Here Comes the Fear

Is this the start of the fear?

The Dow and S&P both plunged nearly 3% overnight. The NASDAQ sank 3.5%. Yesterday, the ASX 200 fell around 2%. It could lose the same again today.

This is what happens when stocks levitate on hope and central bank promises for so long. When the music stops, panic sets in immediately.

That’s because most of the punters out there knew it was too good to be true. But they had to be in it. You know, ‘dance while the music is playing’, and all that…

The catalyst for this bout of fear is an escalation in the US/China trade war. But really, it’s just the imposition of reality that the market is finding it hard to deal with.

At times like this, you’re going to read 1001 opinions. ‘How bad will this sell-off be?’ ‘Why you should be wary of this market’. ‘I told you this was going to happen.’ If you’re invested in the market (and don’t have any gold exposure!) your amygdala (your brain’s fear receptor) will be working overtime.

Your brain has two components: rational and emotional. When the fear takes hold, emotions get the upper hand and you tend to do dumb things. Your rational voice doesn’t get much of a look in.

That’s why today, I’m going to try and NOT add to the collective pool of fear that is filling up rapidly. Instead, let’s take a calm walk around the globe and survey the damage so far.

Gold is responding to a new round of currency wars

Because in the scheme of things, it’s not much. And if you can analyse things rationally, you can map out a strategy.

First though, let’s take a look at the gold price. Overnight, it traded at a new multi-year high around US$1,470 an ounce. That’s not reflected in the chart below (prices yet to update) but there was always a strong chance that this was going to happen.

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Whenever an asset or a stock price breaks out of a long-term trading range, it tells you the odds are on your side for continuing upside. Gold is now in a bull market. It’s as simple as that.

(This is why I’ve been banging the drum on gold for the past few months. If you want to see how I recommend playing this bull market, click here).

Gold Futures - GCSpot (NYMEX) - 1 Day Bar - USD - 6-08-19

Source: Optuma

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Gold is responding to a new round of currency wars. That gold is rising along with the US dollar is impressive. It tells you that global capital sees gold and the US dollar as the only currency havens right now.

It’s also a response to China’s move to weaken their currency, the yuan. Check out the chart below. The yuan has plummeted against the greenback in recent days…

Chinese Renminbi Yuan/US Dollar - CNYUSD (FX) - 1 Day Bar Chart - USD - 6-08-19

Source: Optuma

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China needs to be careful here. They have a huge debt problem. They can’t let the yuan weaken too much, as it could unleash inflation. How will they manage that with so much debt in the system?

The Middle Kingdom is in trouble.

That’s probably why you saw the big iron ore miners drop another 3% yesterday. Iron ore prices are plunging as investors worry about China’s growth prospects.

The chart below shows the iron ore price. ‘Distribution’ is a common topping out pattern where volatility increases at the peak. It refers to early buyers ‘distributing’ their holdings to the latecomers.

This is clearly what’s happened here. There has been a tug of war between the buyers and the sellers. But now, the sellers have the upper hand.

Iron ore ran from US$70 a tonne at the start of the year to US$120/tonne. That’s a 71% rise in six months. In my view, the chart suggests that iron ore will head back to US$70 in the next few months.

Iron Ore 62 Fe CFR China TSI - TIOSpot (CME) - 1 Day Bar Chart - USD - 6-08-19

Source: Optuma

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Fear is starting to flow through Aussie market

As you can see, this fear is just starting to flow through to the Aussie producers. The ASX 200 Resources index, below, shows you that China worries have only started to hit in the last week or so.

The index is still in an upward trend and well above support. So no need for panic just yet. But the iron ore chart is ominous.

S&P/ASX 200 Resources - XJR (ASX) - 1 Day Bar Chart - AUD - 6-08-19

Source: Optuma

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Turning to the US now, and the major US indices have all retreated back below their previous breakout levels. This is ominous too and tells you the market couldn’t sustain new highs.

Let’s have a look at the Dow first. It broke to new all-time highs in June, but has since plunged back through the breakout line…and also through the 50 and 100 day moving averages.

Dow Jones Industrial Average - DJI (WI)- 1 Day Bar Chart - USD - 6-08-19

Source: Optuma

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It’s a similar story with the S&P500. The market has given back two months worth of gains in a matter of days…

S&P 500 Index - SPX (WI) - 1 Day Bar Chart - USD - 6-08-19

Source: Optuma

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Again, same story with the NASDAQ. Note in all three charts how the market plunged as soon as it was evident support around the highs (green line) couldn’t hold.

NASDAQ Composite Index - COMPX (WI) 1 Day Bar Chart - USD - 6-08-19

Source: Optuma

[Click to open in a new window]

This tells you that a huge amount of previous buying was simply due to momentum. And as soon as that momentum disappears, the good time traders are out of there…

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Once this washout runs its course (and it might be done after today) you’ll see a bounce. It will be interesting to see where that bounce takes things.

If the big US indices get back to their old highs (green line) and turn down again, my guess is that it will tell you that the top is in.

Regards,

Greg Canavan,
Editor, The Rum Rebellion


Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own. Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts. At The Rum Rebellion, fake news and unethical political persuasion are not in the least bit tolerated. It denounces the heavy amount of government influence which the public accommodates. Greg will help The Rum Rebellion readers block out all the nonsense and encourage personal responsibility…both in the financial and political world.


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