Stock Market: “To Buy Or Not To Buy, That Is The Question.”

Our long-standing upside target for the Nasdaq Composite as a proxy for the stock market has been reached. In our Wellington Letter we have written for the past 18 months that this index would reach the all-time high of March 2000, which was 5,133 intraday, before the bull market would end.

That high was finally reached and surpassed on June 22 and June 23, 2015. But it was for only two days on a closing basis. The index then turned down and broke through an important support level, raising the probability that it was a false upside breakout. False upside breakouts usually are followed by strong declines. The outcome is still inconclusive.

In today’s manipulated market, with financial engineering and high frequency trading (HFT) acting as the major forces pushing stocks up, fundamental downward forces can be delayed for a while. Eventually, however, market forces should rightfully take over. The following months will be very exciting, and very profitable, if you have the best and most experienced guidance.

Other indicators, including sentiment, money flow, earnings declines and economic weakness, all point to the market being way ahead of fundamentals, and more importantly, under “distribution” by the big, smart money. Money managers, who still think that value means something, can’t find a thing to buy. When money stops flowing in, it becomes harder to sell.

Don’t ever think that the market is ‘fair.’ It owes you nothing. I look at ‘distribution,’ which is the process of the big, smart money flowing out of the majority of stocks while the major indices are still being supported and being pushed up to present the illusion that all is well.

This occurs at all important tops. We saw that in 2007 when I warned of an approaching major market debacle in my 2008 book, Prelude To Meltdown. And since early this year I have detected this again in our money flow analysis.

The major indices have ignored the negative fundamentals, such as a contraction in GDP growth and negative corporate earnings, since the early part of the year. Some indices have risen in spite of the deteriorating fundamentals. It’s very similar to 2008. But the analysts opining in the media somehow avoid mentioning this. Our experience over the past 38 years shows that this always occurs when market tops are being formed.

The challenge for Wall Street is to always broadcast excuses for adverse numbers by rationalizing the bad news in the media. The excuse this year was that the GDP contraction in the first quarter was temporary, or the result of a particularly severe winter. They ignore the fact that the economy was also very weak in areas that had a very mild winter such as the western U.S.

Last year I predicted “at least one quarter of negative GDP growth in 2015,” and the economy possibly entering a recession. We already had the first of these.

Last year, Wall Street predicted a 15% earnings rise in 2015. Instead, we now have two quarters of negative growth. Now they forecast a strong earnings rise in the second half of the year without saying where it will come from.

The smoke screen is that major indices have been pushed to near record highs. But a broad index like the NYSE Composite, which includes all the stocks on the NYSE, is now below the level of early July 2014. Imagine, one year without gains, while the perception is that the market has done great. Always remember, the DOW and the S&P 500 are not “the market.”

But don’t just take my word for all this. Here is what Lu Wang of Bloomberg wrote on March 29, 2015:

“Analysts predict Standard & Poor’s 500 Index profits are about to decrease for three straight quarters. Investors better hope they don’t.

“History shows that once earnings drop for that long, they almost always keep falling, and usually take the market with them. In fact, among 17 declines that got to nine months since the Great Depression, exactly one stopped there, in 1967.

“Even if analysts are right about the duration of the skid, earnings contractions of three quarters or more have triggered bear markets 82 percent of the time over the past eight decades.”

Well, that certainly gives the bulls something to worry about. No one can predict the future, but if history teaches us anything, we need to give careful consideration of prior metrics that have proven painfully accurate.

The most dependable stock market cycle over recent decades is seven years. The top was 2008. Seven years would give you 2015 as the top. Oh, that’s this year!

Socio-economic cycles are a function of social emotions. We believe that world is now shifting from the positive part of the cycle to the negative. That’s when problems, crises, disasters, riots, stock market plunges, all occur around the globe. Look at Greece, China, Latin America, ISIS–the worst since Genghis Kahn, a flood of refugees across the world risking their lives to escape genocide and terrorism, the new nuclear power of Iran, among other extreme negative forces.

The China stock market has crashed. Here is the chart for the China index for the SME (small and mid-size firms), the ChiNext ETF. It plunged from above 65 to just more than 32 in just two weeks. That’s a crash. History shows what happens after a crash like this.

ChiNext ETF

Is the China stock crash a prelude to other global markets? About $4 trillion, or 38% of China’s GDP, was wiped out in a little more than two weeks. Yet some Wall Street analysts go on television and tell you it won’t have any effect on China’s economy. This is exactly what we heard during 2007 when the subprime mortgage market started imploding. Analysts said it was too small to infect the other markets. At the time I felt so certain about a global crash in 2008.

CONCLUSION:

Investment buying seems to have dried up. The only big buyer is stock buy-backs from companies, which will be more than $1 trillion this year.

Eventually, a market decline will bring great opportunities for active investors who know how to make money during strong market declines. And that is our specialty.

However, there will also be some surprises on the upside. What’s important is to catch the turns. And that’s what advanced technical analysis allows us to do.

During the recent China and Greek turmoil, big money flows went into long term T-bond ETFs. (Watch my interview on CNBC where I predicted this).

What’s a safe haven? A headline on Bloomberg last week announced: “Treasury ETF attracts big bucks as investors seek safety amid Greek crisis.”

Another headline on July 11: “PIMCO doubled its holding of U.S. Treasuries in June.”

Yes, this is the “safe haven” play. Our indicators show some very interesting signals for this critical sector.

The next 12 months will be a challenge and will bring great financial pain to those who follow traditional sources of investment advice.

Be alert, be a contrarian, be informed.

Wishing you successful investing,

Bert Dohmen, Founder
Dohmen Capital Research, Inc.

As posted on Forbes.com