new high. The latter includes all the stocks on the NYSE and is thus much more important. In fact, it has made a series of lower highs
8. There were major trend changes in various markets and spreads starting just before July 1, 2014. Something happened around that time to set the current negative trends in motion. That’s when oil, commodities, and the broad stock market indices made their peaks. Bear markets start beneath the surface and then spread. By the time the DJI makes a top, the downward trends in most stocks are already well on their way. The important internal market top in 2007 was made in July (identified in our Wellington Letter at the time) while the DJI made its top in October, three months later.
9. The charts suggest that around July 1, 2014 a decision was made to push the oil price significantly downward. Look at the chart of oil. There are no reasons for a bottom yet.
10. According to Kimble Charting Solutions, over the past 50 years, the SPX was down the last day of the year and the first three days of a new year only once: in the disastrous year of 2008.
11. Furthermore, since 1950, there were only 6 instances when the market was down the first 3 days of the year: the worst 3 day declines were the year 2000 and the year 2008, which were also the worst years for the stock market.
12. These rare events were taking place at the same time we had one of the weakest “Santa Claus rallies” late last year. It was the 3rd worst in 65 years. The only ones that were worse were in 1990 and 1999, which were followed by bad years.
13. Journalists who have spoken with workers in the oil areas such as the Bakken say that the workers don’t expect to have jobs by the end of the month. That will create great pain and affect many other areas of the economy.
14. As we wrote in our award-winning WELLINGTON LETTER issue of January 4, the big negative effects of dropping oil prices are still ahead. We are still in the early phases of the dire consequences.
I would not listen to those who say cheap gasoline is bullish. It’s cheap for a good reason: massive global deflation. My favorite investment area for last year, (up 51% since Jan. 1, 2014), is still my favorite for this year (up 7.2% so far this year). It’s in a very conservative sector. But you can’t just “buy and hold.”
15. Money managers have now been “trained” to think that every market decline should be bought. That works…until it doesn’t and the bargain hunters get killed.
There you have 15 reasons to be cautious in the markets right now. I expect great opportunities for active investors and traders who are prepared and have the most experienced guidance, just as we saw during the crisis of 2008. Such times create fantastic profit opportunities in the markets, first on the way down, and then at the bottom.
The past five years were dominated by the central banks intervening with trillions of dollars of money creation and the “ZIRP”, zero interested rate, policy. These produced incredible financial speculation, at huge leverage, and mal-investments which were undertaken only because money was so cheap. Now that interest rates are practically zero, what tools do the central bankers have left? That is the big question for the next two years.
The world has never seen such huge money creation, and therefore, no one can know the extent of the potentially disastrous consequences.